Kamala Harris’s economic manifesto amounts to populist railing against reality. Her proposals on “price gouging” demonstrate her poor grasp of markets.
Kamala Harris, the Democratic Party’s nominee for president in the United States since the geriatric Joe Biden was forced to retire for age reasons, has tabled a cornucopia of left-wing populist economic policies.
She talks in bromides: promising an “opportunity economy” and “building up the middle class”.
Her goal is that of any other populist politician (her opponent included): by promising material gain to voters, she hopes to buy their loyalty.
Chances are good that her strategy will be successful, especially given that voters ranging from the far left to the centre-right viscerally despise her electoral opponents, Donald Trump and JD Vance (and with good reason, in my opinion).
Populist politicking
A lot of the Harris campaign’s economic policies are transparent populist politicking.
The Trump-Vance campaign promised to increase the child tax credit for parents with newborn children from $2 000 to $5 000, for example. The Harris-Walz campaign trumped them (forgive me) by promising a $6 000 tax credit.
Oh well, welfare isn’t going to kill anyone, and it’s not like the US can’t afford it.
The Tump-Vance campaign also proposed to exempt earnings from tips from income tax. Harris-Walz soon promised the same.
This is unfair to workers who earn regular wages without tips. It would draw workers from wage-earning jobs to tip-earning jobs, distorting the labour market. It would enable employers to reduce the fixed-wage portion of a worker’s income by the amount that the worker now saves on tax. It could cost workers important tax credits if their taxable income falls below the level at which they’re required to file tax returns. And expect a lot of ordinary income to be recategorised into “tips” if this policy ever sees the light of day.
All of this goes to show that economic populism and economic illiteracy is a bipartisan problem.
As Frédéric Bastiat wrote in 1850 in That which is seen and that which is not seen, policy makers ought to pay attention not only to the immediately visible consequences of an economic policy, but also to the invisible and unintended consequences.
Economically literate politicians will have read Bastiat, but I’ll wager neither Trump nor Harris has. Neither campaign cares about the unintended consequences, because their voters can’t see them either.
Gang-busters
Before we get to Harris’s proposals, let’s first stipulate that the US economy under president Joe Biden has been performing admirably.
Post-pandemic economic growth has been consistently strong, inflation has been brought under control without causing a recession, wages have outpaced price increases for over a year, consumer spending is robust, as is private and business investment, and unemployment is near a 20-year low.
Not much really needs to change, but despite the fact that the economy is going gang-busters, not everyone is content with it.
A lot of it is baseless carping by younger generations that are richer than their parents ever were. (The American Enterprise Institute published a detailed working paper demonstrating that intergenerational progress has not stalled, and that each generation is significantly better off than its predecessors.)
Even unjustified discontent is a powerful driver of voting decisions, however, which gives politicians excuses to promise to kiss things better.
“Price gouging”
The Harris policy that struck me as the most egregious is also likely to be the most popular. She has proposed to crack down on what she calls “price gouging” on the part of food retailers.
“As President, I’ll work to pass the first-ever federal ban on price gouging on food,” her campaign said. “My plan will include new penalties for companies that exploit crises and break the rules. And we will support smaller food businesses that are trying to play by the rules and get ahead.”
Of course, nobody was happy with the spate of price inflation that gripped most of the world as a consequence of supply chain disruptions caused by lockdowns and monetary inflation caused by quantitative easing and helicopter money drops.
However, not only does action against price increases address an inflation problem that doesn’t exist anymore, but Harris’s policy plays into the absurd notion that price increases are driven by corporate greed.
Prices, as any Econ 101 parrot can tell you, are set by the interaction between supply and demand. If supply rises relative to demand, prices fall. If demand rises relative to supply, prices rise.
Individual market participants also act as one might expect. Sellers raise prices as high as they can without ending up with unsold stock or scaring customers away to rivals. Buyers, on the other hand, seek out prices that are as low as possible.
Both buyers and sellers are motivated by self-interest. In both cases, an uncharitable description of self-interest could be “greed”, but self-interest is hardly unique to big corporations.
If corporate greed were to blame for price inflation, one has to wonder whether these same companies were overcome with altruism before they hiked their prices.
Opposing lower prices
A demonstration of Harris’s poor understanding of market dynamics can be found in the fact that she, like many other Democratic House representatives, joined the Federal Trade Commission’s fight to block the merger between two supermarket chains, Kroger and Albertsons.
Harris and her political allies argued that such a merger would increase grocery prices.
Kroger has a history of doing the exact opposite, however. When it acquired Roundy’s in 2015, it spent more than $100 million to cut the prices of thousands of products. After buying out Harris Teeter, it spent a further $125 million to reduce prices.
In this case, Kroger originally – in 2022, when it announced the proposed merger – promised to reduce prices by a total of $500 million.
An amicus brief by several state attorneys-general points out that the merger will actually increase competition in the grocery market, not decrease it. And Kroger itself has now promised to do even better, expecting to cut $1 billion off prices if the merger goes through.
