This is just copypasted from a discussion I had in Signal; I ended up putting some effort into it, so I’m copying here for reference. I’m mostly omitting replies except for specific bits I’m replying to. I’ve made a few edits for clarity.
This definitely seems like a road we don’t want to go down…
Catherine Rampell in the Washington Post, critiquing Harris’s proposal
perhaps she’s right that high grocery prices are no longer a problem for folks, but I still hear & read complaints!
I don’t think it matters. The trouble is that even if it’s a big problem, price controls are a deeply counterproductive response. The biggest advantage of a free market Is that prices automatically equilibrate to match supply and demand, and scarce goods are allocated to those who need or want them most (with obvious caveats on that latter part). If you set prices on a product category by fiat, you get significantly worse outcomes in the ways she describes. I think economists are in pretty broad agreement about that, although I could be wrong.
articles featuring companies joyfully raising prices/charging consumers without being stopped.
How can you distinguish whether a company is raising prices joyfully or non-joyfully?
The trouble is that in order to claim price gouging (except in emergency situations where you get a sudden big spike in demand), you have to postulate that companies all of a sudden got greedy. It seems way more likely that whatever level of greed they had before, they still have now.
If that is already illegal
There’s nothing illegal about raising prices. Companies generally charge whatever price results in the highest profit (which is almost never the highest price that anyone would pay). Consider all the incredibly expensive luxury goods that have massive markups, eg gold-plated chocolate truffles. It’s only illegal to collude to keep prices high, because then you’ve lost the benefit of a free market anyway.
It seems intuitive that you could just set prices top-down, but it just never works AFAICT. Think of it this way — I’m a manufacturer of, I dunno, breakfast cereal. It costs me $x to make a box of cereal (and that amount is changing all the time as the price of grains and cardboard and whatever else go up and down). Now you tell me I have to sell it for $y.
– If $y is less than $x plus some amount of profit (because if I can’t make a living why would I bother), then I just stop making breakfast cereal because it’s no longer a viable company.
– If $y is more than $x plus some amount of profit — well, mostly I’ll charge less than $y, because that’s what my competitors charge; if I charge more than the market price then I’ll sell less cereal, and it won’t be worth it. Unless you make us all charge $y, I guess, in which you’re colluding on my behalf to increase my profits.
In the former case, the price controls mean that companies go out of business; in the latter case the price controls aren’t doing any good.
One might imagine that the government could just constantly adjust $y so that it was equal to $x plus some reasonable amount of profit! But that’s the famous economic calculation problem (https://en.wikipedia.org/wiki/Economic_calculation_problem); the government will never have as much information as I do about what it costs me to make cereal and what the market clearing price is, especially because those amounts are constantly changing.
There are exceptions where those mechanisms don’t work — eg monopolies — but in a healthy market with competition, under normal (equilibrium) conditions, price controls only make things worse.
What’s more, I think Harris very likely already knows this, and I would bet that if she gets elected she wouldn’t actually implement price controls (other than maybe some token ones) for that very reason. But it gets votes, because it sounds so good. It’s like promising that everyone will have an above average income.
I’m not sure she has said she would attack the problem by setting price controls!
Well, that’s a fair point. It took me ages to find her official economic policy (https://mailchi.mp/press.kamalaharris.com/vice-president-harris-lays-out-agenda-to-lower-costs-for-american-families), and all it says is:
- Advance the first-ever federal ban on price gouging on food and groceries;
- Set clear rules of the road to make clear that big corporations can’t unfairly exploit consumers to run up excessive profits on food and groceries.
- Secure new authority for the FTC and state attorneys general to investigate and impose strict new penalties on companies that break the rules.
That said, I don’t think I see a way that it could work that wouldn’t ultimately be the same thing — if you forbid companies from charging ‘too much’, you force them to charge no more than the price you want them to.
if price gouging is indeed already against the law,
Price gouging is against various state laws in an emergency (see screenshot). This sounds like she plans to ban ‘gouging’ under normal conditions. Maybe that interpretation is wrong? It’d be awfully nice if she gave details in her economic proposal 😒
I don’t think Harris is just playing to the crowds by tossing tidbits that don’t exist and can’t exist.
I really hope she is, because I think that it would cause a lot of problems if she actually did it.
