Her economic policy recipe comes from the poison cabinet of economics. But that doesn’t seem to bother the Democrat.
That didn’t go down well. Kamala Harris’s proposal to use price controls to combat “extortion” on foodstuffs has caused irritation. Even media outlets like CNN and the Washington Post, which are actually staunch supporters of Harris, don’t see much good in the idea. There is talk of populism, and also of trickery. Whether Harris can convince voters with that remains to be seen, writes the Washington Post – “but if sound economic analysis is still important, that won’t be the case.”
Greed and price gouging
The Democrats are trying to downplay the matter and minimize possible damage. Harris is only concerned with keeping capitalism within limits, they say. In addition, one should not read too much into the economic policy program. But the genie is out of the bottle. If you take the Democratic presidential candidate at her word, she seems to see the problem of rising food prices primarily as a result of corporate greed and price gouging.
Apart from the fact that price fixing is illegal in the US anyway for good reasons, there is no evidence of price gouging. American supermarkets face tough competition and their profit margins are low. They were 1.6 percent in 2023, while they were around 8 percent in other economic sectors. The fact that food is 27 percent more expensive today than before the pandemic has nothing to do with excessive profits, but with disrupted supply chains, labor shortages and rapidly increasing demand.
As wrong as the analysis of the high price of food is, the recommended recipe is also wrong. Because price controls, as suggested by Harris in her program, suffer from many problems:
- Groping in the fog. Nobody knows the “right” price. Because that’s the case, it’s best to leave pricing to the competition. If a company charges an excessively high price and makes a correspondingly large profit, a competitor will quickly offer a lower price to attract demand. If competition works, this will continue until a price is reached at which the product can be offered just about profitably, i.e. without making a loss.
- Overwhelmed bureaucracy. If the state fixes the price instead of competition, the signal and the collective intelligence of the market are missing. This leads to excessive demands. After all, how are bureaucrats supposed to know the costs, wages, supply contracts, marketing strategies and sales channels of companies? How are they supposed to monitor compliance with prices and punish violations? And how are they supposed to take into account the regional differences? This amounts to a planned economy – and has never worked.
- Susceptibility to arbitrariness. Just because something is impossible doesn’t mean that politicians don’t have the confidence to do it. Even the impossible offers opportunities. Price controls allow the creation of powerful administrative apparatuses. In these, bureaucrats negotiate the “right” price level together with politicians and companies who lobby for their voters and industries to receive advantageous prices. This type of lobbying or rent-seeking is expensive, inefficient and prone to arbitrariness.
- Market distortion. The most important economic argument against price controls is not overwhelmed bureaucrats or busy lobbyists. The distortion of the markets is more serious. If politicians set prices as they see fit, prices no longer signal shortages. The result is that the markets become unbalanced. This applies regardless of whether governments set a minimum price or a maximum price. The country’s prosperity falls in both cases.
- Harmful maximum prices. Kamala Harris’ criticism of supermarkets is aimed at maximum prices. But producers who can no longer cover their costs at this price will withdraw, and supply will fall. In contrast, demand will rise thanks to lower prices. There will be excess demand. This is also evident in rent caps. They exacerbate the shortage because the incentive to build new housing is reduced, but demand for the low-cost housing increases.
- Many workarounds. Regulations lead to those affected trying to minimize the damage. This can be done by reducing quality. When there was a maximum price for meat in the USA during World War II, butchers mixed more cheap fat into hamburgers. Black markets are an alternative. When the price of petrol is kept low and long lines form in front of petrol stations, black markets arise where you pay more but get the petrol immediately and in the desired quantity.
- Pure symptom control. Government price limits are purely symptomatic. They do nothing to address the underlying problems that cause high prices, such as excessively expansive financial or monetary policy. This was shown when US President Richard Nixon tried to defuse inflation in 1971 by freezing prices and wages for 90 days. When the measure was lifted, the pent-up inflation immediately erupted again. The prospect of such price jumps makes it difficult to lift price controls that have been imposed and planned as temporary.
The list is not exhaustive, there are other sensitive points. Hardly any political measure has such a bad reputation among economists as price controls. Harvard economist Kenneth Rogoff calls Harris’ plan a “terrible idea.” The aversion also stems from the fact that price controls inhibit innovation and create the wrong incentives. If a pharmaceutical company cannot expect to be able to sell its drugs at a cost-covering price, it will no longer be willing to invest large amounts of money in research.
Few exceptions
Nevertheless, there are situations in which price controls may be necessary. This is the case in wars or natural disasters when supply chains are massively disrupted. In order to supply the population with essential goods in such times, states often resort to price limits, with the associated excess demand being mitigated with rationing, such as vouchers. Interventions in the price mechanism are also necessary in the case of monopolies and other forms of market failure, such as environmental protection.
But the US is neither at war, nor is a monopolist in charge of the American food market. The pandemic is over, competition is in place, and there is no sign of market failure. Why is Harris still advocating price controls? Does the Democrat or her economic policy team lack fundamental economic knowledge? That is unlikely. The authors of the program are probably aware of the inadequacies of their measures. There are other reasons why they are still advocating price limits.
One of the aims is likely to conceal the Biden administration’s complicity in the high food prices. The government has unnecessarily increased the already high inflation pressure with an extremely expansive spending policy. The generous government subsidies to private households during the pandemic led to excess savings that could hardly be spent during the pandemic. When these savings then flowed into consumption and encountered a limited supply there, prices rose.
The laws of the election campaign
Pointing out this connection is not very smart from an electoral point of view, since Harris, as Vice President, bears some of the responsibility. So in the campaign she is relying – probably against her better judgment – on the narrative that the increased food prices, which are hitting the middle and lower classes very hard, are due to the greed of the already unpopular corporations. The fact that the Federal Reserve found no evidence of such “greed flation” in a study does little to change the electoral benefit of being able to present a scapegoat for high prices.
It is unlikely that the idea propagated by Harris will ever be implemented. Even if the Democrat were elected and then, as promised, tackled the “first nationwide ban on price gouging in food,” the plan would probably have no chance. Because the ban would have to be presented to Parliament, where the necessary majority would hardly be achieved. Republicans see this as a relapse into communist practices, and even moderate Democrats are not very enthusiastic about radical left experiments.
The most effective contribution a government can make to creating low prices would be a frugal fiscal policy. Apart from that, combating high prices is primarily the Fed’s job. Neither option is politically attractive. Candidates want to offer voters lots of pleasant things, which usually cost money. In addition, Harris can’t really explain that the biggest problem for voters lies outside their sphere of influence with the central bank. That would seem helpless. Actions are needed – even if they are as populist as attacking imaginary price-drivers.