Politicians routinely pander to voters with ideas that sound appealing but are harmful in practice. The reflexive vow to impose price controls to stop those greedy corporations from gouging consumers with high prices exemplifies this type of poor policy. Yet in one of her first policy proposals as the Democratic Party’s White House candidate, Kamala Harris insisted that the country needs “the first-ever federal ban on price gouging on food and groceries.” She would set “clear rules of the road to make clear that big corporations can’t unfairly exploit consumers to run up excessive corporate profits on food and groceries.”
While these accusations are vague, they still clearly do not apply to the grocery business. In 2022 when inflation was peaking, the average profit margin for a grocery store was 2.3% . Not only was this profit margin lower than 2021 ( 2.9% ) but it is also well below the average business profit margin between 8 and 9%. Making the exploitation argument even weirder, profit margins fell further to 1.6% in 2023.
While shortages in the wake of the COVID-19 pandemic caused supplier prices to rise at a higher rate than overall inflation , if grocers are exploiting consumers and price gouging, then they are clearly the worst price gougers ever. Grocery retailing is a low-margin, high-volume business. Consumers are neither exploited nor gouged. They can patronize the grocery store of their choice to find tens of thousands of products.
As is all too often the case, good economics makes bad politics. It is politically expedient to blame companies. Identifying businesses as the scapegoat also gives the Democrats’ preferred price control policy a veneer of logic. After all, if businesses raising prices causes inflation, it follows that prohibiting those price increases will remedy it.
The problem is that history is not on the vice president’s side. American economic history is replete with failed price control policies.
To counter the inflationary pressures from World War II, for instance, FDR implemented a vast system of price controls and rationing.
While prices no longer increased while the controls were in place, problems of shortages and “shrinkflation” replaced visible price increases. Ultimately the price controls were removed in 1946 and the annual inflation rate skyrocketed to more than 20% in 1947 .
President Richard Nixon also failed to learn from history and implemented a wage and price control regime that froze wages and prices in 1971 for 90 days. The controls were then gradually lifted over time. Rather than relief, the decision produced “ shortages and long lines ,” says the John Locke Foundation, which “frustrated consumers for years.”
The list of examples goes on, but the theme is the same: Price controls fail to arrest inflation and ultimately impose costs that far exceed the burdens associated with the original inflation. Importantly, the adverse consequences of price-gouging laws do not only apply when targeting inflation. These controls never work regardless of the promise and often result in perverse if not outright cruel outcomes.
Today, price-gouging rules persist in local laws across America. Take the case of John Shepperson, a Kentucky man who bought 19 generators from Home Depot , took time off from his job, rented a truck, and drove 600 miles to Mississippi where victims of 2005’s Hurricane Katrina needed electricity. “John offered to sell his generators at twice the price he paid, to help cover his costs and make a profit,” recounts American Enterprise Institute economist Mark Perry.
Though “people were eager to buy” his generators Mississippians in need never had the chance to do so. Shepperson was arrested for violating Mississippi’s price gouging law and held for four days. The generators were confiscated, says Perry, and never made it to consumers with urgent needs. The prices Shepperson wanted to charge were expensive. But when the locally available generators sold out, as they will in an emergency, those who arrived after the last one was purchased became victims to both the storm and laws that create artificial scarcity.
Historically, price controls fail to meet the hope of their advocates because such policies do not address the root causes of the problem and introduce a slew of harmful and unintended consequences. The Harris price-gouging plan follows this same script. It fails to understand the causes of inflation and does not account for the harmful consequences price caps inevitably impose.
Given that history, the best we can hope for is that the vice president’s proposal is merely pandering to voters, and she has no intention of following through. Otherwise, consumers will pay a very high price indeed.
More must-read commentary published by Fortune :
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune .
This story was originally featured on Fortune.com
Most Popular
Comments / 0