Now that 30 days have passed since its original publication, I can share here – below the fold and free of charge – the full text of my and Richard McKenzie’s August 23, 2024, Wall Street Journal essay, “Kamala Harris’s Price-Control Delusion.”
Kamala Harris’s Price-Control Delusion
Consumers inevitably would end up paying via shortfalls of supply and reductions in quality.
By Donald J. Boudreaux and Richard B. McKenzie
Aug. 22, 2024 at 4:50 pm ET
Kamala Harris has fallen victim to an economic delusion. As president, according to her campaign, she would impose national price controls on food and groceries to fight inflation. But presidential powers don’t allow one to best market forces. Mandatory price controls, while keeping nominal grocery prices from rising, would raise the real cost of groceries by reducing supplies and product quality below consumer demand.
Merchants have a myriad of ways to circumvent price controls by reducing what consumers get in return for what they pay—and competitive market forces will encourage them to do so, even when illegal. Consider the economics at play. If sticker prices were prevented from rising as grocery supplies fall, stores would raise nonsticker prices. “Shrinkflation”—when companies keep prices the same but shrink the portions of goods—is the most familiar example. Stores can also make nonprice adjustments, such as passing off “select” grade steaks as higher-ranking “choice” grades or slicing bacon thinner. (Gasoline stations were widely rumored to have done much the same—filling “premium” tanks with “regular” gasoline—during the Arab oil embargo in 1973-74.) Stores may also hire fewer cashiers, devote less effort to cleaning produce, or reduce hours of operation.
Price controls could also lead to food shortages if producers withhold goods from the market because they’re unable to obtain reasonable prices. This would mean more empty shelves, forcing shoppers to incur greater search costs, such as repeated trips to the store.
Absent price controls, stores offer the quantities and qualities of goods and in-store amenities that they do because they determine that their customers prefer to pay more for added value. Price controls eliminate many of these win-win transactions. In competitive industries like grocery retailing—whose profit margin is only 1.6%—the quality-adjusted prices of products subject to price controls would likely be higher than the uncontrolled sticker prices.
Price-control proponents often justify their position by claiming that grocery stores are monopolies. They point to a fantasy economic theory that purports to show how price controls in monopolized markets can lead to an increase in sales. But grocery stores aren’t monopolies—Americans can easily switch from Safeway to Whole Foods to Trader Joe’s. Even if they were, government intervention still wouldn’t be the answer. Monopolists are just as willing and able as are competitive firms to respond to sticker-price controls with nonsticker-price adjustments.
Economists Tyler Cowen and Alex Tabarrok describe a market price as a “signal wrapped up in an incentive.” It informs sellers and buyers of market opportunities so they can respond as productively as possible. Price controls, by contrast, convey distorted information, pushing buyers and sellers to pursue wasteful evasions. Ms. Harris should know better.
Mr. Boudreaux is a professor of economics at George Mason University and the Mercatus Center. Mr. McKenzie is an economics professor emeritus in the Merage Business School at the University of California, Irvine, and author of “The Selfish Brain: A New Way of Economic Thinking.”
