Inflation has risen by approximately 20% during the Biden presidency. Presidential candidate Harris, being tied intimately to Biden’s administration wants to explain price increases in ways that focus on corporate greed rather than her own administration. Her posture is essentially that corporate raiders are the reason prices are high, and the solution is price gouging legislation to create price ceilings during ‘emergencies’. Price increases beyond a certain level are ‘gouging’ the American people, and this law will create a framework to keep prices low. Supermarkets are targeted because that’s a high visibility where many of people’s expenses come from.
Interestingly, grocery stores have profit margins between 1% and 3% of revenue. In 2023, profit margins for grocery stores were 1.6%. It also seems peculiar that this proposal comes two years after COVID ended because the attitude behind it seems to be that any time prices raise drastically, it’s an emergency. One would think this becomes another lever in a politician’s toolkit to tradeoff reduced inflation for before re-election in exchange for lesser economic efficiency.
The political economy for this makes sense more than the actual economics of the proposal. Despite having negative effects if passed, it may often be individually rational for politicians to pursue price controls. Many people believe that exploitation is wrong, and are willing to chalk up being unable to buy necessities at all to natural disaster, or forces outside of anyone’s control. Thus, punishing price gouging lets politicians take credit for keeping prices low, as shelves become empty, without paying the political price for unnecessary scarcity. Additionally, since there are strong aversions to even a whiff of exploitation, most voters fail to consider the disadvantages of being unable to buy goods and services at all. Politicians can channel this moral indignation into votes, volunteering, and money despite their actions being negative sum.
Unfortunately, support for price controls comes at a steep cost. The actual effects of price gouging legislation, or creating price ceilings prolong disasters and lead to the misallocation of resources. This is because people act in ways to maximize their self-interest.
During times of crisis, many people hoard because they aren’t sure when a crisis will end. When everyone thinks this way, there isn’t enough supply to satisfy demand. This leads to two things. First, supply consistently runs out. This means that some people who need goods and services will be unable to purchase the goods through legal avenues. An example of this is that when generators are priced too low during a storm, those who need them for medical equipment may not be able to prioritize their needs against someone else’s Xbox wants. Second, as this need isn’t filled, black markets or secondary markets pop up to resell and charge higher prices with the added disadvantages of potentially being less safe and predictable than other firms. For example, when parents must resort to buying baby formula on the black market, unethical people may cut the product with a cheaper substitute, potentially putting people at risk.
By contrast, when price raising is unregulated by bureaucrats, disasters end faster. The sovereignty of the dollar serves as an effective incentive to get ones’ hand on more supply. You’re more likely to serve your fellow man if you can get paid to do so. Probably the most illustrative example of this is John Shepperson. After Hurricane Katrina, John bought 19 generators, and drove 600 miles from Kentucky to Mississippi to sell them at double the purchase price. Instead of being able to sell at a profit, helping the desperate acquire power, he was thrown in jail, his generators confiscated. This example sent a clear message to other entrepreneurs looking to make a buck off of providing help, the risk of law enforcement. It’s safer to do nothing than to do work without making money.
There are other socially destructive elements to price controls as well. Christopher J. Neely of the Federal Reserve explains that the costs of price controls include “Widespread evasion of price controls promotes disrespect for the law. Suppressed inflation appears when temporary controls are relaxed.” If one cares about values like rule of law, and honest accounting of inflation, these policies exacerbate that as well.
Ultimately, when politicians promote price gouging laws, it’s important to remember that there are market failures in politics as well. Politicians don’t pay the full price of their actions when they promote policies like anti price gouging legislation.
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