Lewis: Californication
Several years back, while living in Northern California, I got a note from my insurance company saying that my home insurance was being canceled. No explanation was given. We lived out near vineyards and all of the homes had stucco siding and tile roofs, so I assumed we were relatively safe in terms of fire risk. What shocked me the most was that they never tried to increase the premium or tell me that I have to add more fire protections — they just canceled.
I now know my insurance was relatively inexpensive (at least compared to what I pay here in Colorado) because the state had put price controls in place effectively setting maximum prices without regard to the actual costs. Insurers were losing money in California and their only out was to cancel premiums.
While I am sure they had good intentions, price controls set off a chain reaction of problems. Many who have lost their homes in the recent fires did not have adequate insurance. Since insurance companies could not set rates appropriate to the risk, it is likely the steps that should have been taken to reduce these risks were not implemented. Coloradans and all Americans will pay the price for California not allowing free market capitalism to function properly.
Here in Colorado, I am starting to see legislation being proposed that could take us down this road to “Californication” which, to me is very disturbing. One such bill proposes to make it illegal for landlords to “coordinate” pricing. On the surface, price coordination may sound nefarious, but we all do it. When we go to sell our car, we look up the Kelley Blue Book value and investigate what cars like ours are selling for. When we sell our home, we may go to Zillow or other sites to understand what price to set.
Understanding the market is a practice everyone uses and a basic function of capitalism. While collusion — making secret deals to inflate prices — is and should remain illegal, researching the market to set prices should be a fundamental right.
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Another problematic example is a bill to combat “price gouging” in sales of necessities. Again, on the surface, this sounds like a good thing but there are a few issues. First, there is little evidence that rising prices are in any way the result of profiteering. Grocery industry profit margins in 2023 were only 1.6% — which is a return on investment that few of us would consider as high for our own investments. Most evidence indicates that rising grocery prices correlate with increases in operational cost.
One might argue that a bill like this, even if it is not really necessary, won’t do any harm. I believe that is an incorrect assumption. First, any new regulation has a cost to implement both in terms of grocery stores providing data and government regulators verifying compliance. That will increase both food costs as well as taxes. Given the lack of evidence that there will be a significant savings, it is more than likely that a measure like this will only serve to increase costs to consumers. Regulations like this also serve as a deterrent for new players to enter the market so, in the long run, it will more likely serve to decrease competition.
If price gouging truly is a significant issue, then why not require metrics that require the State to report the net savings achieved from this legislation on a regular basis? If it works, great. If not, then eliminate it.
Clearly there is a role for government to play in setting legal boundaries for free market capitalism. That said, if governments go too far with regulations like price controls and making standard practices like benchmarking and market analysis illegal, then capitalism will cease to function. You can read history books and be your own judge as to how well that turned out or, maybe, just look to California.
Mark Lewis, a Colorado native, had a long career in technology, including serving as the CEO of several tech companies. He’s now retired and writes thriller novels. Mark and his wife, Lisa, and their two Australian Shepherds — Kismet and Cowboy, reside in Edwards.
