Will the Harris Anti-Price Gouging Plan Gore the Market? Hardly!
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the
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The high price of food is a particular sore point, and the Vice President’s response is to make it worse. On Friday she floated a “first-ever federal ban on price gouging on food and groceries.
There is also no evidence that supermarkets or other food retailers are gouging anyone. Fixing prices is a recipe for shortages, as controls would discourage grocery suppliers. Price controls have led to shortages everywhere they’ve been tried, from Moscow to Caracas. The last American President to impose wage and price controls was Richard Nixon in the early 1970s. He had to stage a humiliating retreat amid shortages and market dislocations.
—The Editorial Board, “Kamala Harris Endorses Nixonomics: She wants price controls on groceries, Venezuelan-style,” Wall Street Journal, August 16, 2024.
For the Wall Street Journal editors, there is a specter haunting the market economy: the specter of Kamala Harris’s grocery price gouging proposal. For them, it is dead-and-buried Soviet economic planning banging around in the attic, President Richard Nixon’s wage and price controls, and Venezuelan-style economic policy—all rolled into one. Their apoplectic reaction is enough to scare the bejesus out of most anyone, not just the usual readers of the Wall Street Journal.
While the details of Harris’s proposal are not altogether clear, what she proposes falls far short of the editors’ ideology-induced hallucination. But that hasn’t stopped critics of her proposal from warning of its disastrous consequences for our “self-regulating” market economy. From ultra-conservative Republican Florida Senator Rick Scott to Washington Post opinion columnist Catherine Rampell, to former Obama administration economist Jason Furman, critics have warned that it would “end up destroying supply,” “lead to black markets, and hoarding,” and “result in less much-needed food.”
After you have located your smelling salts, let’s take a look at just what Harris has proposed to do about grocery price gouging and its likely effects, which bears little resemblance to what the editors had to say.
Back to Reality
To begin with, there is a world of difference between Soviet or Venezuelan economic planning, Nixon’s wage and price controls, and Harris’s proposed federal law that would penalize price gouging in the grocery industry. In its first 100 days, according to her proposal, a Harris administration would work with Congress to:
- “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 Federal Trade Commission (FTC) and state attorneys general to “investigate and impose strict new penalties on companies that break the rules.”
The Harris proposal would also direct her administration to “crack down on unfair mergers and acquisitions that give big food corporations the power to jack up food and grocery prices... .” At the same time, she promises to give small businesses the resources they need to compete in the grocery industry.
That’s the entirety of her grocery price gouging proposal. Clear rules that define “excessive profits on food and groceries” that “unfairly exploit consumers” will need to be specified in legislation. So too will the “strict new penalties” that the FTC and state attorneys general will be able to impose.
On top of that, Harris’s price gouging proposal is nothing new other than the fact that it would be federal law, not state law. Currently 37 states have anti-price gouging laws that target excessive increases of prices of necessities during emergencies or crises. For instance, according to state statutes, Florida outlaws “unconscionable” increases of prices of essential commodities during a state of emergency that “grossly exceeds the average price during the 30 days prior to the disaster declaration” (and can’t be justified by rising costs). Several other states specify that price increases ranging from 10% or greater to 25% or greater from the previous 30-day average price are unlawful.
Few would argue that groceries are not a necessity or deny the debilitating effect of increasing food prices, which in August 2024 were 21.4% higher than in August 2020 in the midst of the Covid-19 pandemic. In the last two years, U.S. consumers have spent more of their disposable income on food than any time since 1991.
Isn’t Competition the Antidote to Price Gouging?
State laws against price gouging have met with little opposition, but Harris’s federal proposal has gotten under the skin of not just the Wall Street Journal editors but many economists as well.
The argument that corporate greed makes legislative controls necessary to stop the gouging of consumers especially bothers economist Greg Mankiw, the author of a widely used economics textbook and former chair of the George W. Bush administration’s Council of Economic Advisers. He told the Wall Street Journal, “Our assumption is that firms are always greedy, and it is the forces of competition that keeps prices close to cost.” He went on to assure the Journal that the food business isn’t a monopoly—most people, but not all, have the option of going to another store if one store raises its prices too much.
