When I was a graduate student in economics and learned about the inflation of the 1970s, I marveled at how poorly policymakers understood the problem. The price controls they enacted that decade failed miserably, leading to shortages and other market disruptions. I assumed, as a result, that we’d never hear the words “price gouging” again.
I was wrong. Last week, President Joe Biden released a plan to bring down food prices that repeats these past mistakes. The president proposes “calling on” grocery chains to lower prices, partnering with state attorneys general to “take on price gouging,” and boosting food benefits to low-income people by $2,000 annually.
It’s all bad economics. Our recent bout of inflation was caused initially by a combination of pandemic-driven supply constraints and elevated demand from federal transfer payments—not corporate greed or price gouging. While our supply problems have largely resolved themselves, policymakers have continued to pursue expansionary fiscal measures. That has kept demand high atop entrenched inflation. When demand is elevated or supply is restrained, sellers naturally raise their prices to prevent shortages and to “clear the market.” The White House’s proposal ignores these basic economic realities and instead proposes cracking down on corporations and doling out money to consumers, which could make inflation even worse.
The administration’s plan has two decisive flaws. First, it will harm small grocers. Businesses of all sizes face elevated labor costs and economy-wide inflation. If grocers are forced or cajoled into slashing prices without a corresponding reduction in input costs, small firms, which don’t enjoy their larger competitors’ economies of scale, may be put out of business.
Second, the plan fails to recognize that food prices, driven skyward by previous rounds of federal spending, have since stabilized. “Food at home” inflation has largely moderated, barely budging in May and falling the month before. While consumers are rightfully upset that grocery prices have risen more than 20 percent over the past four years, policymakers can’t unring the bell.
The slowing of inflation is little comfort to the many households whose wages have not kept pace. But imposing price controls on grocers isn’t the answer. Grocers still must pay for the food they sell (farmers lived with inflation, too), and they must deal with inflation-driven surges in labor and transport costs. Price controls would put many food sellers out of work, too, given their razor-thin margins.
Americans should direct their ire at policymakers, whose blunders contributed to the high inflation we experienced the last four years. Food had become a smaller part of household budgets in recent decades—a remarkable market-driven achievement that especially benefitted those of modest means. In the last few years, amid the federal government’s spending spree, the trend reversed, and households’ proportional spending on food grew for the first time in decades.
Price controls or pressure campaigns on grocers won’t solve this problem. It will only create a new one that many consumers haven’t faced in their lifetimes: food deserts, caused by closed stores and shortages. Instead, the government should curb spending and let wages grow, allowing more Americans to weather the disastrous results of the past four years.
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