Harris' fight against price gouging is good economic policy

Former President Donald Trump has called Vice President Kamala Harris a “communist through and through” for her attacks on price gouging. Harvard professor Jason Furman says her anti-price gouging proposals are “not sensible.” Clearly, there is a big deal at stake: the election and the sanctity of textbook economics.

The idea that prices serve to balance supply and demand – and that they should be allowed to do so – is deeply ingrained in economists. So much so that facts hardly matter. For example, Furman told the New York Times on August 15: “Egg prices went up last year – because there weren't as many eggs and that led to more egg production.”

In fact, egg production in the U.S. peaked in 2019 and then declined slightly until last year. Egg prices jumped starting in early 2022 to an average of $4.82 per dozen in January 2023 before falling back again without increasing production. High prices did not spur America's chickens to greater effort. On these points, Furman laid an egg.

Here's a better story: 2022 was the year of the highest cost increases in feed and fuel. Egg prices rose because costs rose. Then production fell again – partly because of bird flu (it has since recovered). When feed and fuel prices fell in 2023, egg prices fell again.

Have egg farmers ripped off the public – in 2022, as recently alleged, or before? Yes, they have, a jury has found, in a conspiracy by major players from 2004 to 2008 to export eggs and cull flocks, creating a shortage they could exploit. But many small producers were not directly involved. They value their reputation, their customer relationships, and know that if they charge too high a price, someone else could undercut them. Eggs, after all, are not that different from chicken to chicken.

Most companies act like honest egg farmers most of the time. But some fleece the public sometimes. Companies that use eggs have invested heavily in branding, packaging and advertising to differentiate their mayonnaise or pasta from the field. When the price of eggs goes up, these companies “take the price” – as they say on their earnings calls. What they mean by that is that they take the opportunity to raise their prices and count on their competitors to do the same so that everyone can protect their margins. But when egg prices fall, they are in no hurry to lower prices – and so they reap an unexpected profit.

Pharmaceutical companies are notorious for their extortionate prices, especially when the costs are covered by insurance or Medicare. This is why drug prices must be controlled – and this is the case in most countries. In 2021, Texas oil producers – many of them owned by private equity – had a field day as demand recovered while supply fell (it was a deliberate business strategy reported in the local press at the time) and prices and profits soared. This is why it was good policy to use sales from the strategic oil reserve to bring oil prices back down. Landlords are a mixed bag – some are extortionate, some are not; here too, private equity is greedy and buys up houses to rent at premium prices. This is why rent stabilization is needed.

Most of the time, price gouging is an exception and can be dealt with on a case-by-case basis. But there are times when gouging becomes the norm. When base costs soar, as they did in 2021-2022, business plans are disrupted. Uncertainty and fear set in. Some companies will respond by increasing their margins – because they can without attracting attention. Their goal might be to build up a cushion in case costs rise even further. Others might take advantage of the situation – like the big egg producers – to get what they can get. But then their customers come under pressure and a battle for margins ripples through the supply chain. In such cases, general price controls or policies can help.

In 1962, then-President John F. Kennedy implemented nationwide wage and price controls with policies that were accepted by the most powerful unions in the steel, automobile and rubber industries. Roger Blough, head of US Steel, announced a massive price increase and Kennedy forced him to back down. Kennedy was right – and Harris is right to now take action against price gouging.

Harris's policies are popular. That is a sign that Americans still have common sense. That is a good thing. It shows that all the efforts of the free market economists to drive out their common sense have not yet borne fruit. worked.

James K. Galbraith teaches economics at the LBJ School of Public Affairs at the University of Texas. Isabella Weber is an associate professor of economics at the University of Massachusetts Amherst.