The 1970s called, and they want their economic policies back. With Democratic presidential nominee Vice President Kamala Harris set to unveil her economic agenda in a speech this weekend, her campaign released a Wednesday night teaser in which price controls feature prominently. “Her timing is impeccable,” quipped economist David Henderson. “She announced the price control policy on the eve of the 53rd anniversary of President Richard Milhous Nixon’s August 15, 1971 price controls.”
According to early reports, a Harris administration would back legislation to enact the first-ever federal ban on “price-gouging,” focusing particularly on grocery stores. The plan would be enforced through the Federal Trade Commission (FTC), an independent agency already radicalized under the Biden administration to hinder profitable business moves such as grocery chain mergers.
Criticism
Details are sketchy (the leftist bureaucrats can sort them out later), so that even The New York Times is wondering openly about “what exactly would qualify as grocery-store ‘price gouging.’” However, one “likely template” would be “a recent bill from Sen. Elizabeth Warren (D-Mass.),” similar to a bill Harris co-sponsored in 2020, a Washington Post analyst suggests. “It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food.” The Times also noted that the Harris campaign’s plan “did not detail how Ms. Harris would pay for her spending and tax-cut proposals.”
“It’s hard to exaggerate how bad Kamala Harris’s price-gouging proposal is,” the Washington Post continued. “At best, this would lead to shortages, black markets and hoarding, among other distortions seen previous times countries tried to limit price growth by fiat. … At worst, it might accidentally raise prices.” The Post reminded readers that price fixing is already illegal, and that grocery stores are “notorious” for their small profit margins, currently sitting at about 1.5%.
“She is running on the Maduro plan,” former president Donald Trump responded to Harris’s plan. “We call it the Maduro plan. Like something straight out of Venezuela or the Soviet Union.” Under Nicolas Maduro and his predecessor, Hugo Chavez, the socialist regime in Venezuela has crippled a once-thriving economy, prompting widespread food shortages due to policies such as price controls. Last month, Maduro faced massive protests after having himself declared the victor in a presidential election most outside observers believe he lost in a landslide.
Graphic Depiction
To demonstrate the economic folly of price controls, all it takes is a basic supply-and-demand graph. According to economic theory, the price consumers are willing to pay for additional units of a good — bags of granola, for example — declines as their demand for more bags of granola slackens. Meanwhile, the price producers are willing to accept for additional bags of granola increases as their production costs expand.
Economic theory proposes that, in a perfectly free market with sufficient competition, there is an equilibrium price (and quantity), derived through trial and error, where consumers and producers negotiate the ideal price. At this equilibrium price, consumers are willing to buy exactly as many goods (bags of granola) as producers are willing to supply — no more, no less.
Figure 1. Basic Supply and Demand Graph
It’s important to recognize that, in a free market, the price mechanism is self-regulating. If the price is set too high, producers would find unsold merchandise on their hands, and they would have to take a loss by discounting merchandise or simply disposing of it. Producers have an obvious, monetary incentive to avoid such losses from overproduction.
If the price is set too low, a shortage results. Some consumers would have to make do without because there aren’t enough bags of granola to go around. Some of those consumers love their morning granola so much they would even be willing to pay extra to obtain it. This demand will drive prices up. The market sets prices more accurately and responds to pricing errors much faster than central planners can; this improves the experience of everyone involved.
Price controls restrict the price from moving around freely. A price ceiling or price cap prevents the price from moving above that value. If the upper limit is at or below the equilibrium price, then the price control will have no effect. But if the upper limit is lower than the equilibrium price, it will cause a shortage (see graph below). (The same logic applies to a price floor, but in reverse.)
Figure 2. Supply and Demand Graph with Price Cap
The graph demonstrates several effects of a price cap set too low. First, it produces a shortage, since people demand more granola at that price than there are bags to go around. Some people will have to go without, and the system has no fair way to assign the available bags of granola to the people who most need or desire it. Second, it results in job cuts. Granola companies are unwilling to produce extra bags of the tasty treat when their costs exceed the price they are allowed to ask. So, they no longer have jobs for the workers they would employ to produce those extra bags.
Of course, the rhetoric of “price gouging” tries to present the policy it describes as somewhat different than a price ceiling, strictly speaking. It only aims to prevent dramatic increases in price, versus lowering prices from where they currently sit. However, this is equivalent to adopting the current equilibrium price as a ceiling. That would be fine (and unnecessary) if price equilibriums never changed, but they do. In fact, widespread inflation is guaranteed to raise the equilibrium price. Inflation raises every supplier’s production costs, thus raising the entire supply curve, as depicted below). Notice how the price cap, combined with a higher equilibrium price, once again creates a shortage and cuts production.
Figure 3. Supply and Demand Graph with Price Cap after Inflation
Other Policies
Besides price controls, Harris’s economic agenda also features tax credits for home builders, $25,000 subsidies for more than one million first-time home-buyers, a $6,000 child tax credit, price caps on prescription drugs, and eliminating taxes on tips. Harris calls for home builders to double their production of new housing units from approximately 1.5 million per year to three million.
Very little in this policy agenda is original to Harris (not that an “original” economic policy is a good thing!). “Taken together, her plan represents more of a reboot of President Biden’s economic policy than a radically fresh start — a new sales pitch focused on its most popular aspects, not a new vision,” The New York Times summarized.
Yet some elements of Harris’s agenda also copy policies espoused by the Trump-Vance ticket. Harris’s plan to eliminate taxes on tips copies a Trump proposal, and it comes after Vice President Harris in 2022 cast the tie-breaking vote on a bill that would let the IRS “track workers’ tips so they can be taxed,” according to Americans for Fair Taxation. Harris’s proposed expansion of the child tax credit also comes after J.D. Vance proposed expanding it to $5,000.
There are strengths and weaknesses to Harris’s agenda. Its strength lies in its sensitivity to where Americans are hurting — food prices, tax burdens, the impossible costs of buying a home. Its weakness lies in understanding how to truly provide relief. The reason why people can’t buy homes is because interest rates are high to deal with inflation, and a down-payment subsidy doesn’t change that. Food prices are also because of inflation, which in turn is due to the federal government’s irresponsible deficit spending since 2020. The solution is not more government intervention in the economy but more stability that lets the economy grow its way into health.
The Focus Is on Price Controls
The policy proposal that shows this contrast most sharply is price controls. “This represents a return to the lazy, failed economic policies of the 1970s, when price controls proved to be a disaster for the economy,” said Brian Riedl, a senior fellow at the Manhattan Institute.
The 1970s witnessed a calamitous combination of economic policies. The Nixon administration continued the Johnson administration’s New Deal policies that sparked high inflation through deficit spending. Then it imposed price controls that led to shortages. Its environmental regulations further dampened the economy. The result was a period of “stagflation” — both inflation and high unemployment, a marriage of woes economists hadn’t thought possible. These policies plunged America into an economic hole so deep that it took a decade to dig ourselves out.
It isn’t just America; dating back to the Roman Empire, price controls have hurt economies everywhere they have been tried.
In Jamaica in the 1970s, a left-leaning government imposed price controls to counteract rising inflation, and it nearly ruined the country’s credit. But the island country’s economic ruin did not teach everyone the same lesson. A Jamaican emigrant had traveled to the Land of Opportunity, graduated college during the civil rights movement of the 1960s, and became a Marxist economist at Stanford University. That professor, Donald J. Harris, would return to his island of origin to teach his daughters, Kamala and Maya, about their heritage. On one of those trips, it seems his eldest daughter also absorbed some unsound economics too.
Joshua Arnold is a senior writer at The Washington Stand.
