In a speech last week, Vice President Kamala Harris called for a federal ban on “price gouging” on groceries. From a strictly economic standpoint, there are so many things wrong with this proposal that I don’t know where to begin.
But the worst of it isn’t in the policy analysis — it’s in what this pandering says about the chances of a serious discussion of difficult issues with the American voter.
Let’s start with the policy analysis. Even without referring to the current situation, there are three well-known problems with a ban on price gouging. First, grocery stores typically have extremely low profit-margins, on the order of 2 percent or less, reflecting their limited pricing power in a competitive industry. So this is not the right sector — if there ever is one — to target with price-controls.
Second, it is very difficult to define price gouging. How do you distinguish it from a rise in prices owing to shortfalls in supply or surges in demand?
Third, any controls on prices will constrain incentives for producers to bring additional goods and services to markets. This is why price-controls usually lead to shortages more injurious than the price increases they are designed to stop.
The call for a ban on price gouging makes even less sense once it’s placed in the context of recent economic developments. Inflation has already fallen dramatically — from 9 percent in mid-2022 to just under 3 percent in July — and most economists expect it to keep falling in the months to come.
Moreover, inflation has now fallen below the growth rate of wages. In a recent paper, my colleague John Roberts and I documented the emergence of a “wage gap” in 2021 and 2022 as prices surged well above wage growth. That surge in prices reflected market forces: shortfalls in supply triggered by pandemic disruptions, combined with increases in demand stemming from the Trump and Biden stimulus packages.
As prices overtook wages, the flipside of this wage gap was a rise in the markup of the prices firms charge for their products. But since then, declines in commodity prices, the restoration of supply conditions and a softening of demand have led not only to the fall in inflation noted above, but also to more competitive market conditions that have restrained firms from passing higher wages into prices. In consequence, the wage gap is eroding and the purchasing power of worker incomes is rising.
So why does Harris need to call for a federal ban on price gouging? As I have learned to my great surprise, most Americans are not closely following the statistics on the rate of change of the consumer price index, much less the Federal Reserve’s preferred measure, personal consumption expenditures prices excluding food and energy. Instead, Americans are reacting to the prices they see in the supermarket, at the pump and at restaurants, and they are dismayed that those prices are so much higher than they were four years ago.
Moreover, most Americans do not share the view — standard among economists — that prices are sticky on the downward side and very difficult to lower. In fact, they want to see deflation, and they want someone to make that happen.
So what are Harris’s options? One would be to educate the public about how quickly inflation is coming down, how real wages are rising, how this is all happening in a vibrant economy with historically low unemployment and how it would be unrealistic and counterproductive to try to lower the price level.
I’m no expert on politics, but insofar as the American public has steadfastly rejected that message when it came from President Biden, I am skeptical that Harris could do any better with it. And that’s especially true since her opponent is promising to “end the inflation nightmare” and bring down prices “very quickly,” claims that are fanciful but may still appeal to the gullible voter.
Harris’s other option is to convey that she feels the voters’ pain and is serious about trying to do something about it. Hence the call for a federal ban on price gouging. Whether it gets her any votes or not is an open question, but it is a shame she felt she had to do it.
If the goal is to ease the burden of high prices on the most vulnerable members of society, there are many better ways to do it, including some — such as incentives for housing construction and expanded child tax credits — that were also in Harris’s Friday speech. And that is the conversation we need to have.
Steven Kamin is a senior fellow at the American Enterprise Institute, where he studies international macroeconomic and financial issues.
