This past week, Kamala Harris, the Democratic nominee for president of the United States, put forward an economic plan for the revitalization of the American economy. But the law of unintended consequences means that her plan would do the exact opposite. It is a rare achievement for a major political figure to put forward a childlike plan for economic revival that is deservedly both panned by the Washington Post editorial board as a collection of “populist gimmicks” and ridiculed by the Wall Street Journal as “Venezuelan-style left-wing populism.” For once, left and right unite to denounce this toxic one-two combination: huge restrictions on competitive markets coupled with massive programs of redistribution.
Harris is obviously worried about the high inflation rates that during the darkest Biden period reached a temporary high of close to 9 percent. The upshot was that while the stock market did very well, the labor market did not, such that the country has seen a decline in real wages during the Biden years of about 3.9 percent, compared to a 2.6 percent increase during the first three years of the Trump administration before COVID (and the notorious COVID-era restrictions). There is no great mystery here, for, as countless economists have noted, if more dollars chase fewer goods, inflation results from the confluence of these two major forces. Unwise regulation, such as the effort to force EV vehicles on an economy that can ill bear their cost, and major expenditures, such as President Biden’s programs for student loan forgiveness, for which the Democrats should be grateful that they have been blocked in the courts, further contribute to inflation.
There is only one way to deal with these excesses: undo them both. There are always real costs to switching gears, because they upset settled expectations. But the longer the delay, the more severe the difficulties from current policies. Eliminating the growth restrictions will start to unleash market forces, at least if there is some expectation that there will not be in quick succession yet another turn of the screw. In contrast, it is a perpetual delusion to think that the way to patch up matters is by using a second bad program to counteract the effects of the first. Thus, one common example involves minimum-wage laws, which are now causing havoc in the California restaurant industry. These distortions are not cured by giving subsidies to either the employer or employees, which never undo the damage, but only spread the harm to third parties whose income and wealth are depleted by the new tangle of taxes and regulations.
It is just this deadly downward spiral that Harris puts forward when she wishes to give the FTC (with its dismal performance on the antitrust front) the power to impose “the first-ever federal ban on price gouging on food and groceries—setting 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.”
The warning signs are everywhere. She introduces her program by charging an entire competitive industry with “price gouging” when its return on equity, as Lawrence Kudlow notes, is well below that of other industries—between 1.2 and 4.7 percent, as compared to the basic rate of 8.5 for most American companies and far below the higher margins of “Apple 25 percent, Meta and Microsoft 34 percent, Nvidia 53 percent.” Her “first-ever” federal ban is hardly a selling point: it means that political actors from both parties have declined the invitation to establish price fixing in agricultural markets.
Food prices often vary rapidly. Grapes sell for one price when they are in season and for another when they are not. But there are many types of grapes and huge regional and temporal variations in price. No government agency could track these differences, and none should try. Take a look at many restaurant menus and you will see next to key foods the letters “MP,” for market price, which tells you that the restaurant cannot know from week to week the price of various kinds of fish, meats, and vegetables. No system of price controls could keep up with these constant variations, which is why none has been tried.
Yet suppose there are some commodities that do have more stable prices. Even then, Harris is on a fool’s errand. There is a well-known theory about historical systems of price controls. But all of these cases involve what are termed natural monopolies, where declining costs of provision over the relevant price range means that a single seller is able to serve the market more cheaply than two (or more) producers. However, the price of having that one low-cost producer is that it is in a position to charge monopoly prices, which results not only in transfer payments to the fortunate seller, but also in a reduction in overall welfare, as certain buyers who are willing to purchase at competitive prices will drop out of the market when prices go higher. The great challenge of rate regulation is to adopt some system of rate setting that moves back toward a “risk-adjusted” competitive rate of return. It is no easy feat, however, because too light a hand could preserve those monopoly gains, while too heavy regulation could result in a confiscation of private capital, when the regulated firm is no longer able to recoup its initial investment, its operating costs, and the sensible rate of return. Indeed, in dynamic markets, it has long been asked whether the game is worth the candle, especially if entrepreneurial innovation introduces novel forms of business that undercut the dominant market without the administrative overload—think of the progression from the telegraph, to the telephone, to the Internet.
It is important to recall the characteristics necessary for successful regulation. First, there has to be some demonstrated exercise of monopoly power, which are commonly found in the traditional targets of regulation—pipelines, public utilities like gas and electric power, and common carriers. The few firms, moreover, supply standardized products in large quantities to individuals in a fixed community and involve heavy front-end costs that can be left stranded by confiscatory rates. Food products are the absolute antithesis of this. The industry has literally hundreds of different product lines. Both entry and exit by firm and by product are very rapid. Price movements are quick and uncertain, so rates could not be determined on an annual basis. Additionally, if they were somehow subject to effective regulation, the result would be a rerun of the disastrous Nixon experiment with price controls for gasoline, which kept prices low when demand was high, so that people either waited in queues to purchase gas or engaged in some special fiddle that gave them the prices they wanted through the black market. Rent control gives the same story, where low rents retard development, reduce the tax base, lead to excessive taxes in the unrelated market, and create a cottage industry of lawyers who make their living before housing courts, stacked with tenant advocates, that lead to chronic shortages.
What magic elixir Harris can devise to overcome all of these well-known objections cannot be told, but if she is determined to create an “opportunity economy,” she picked the worst possible way to do it.
Harris’s next proposal fares no better. She is obviously distressed about the high mortgage rates that have made it difficult for owners with favorable mortgages on their homes to sell, and for first-time buyers to enter the market. But those interest-rate highs stem from the common belief that mortgage rates are not likely to come down soon. That expectation could be reversed by a degree of fiscal discipline from Biden and Harris to reduce long-term inflationary pressures, which in turn will let rates drop toward the more attractive levels that applied during the Trump administration. Note that this fiscal discipline does not require any special treatment for any class of homeowners or buyers, and thus reduces the dangerous role of the central government in picking friends.
Harris, however, followed the time-honored progressive habit of introducing a second blunder in order to offset the first. In this instance, she hopes (whether by grant or loan is not clear) to provide all “working families,” another undefined term, who have paid their rent “on time for two years” with “up to” $25,000 in down-payment assistance, with more generous support for first-generation homeowners. Start with the obvious objection about the vast sums needed to service some one million first-time home buyers, for a total annual sum of $25 billion, with no visible source of funding. Then note that the one so-called eligibility requirement makes no sense. It would exclude individuals who have not rented at all, and leave in a state of confusion an application by a newly married couple, one of whom was a day late on a rent payment while the other had a spotless record. Her proposal would require a huge government bureaucracy to make ad hoc decisions on the amount and terms of the individual awards in record time—and this by a government that cannot create a standard form for college financial aid.
Neither of these misguided programs can be saved by any fine tuning. The Harris economic plan is supposed to open up economic opportunities for all, but so long as the words growth, markets, and competition are absent from her discourse, the intended beneficiaries of this self-destructive program suffer along with everyone else.