Maybe one other angle on it that would seem clearer: let’s go back to my cereal company. Suppose that the government sets a low price for my boxes of cereal, and I somehow don’t go out of business. It’s guaranteed that more people want my cereal at the new lower price than did before (since previously they were willing to pay more for it). Somehow my million boxes of cereal have to get distributed to the way-more-than-a-million who want it. What’s the right way to decide who gets it, if not prices?
– It could just go to whoever happened to get to the store at the right time, and then everyone else would miss out, many of whom wanted my cereal a lot more than the people who happened to get there first.
– You could have long lines (as has happened with bread in many places) — then ‘who’s willing to pay the most’ gets replaced by ‘who’s willing to waste the most hours in line’, which does to some extent allocate it to the people who want it most, but at the cost of huge amounts of wasted time that are just pure deadweight loss.
– You could have rationing, eg everyone gets one box of cereal a month, but then a) it goes to many people who don’t want it much, and b) any feasible rationing scheme fails to take into account people’s differing needs.
– It could go to my buddies, which doesn’t seem like a particularly fair allocation scheme to me. Or to whoever’s willing to do me the most favors in exchange, in which case we’ve just exchanged a legible pricing system for an illegible black market.
– You could have the government try to decide who needs it the most, but boy does that not sound like a fun time for anyone.
Note that under many of the above plans, people would perceive it as a cereal shortage.
The advantage of prices is that they’re a constant, implicit, running auction. As prices get higher, the people who value the item less drop out by buying something else instead. As a result, it goes to whoever cares the most. That’s distorted by different people having different amounts to spend. But I still don’t see a better alternative.
If you can see a better way of allocating goods that not everyone can have to the people who want or need them most, I’d love to hear it.
Some other good pieces on this topic:
- https://apnews.com/article/kamala-harris-price-gouging-ban-inflation-65dc8844bb41159d76886f752b6cab28
- https://web.archive.org/web/20230715183338/https://nymag.com/intelligencer/2023/07/the-greedflation-debate-is-deeply-confused.html
- https://en.wikipedia.org/wiki/Price_controls
FWIW here’s a version that you could do that I think would at least cause way fewer problems (although an economist might poke a hole in it within 30 seconds): you could implement a progressive tax on corporate profits and distribute the proceeds. It definitely does still have some problems:
– It decreases the incentives for companies to find better ways of doing things that will result in greater success, which leads to less economic growth, which leads to a worse standard of living than you would otherwise have. I think this is just a fundamental price you pay for any anti-corporate-profit scheme.
– It increases the incentives for companies to spend money instead of keeping it as profit. Some of those are generally viewed as bad (eg stock buybacks) and some as good (capital stock, R&D); I’m not sure whether it would come out net good or bad.
– Historically I think it’s pretty hard to keep money earmarked for redistribution instead of congress taking it (or ‘borrowing’ it) for whatever they want to spend it on (weapons, pork barrel bills, probably maybe some good stuff too but not the redistribution you wanted).
– Most economists think that corporate taxes are already higher than would best serve the public. You could do it in a way that’s neutral on total corporate taxes, although I suspect it might be hard to find the political will to do that.
Sidebar: I hadn’t realized before now that Richard Nixon tried price controls (along with some other unconventional economic moves); Wikipedia summarizes their impact as, ‘The Nixon shock has been widely considered to be a political success, but an economic failure for bringing on the 1973–1975 recession, the stagflation of the 1970s, and the instability of floating currencies.’
https://en.m.wikipedia.org/wiki/Nixon_shock
The most egregious example of price gouging that I am aware of is not in groceries, but in pharmaceuticals.
Ah, yeah, pretty much the exact opposite of groceries; there’s almost no competition, arguably mostly because the government prevents it. Scott Alexander had an interesting argument with Vox’s Sarah Kliff on this:
– https://slatestarcodex.com/2016/08/29/reverse-voxsplaining-drugs-vs-chairs/
– (& later) https://slatestarcodex.com/2016/09/07/reverse-voxsplaining-brand-name-drugs/
(each of those links to the Kliff piece it’s responding to)
(that first Scott Alexander piece is quite short by his standards, and fairly mind-boggling; it looks at how things have gone with attempts to compete on epi-pens)