Mankiw has a point. Some 90% of U.S. consumers live within 10 miles of a grocery store. And today consumers can even use their phones to compare the prices at different grocery stores.
But what Mankiw doesn’t mention is that while there are many grocery stores, most are owned by a few mega-corporations. For instance, Albertsons—the fourth largest grocery corporation in the United States—owns Acme, Safeway, Shaw’s, Star Market, Vons, and Tom Thumb, along with 12 other grocery store chains.
In 2023, Walmart-owned stores accounted for 30% of U.S. grocery sales, followed by Kroger’s 10%. The top four grocery corporations accounted for 55% of grocery sales, and the top five accounted for 61% of sales.
That’s far from a competitive market that can keep prices close to costs. When the market share of the top four firms exceeds 50%, an industry is generally considered to be highly concentrated, such that the largest firms possess enough market power to restrict output or fix prices to boost their profitability.
In short, that level of concentration has compromised the ability of Adam Smith’s invisible hand of price competition to discipline corporate greed and prevent corporations from gouging consumers. No wonder, the FTC has filed suit to block the merger of Kroger and Albertsons, the second and fourth largest grocery corporations.
What Price Gouging?
No one disputes that grocery prices have risen dramatically since the pandemic. But just how important a role increased corporate profits have played in pushing up those prices is up for debate. For instance, a 2024 New York Federal Reserve Bank study attributes higher grocery prices to rising wages for grocery store workers, along with a spike in agricultural and livestock prices.
But even New York Fed researcher Thomas Klitgaard, who argues that “profit margins [the markup of prices on top of costs] haven’t been important” causes of higher grocery prices, allows that operating profits in dollar terms did increase by $10 billion from 2019 to 2023 in beverage and retail stores, because increased operating expenses were applied to a larger base of consumers, which allowed for higher profit margins.
Other researchers place far more emphasis on rising profits and profit margins as a cause of the spike in grocery prices. For instance, “Feeding America in a Time of Crisis,” a 2024 staff report of the FTC, found that the annual profits for food and beverage retailers—the amount of money companies make over and above their total costs—rose substantially during the pandemic and remain quite elevated. Those revenue increases were higher than their most recent peak of 5.6% in 2015, reaching 7% in the first three quarters of 2023. For the FTC researchers, that “casts doubt on assertions that rising prices at the grocery store are simply moving in lockstep with retailers’ own rising costs.”
Ernie Tedeschi, former chief economist of the Council of Economic Advisors during the Biden administration, also found that the average price markup for groceries rose from 5.3% of cash operating costs (more or less the costs a business incurs to run its day-to-day operations) in 2019 to 6.8% in the second quarter of 2022. Tedeschi estimates if grocery markups had stayed at their 2019 level, grocery prices would have risen 4% faster than all other prices, rather than 5.4% faster, although he remains agnostic about the exact cause of those higher markups.
The Harris campaign and other advocates of price gouging legislation, however, never claimed that the increase in corporate profits and profit margins were the only cause of higher grocery prices. That the current grocery price inflation has multiple causes, even if price gouging is not its primary cause, means that price gouging legislation remains a useful safeguard. In the words of Senator Elizabeth Warren, “it’s another tool in the toolbox” to fight inflation.
Yet More to Do
Perhaps the biggest worry about Harris’s proposal is that it will do too little to combat price gouging, not that it will do too much or induce shortages. The Harris proposal is less aggressive than the Price Gouging Prevention Act of 2024 introduced by Senator Warren and three other senators earlier this year. Much like state laws, the federal act would “allow the FTC and state attorneys general to stop sellers from charging a grossly excessive price.” But unlike the Harris proposal it would cover all industries and not just grocery stores. That broader coverage is much needed. Researchers at the Groundwork Collaborative, a D.C.-based progressive policy advocacy group, found that corporate profit margins accounted for more than a third of inflation since the pandemic began, and roughly half of inflation in the first half of 2023.
This much is clear. The Wall Street Journal editors’ raving about the evils of wage and price controls and economic planning have little to do with what Harris actually proposed, and there is little reason to believe that her proposal will have the disastrous consequences they envision.
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