Yet Harris opposes this deal, because of what must be an ideological blind spot. Unintentionally (one assumes), she opposes lower prices.
Her Democratic colleagues are also deeply distrustful of dynamic pricing technologies, which they call a “profiteering scheme”.
Although retailers claim that it makes pricing more efficient, leading to lower prices overall, politicians incorrectly assume that in a competitive market, the ability to implement “surge pricing” (or, conversely, price discounts during quiet times) grants retailers the magic power to exploit hapless customers by charging whatever they like.
Price signals
Consumers aren’t passive victims of price increases. Rising prices cause consumers to change their behaviour.
They do so not only by getting angry and lobbying their political representatives to “do something”. They respond by buying less, or switching to alternatives.
At the same time, higher prices signal to producers that they should increase production, and signal to would-be commercial rivals that they should enter the market to compete for a slice of the profit.
These dynamics ensure that excessive profits are competed away, and the rate of price increases returns to the baseline set by monetary policy (usually about 2% per annum in advanced economies).
This is already happening: consumers are reportedly buying store-label products instead of branded products, for example. If the greed of grocery stores or their suppliers were the problem, why would they sell no-name-brand items at a discount to more expensive and more profitable branded alternatives?
In the automotive market, people are buying more used cars, forcing dealers to reduce prices on new cars.
In theory, the effect of economising and shopping for cheaper alternatives should be that demand declines relative to supply, which should force prices down. And indeed, food inflation, which peaked at 11.4% in August 2022, ameliorated to 2.2% by June 2024. Overall inflation followed a similar curve.
Reality confirms the theory.
“While inflation is down, prices are still high, and I think consumers have gotten to the point where they’re just not accepting it,” said Tom Barkin, president of the Federal Reserve Bank of Richmond, at a conference of business economists. “And that’s what you want: The solution to high prices is high prices.”
So, the free market is working as intended, but that won’t stop politicians like Harris from interfering. After all, saying you’ll do nothing and let the market do its thing is hardly a popular vote-getter.
Market shocks
The Harris campaign hasn’t provided any details on how exactly it is proposing to limit “price gouging”. In fact, the term cannot even be accurately defined. There is no magic line between a reasonable price increase and “gouging”.
The term is often used in the context of natural disasters or other emergencies, when essentials suddenly become far more expensive.
On the face of it, this looks like retailers exploiting desperate people. In reality, however, this rewards retailers for continuing to sell their wares under difficult circumstances, signals to producers to increase or redirect production, and signals to consumers to economise.
As I explained in the last column that Daily Maverick refused to publish (on the grounds that “readers will tear you to shreds”), these consequences of high prices combine to achieve the purpose of a free market: to find the most efficient way to distribute scarce resources in the face of potentially unlimited demand.
Measures to limit so-called gouging will likely take the form of caps on annual price increases. Harris will also likely support an anti-price-gouging bill that has already been introduced in the House by a coterie of left-wing Congresscritters from her party, which essentially prevents large companies from responding to “exceptional market shocks” by significantly raising their prices.
Price controls
Limiting price increases is tantamount to price controls, since it artificially restricts how high prices can go.
Price is a signal, remember? It is a signal to consumers of how much of something is available, and it is a signal to producers of how much demand there is. If you artificially keep prices down, the inevitable consequence is that producers produce less of it than they otherwise would, and consumers demand more of it than is available. Ergo, price caps cause shortages.
(There’s a converse effect: price floors, which are sometimes instituted to protect producers from low prices, cause unintended surpluses, for exactly the same reason that price caps cause shortages.)
In fact, this dynamic works so well that retailers actively use lower prices to get rid of unwanted stock. When they want to sell out of something that isn’t moving fast enough, they discount it, until there is a “shortage”.
Overheating
Of course, nobody likes needlessly high prices, and the policies that caused them – worldwide hard lockdowns in response to the Covid-19 pandemic – were misguided at the time.
However, market prices are not amenable to direct government intervention. There are certainly (de-)regulatory policies that can reduce costs and make it easier for rivals to compete with lower prices, but tackling prices directly is to forcibly change effects without addressing causes.
That’s a bit like deciding you don’t want your car’s engine coolant to get hotter than 100°C, and trying to achieve that by preventing the temperature gauge from exceeding 100°C. All you’ll achieve is that you won’t know when your car overheats until it comes to a grinding halt.
Unfortunately, politicians on both sides of the aisle have yet to learn this. They do not have, and should not have, control over prices in market economies.
The cure for high prices is indeed high prices. Forcing them down prematurely will only create shortages and a misallocation of productive resources.
The Harris campaign’s housing plan also demonstrates deep confusion over the impact of economic policies, but perhaps that story is best left for another day.
[Image: Low prices cause empty shelves. In this case, it was intentional on the part of a Whole Foods store on 16 March 2020. Photo by Seth Anderson, used under CC BY-NC-SA 2.0 licence]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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