A policy for food prices
Another of my favorites from among my columns last year. This one was published on September 4th 2024, just after Kamala Harris had called for price controls for groceries.
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Vice-President, Kamala Harris, has called for price controls on groceries to prevent “price gouging”. Specific markets – such as rented housing – aside, the US has recently avoided price controls. Until the last few years, inflation had not been a salient political issue since the 1980s. Economists agree that price controls don’t work. So why is Harris doing this?
One reason is that she is instinctively, just like Trump, Biden, and Sanders – a populist. She is happy to blame other people for voters’ woes, and whip up hatred towards the scapegoats. Another is that inflation has once again become politically critical during the Biden-Harris years.
Inflation, as Milton Friedman observed, is always everywhere a monetary phenomenon. Prices of individual assets, goods, and services will go up and down, providing key market signals. But if prices as a whole are rising that’s just illusion. What is actually happening is that the value of money is falling. That happens when the government issues too much money. Inflation’s recent peak was 9.1% in June 2022, its highest level since 1981.
This is where it gets complicated. Almost everyone agrees that increasing the money supply – by, for example, spending money it doesn’t have – ?will push up inflation. But the speed with which this feeds into the economy is harder to measure. The general consensus is that the impact is felt around 18-24 months after the monetary expansion.
The recent peak was therefore likely caused by the huge monetary expansion in 2020 and 2021: initiated by President Trump and continued by President Biden. The fall in inflation over the last two years results from a slowdown in expansion under Biden. Of course, the fiscal and monetary expansion was a direct response to the Covid pandemic. It may be that economists never reach a consensus over whether that response was worth the inflationary costs. But there is clearly truth in the claim that the decline in inflation was the result of Biden’s policies and the earlier rise was the result of both Trump and Biden.
So, can the government do something about the price of groceries specifically? Sure. But price controls are not the solution. Far from being guilty of “price gouging” the market for food distribution and retailing is very competitive. Profit margins are very slim. Some of the larger businesses have high total profits, but that’s on very high turnover.
However, government affects food prices in a great many ways. Government taxes food imports and restricts them in other ways. It subsidizes food exports. It subsidizes crop diversion programs, such as using corn for ethanol. It directly intervenes in the market to push up prices if they start to fall. It also boosts demand by subsidizing food purchases through the SNAP program.
The overall effect of both reducing food supply and boosting demand is to push prices up. There are a few interventions which may moderate this effect. There is, after all, an entire Department of Agriculture with many incoherent and contradictory policies, but generally speaking it exists to help farmers, not consumers.
To make food cheaper, it could simply stop deliberately making it more expensive.
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Quentin Langley lives in New York and teaches at Fordham University and Manhattan College. His book, Business and the Culture of Ethics was published in September 2020
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