When people complain that prices are too high, they are actually complaining about inflation that occurred in the recent past. When the government tries to soothe us by saying “inflation is down” please do not think that means prices have started to fall. Inflation is a general rise in prices. When inflation “falls” it just means the rate of increase declines. Thus, there are two problems. Previous inflation means we pay higher prices today than we did a year or so ago. Today’s inflation means prices are going up before our eyes --- we see it more dramatically at the gas pump but we have also seen some big jumps in the supermarket. I apologize if this seems obvious but it is important to emphasize that a decline in the rate of inflation is not a fall in any price.
(Some products do have prices that fluctuate a lot, like gasoline. So sometimes those prices fall. The average price of a gallon at the pump was $2.19 in 2020, $3.03 in 2021, rose dramatically to $3.98 in 2022, and began to fall --- it was $3.54 during 2023 and so far in this year it has fallen to $3.41. Remember these are national averages – there is a lot of regional variation.)
Now don’t get me wrong --- it’s good that the rate of inflation has come down. The rate of inflation was below 2 percent in 2020 and peaked at 8 percent in 2022. It has fallen since then (it was a bit over 4 percent in 2023).
[These rates can be found here . The Federal Reserve Bank of St. Louis collects a large amount of economic data. One can usually access them by typing FRED into the google box and then identifying the types of time series you want to check out.]
The problem, of course, is that all that inflation through 2022 and 2023 has left us with higher prices. It is also true, as I’ve noted in previous commentaries, that for the most part wages have risen more than inflation but that didn’t help those who were unemployed and the rise in food prices has been particularly galling for most of our fellow citizens. So, attempts to address the pain of price increases are important for both sitting Presidents and would-be Presidents.
However, it is important to acknowledge that absent price controls, there is no magic bullet to reduce inflation --- and it is even harder to actually get prices to fall. Traditionally, (and by this, I mean since World War II) the main tool for reducing inflation has been for the Federal Reserve (our Central Bank – called the “FED” in short-hand) to raise interest rates until the economy experiences a recession.
(President Biden was right in his debate with Trump on June 27 [a successful comment lost in the hand wringing by Democrats about how badly he did in general] when he noted that the low inflation in 2020 was because Trump had allowed the economy to fall into a deep recession by his mishandling of the COVID crisis.)
Obviously, a Harris Administration would not want to permit the reduction of inflation to be accomplished by throwing the economy into recession. That “cure” would be worse than the “disease.” Instead, as I have mentioned a number of times, the FED has attempted to manipulate the economy so that the decline in inflation would be slow enough not to cause a recession --- a so-called “soft landing.”
These are the issues before policy makers as Harris makes her proposals. I said in the oral presentation that to investigate those proposals is a bit complicated but that I would give it a try.
The first thing to understand is that the efforts of some politicians to call the Harris proposals PRICE CONTROLS is either just plain ignorance or just plain dishonesty. If Harris were President and got Congress to enact a federal law against price gouging, that would NOT be price controls. The US had price controls during World War II and during a few years under President Nixon (1971-73). They were very extensive and during World War II, they actually involved rationing. There are very few examples of price controls today. Major ones include rent control laws in some localities.
Meanwhile, there are laws against price gouging in 37 states.
Well, okay, what is price gouging? The law professor Zephyr Teachout wrote an interesting article for the Atlantic in which she defended the Harris proposals. She described how most state price gouging laws work:
“A typical price-gouging claim has four elements. First, a triggering event, sometimes called an “abnormal market disruption,” such as a natural disaster or power outage, must have occurred. Second, in most states, the claim must concern essential goods and services. (No one cares if you overcharge for Louis Vuitton handbags during a hurricane.) Third, a price increase must be “excessive” or “unconscionable,” which most states define as exceeding a certain percentage, typically 10 to 25 percent. Finally, the elevated price must be in excess of the seller’s increased cost. This is crucial: Even during emergencies, sellers are allowed to maintain their existing profit margins. They just can’t increase those margins excessively.”
In other words, the law against price gouging is triggered when some unusual event creates short run shortages and the evidence for it involves expanded profit margins.
Now many consumers believe that grocery prices have risen because of price gouging. AT first blush, this appears wrong because most retail establishments have very thin profit margins. That’s true. But it’s also true that during the recent inflationary surge, the meat packers, giant poultry companies, etc. have been able to stretch their profit margins. That is because they mostly operate in OLIGOPOLISTIC markets (a handful of giant firms) where price competition is anathema. Instead, these giants are careful to follow each other’s price increases for the most part. They compete by attempting to convince consumers that their brand of cereal is better than their competitor’s (or that Perdue’s chickens are better than other brands). Both of these versions of “competition” actually raise prices because of the high costs of advertising.
Such giant firms have been known to take advantage of price increases (such as occurred during the pandemic and after) to raise their prices MORE than their costs.
Here is one example: “When avian influenza recently wiped out more than 58 million birds in about a year and egg prices dramatically shot up, Cal-Maine, the largest distributor of eggs in the U.S., increased its gross profit margins five-fold. That raised questions for farmer-led advocacy group Farm Action, which penned a letter to the Federal Trade Commission (FTC) in January asking the agency to investigate Cal-Maine for price gouging and collusion.”
[quoted from https://civileats.com/2023/05/22/food-prices-are-still-high-what-role-do-corporate-profits-play/]
In other words, the distributor was the price increasing culprit, not the grocer. There was a sharp decline in the number of birds which would have led to SOME price increase. The distributor just used their market power as the largest distributor to lever the price they received more than warranted by the shortage. Otherwise, they would not have been able to increase their gross profit margin.
So, Harris is definitely right to propose a law against price gouging.
[The Teachout article in the Atlantic has a neat little discussion about why economists attempt to argue that “the market” will solve the problem of high prices during periods of shortage is nonsense. Her conclusion is that the public which smells a rat when price gouging occurs has more understanding of how the world works than too many of my fellow economists.]
Harris also wants to increase the number of drugs the prices for which Medicare can negotiate with drug companies. This is the same principle that WalMart follows when it negotiates with its vendors. It’s not price controls --- it’s price negotiation --- and it happens in almost EVERY transaction. Sometimes the seller is too weak to affect the price and must accept whatever is offered. (Think of a chicken farmer selling to Perdue.). Sometimes, the seller is a giant company (think Exxon-Mobil) and it can tell its buyers what the price will be. The local gas station must pay Exxon’s price to keep the franchise. And changing the franchise will not guarantee they will pay a lower price because they would be exchanging one giant supplier for another.
I happen to think Vice President Harris’ approach is a good one. It will not completely solve the inflation problem but it will reduce the ability of giant businesses to take advantage of temporary shortages to lever their prices upwards --- responding to cost increases by fleecing the public in order to expand their profit margins.
[For more details on the Harris plan, check out: https://www.cbsnews.com/news/kamala-harris-dnc-economic-plan-price-gouging-ban-inflation/]
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies.
The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.