Early in the pandemic, a local merchant I know in New York, an immigrant who owns a small stationary store, worked tirelessly to obtain the goods his customers all then believed were needed—masks, hand sanitizer, and so on. He paid a markup for these goods, not to mention the time it cost him to secure them, and naturally passed the higher prices on to his customers. But given the emergency, he faced a price limit on what he could sell the masks for, with steep fines if he didn't comply. He fought these mandates in court and nearly lost his business.
This is the world that could await us if Vice President Kamala Harris has her way. So far, the Harris/Tim Walz economic policy platform is a bit of a mystery. Will it reflect her left-wing campaign of 2019, which featured Medicare for all and a ban on fracking, or something more moderate? Voters will get some idea on Friday, when Harris reveals the centerpiece of her economic policy: price controls. Her campaign announced that she would pursue a federal ban on “corporate price-gouging in the food and grocery industries.”
This is the wrong solution to a nonexistent problem. Food prices have steadily fallen over time as a share of income. The exception was the pandemic, where the cost of food eaten at home rose 20 percent. This was caused not by grocers’ price gouging but by shortages and elevated demand from excessive fiscal policy. The natural market response to less supply and more demand is to raise prices. Doing so eliminates shortages and keeps markets functioning.
Inflation on food at home now stands near zero. People are frustrated, though, because prices are significantly higher than they used to be; short of mandating wage cuts for everyone involved in the food chain, there is no way to bring prices back to 2019 levels. The Harris/Walz plan also entails raising the federal minimum wage to some unknown level, which will increase labor costs for grocery stores and undermine any effort to lower prices.
Gouging is often hard to define, let alone spot in the wild. It could be argued that the proposed policy is harmless because food price inflation is low now, anyway. But as in the example of the immigrant merchant, having an anti-gouging law on the books invites regulatory abuse. Targeting big companies, as the Harris plan seems designed to do, is not harmless, either. Food prices as a share of income fell as the food industry consolidated and took advantage of economies of scale. Limiting food companies’ ability to set prices in response to market conditions will only curb their growth and willingness to operate in less populated areas—further increasing the prices that many consumers pay. We can expect fewer goods available during the next event that increases demand or reduces supply. Good luck finding food during the next hurricane.
Economists mostly agree that price controls don’t work, succeeding only in creating shortages and making inflation worse. Price controls reduce merchants’ incentive to secure more goods that they must sell at a loss. The Harris proposal is a clear signal that we can expect her campaign to push economic policies even more populist and left-leaning than those of the Biden administration.
Not listening to economists has become a trend of late. This may be because many bad economic policies already enjoy support among voters. It’s easy to blame faceless corporations or landlords who set the prices that we pay without considering their costs and incentives. And both parties want to get elected, after all. But the job of public officials isn’t to pander—it’s to lead, explain hard tradeoffs that are often necessary, and pursue the most sensible policies that, however incrementally, might make people’s lives better. Instead, we get more policies that will make us all poorer.
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