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Kamala Harris proposed a slew of proposals arguing that pricing in America has gone haywire. Economists got mad. Trump called her a Communist. What does it all mean?
The big news here is that Harris blamed big business monopolists for inflation, and proposed antitrust policies - price fixing and price gouging rules - to bring it down. The media coverage of Harris’s plans was kind of insane, with economists upset and editorial boards dutifully agreeing with their betters. So what exactly did Harris propose? And why were economists so hostile? That’s what I'm going to answer.
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Let’s start with the three basic concepts put forward over the past week. These are (1) price fixing, (2) price gouging, and (3) price controls. What are they and how do they differ?
Price fixing means an agreement or conspiracy among competitors to set price, output, wages, or terms of trade for goods or services, or as Adam Smith put it, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Price fixing is often illegal, a violation of antitrust laws. But it’s not always illegal. Bargaining together for wages is a form of price fixing known as a union. Similarly, there are legal exceptions to antitrust laws for certain farmers to collectively bargain when negotiating with powerful processors.
Price controls means setting prices centrally through an administrative agency. It’s a form of price fixing, and one that has been pervasive in every society in human history. In market economies, price controls are usually applied to public utilities like electricity, water, gas, health care, and banking. Both Kamala Harris and Donald Trump, for instance, seek price controls on insulin. The Federal Reserve is not only the nation’s largest employer of economists, it’s also our most important administrative price setter, choosing the price of loans and bonds for every government agency, city, state, and corporation. Four times in the 20th century America imposed price controls on everyday items like food and clothing, with varying degrees of success but often pervasive black markets. Usually price controls involve doing an analysis of cost, and then setting the price to cover that cost plus a reasonable profit. Other price controls, like usury caps, don’t require such analysis.
Price gouging has two meanings. The first is technical, and means taking advantage of an emergency or supply disruption to raise prices above what they otherwise would have been, like Enron gouging the state of California in power markets in 2001. There is no Federal prohibition on price gouging, but dozens of states have laws on the books prohibiting the practice. While the concept is clear, there are many ways to define what constitutes price gouging. For example, Arkansas, California, the District of Columbia, Maryland, New Jersey, Oklahoma, and West Virginia have price gouging statutes that limit price increases to 10% during emergencies, unless there’s a cost justification.
Generally speaking, firms with more market power can price gouge, so such laws are sometimes known as “antitrust as last resort.” Senator Elizabeth Warren’s proposed Federal legislation only applies to firms above $100 million in revenue, with a focus on those with market power.
The second meaning of price gouging is how normal people use it, and that term means charging unfair prices because a corporation has the power to do so, aka Ticketmaster. That kind of price gouging can encompass anything from charging a lot during an emergency - the technical definition - to slapping a junk fee on a hotel bill after you’ve checked in, to surveillance pricing where a company charges you more because of what they know about you, to making it hard to cancel a subscription. Basically, being cheated by someone with power is being gouged.
Harris is talking to voters, so she uses the second definition of price gouging. She’s mostly noting that pricing in America has become a bullshit game of endless Ticketmaster-style fees and price hikes. And on that, she’s right, and the economists deserve scorn.
Why is pricing such a big deal right now? One answer is that it’s an election season, and voters are very mad about the high cost of living, consistently listing inflation as their number one concern. But it’s not just politics. Corporate markups have increased for decades, skyrocketing during the pandemic.
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Something real is going on. In individual markets, CEOs have been bragging publicly that they are restraining production to increase prices. Profit margins in the food industry jumped during Covid and haven’t come back down. Or take rent. There’s a company called RealPage that works with the biggest corporate landlords to hold apartments empty so they can increase prices, which jumped up 11% in 2022. There’s some evidence of conspiracy around pricing in virtually every industry. Turkey, poultry, and pork. Frozen french fries. PVC pipe. Anesthesiology. Oil. Ammunition. Pharmaceuticals. K-Pop. Credit bureaus and FICO, Verisign, industrial gasses, architectural software, locks, entertainment data. Homebuilders. Garden chemicals. Defense and aerospace. Ticketing. Estate Sales. Gaming. Drug wholesaling. Work ID information. Seeds and chemicals. Etc.
High prices are a big problem, but even more than high prices, unfair prices are common. Think about all the ticky-tack fees we’re subjected to, resort fees for hotels, convenience fees for Ticketmaster, even school lunch transaction fees! According to Consumer Reports in 2019, 85% of Americans “have experienced a hidden or unexpected fee for a service in the previous two years,” and 96% found them “highly annoying.”
It’s not a surprise, therefore, to find that laws to crack down on corporate pricing are popular, with voters by a 42 point margin seeing antitrust laws as helping to lower costs. In a recent influential polling memo, five of the top seven proposed solutions to inflation involved some sort of anti-monopoly or pricing rule.
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What Is Harris Proposing?
Pricing is dynamic, complex, and endlessly complicated. New industries are constantly emerging, and changing. Moreover, the fact we didn’t enforce antitrust laws for decades means there are industries of consultants finding ways to cheat us. (One company’s sole purpose is to invent new airline fees!) Until the 1980s, writing and enforcing pricing rules was a large part of governing, and the collapse of our faith in politic is in some ways due to the end of public governance on pricing.
The most important thing Harris is doing, therefore, is to just say that pricing rules will be a key priority for her administration. That, more than anything, is what matters. She’s already part of an administration that has live antitrust suits or investigations on rent, meat, supermarkets, Ticketmaster, gaming, oil, pharmaceuticals, et al, and one that has brought down the price of inhalers, epipen’s, insulin, and airline tickets, as well as radically cut junk fees on credit cards and bank overdraft charges, and mostly ended hospital surprise billing practices.
Still, she’s promising specifics beyond what Biden has done, putting forward anti-monopoly laws involving pricing on housing, food, and medicine, while deemphasizing big tech. On rent, for instance, Harris says she seeks to block Wall Street from buying up homes, and to end the rent-fixing conspiracy of RealPage and corporate landlords, which has driven up rents.
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With food, Harris argued that high prices are largely caused by “extreme consolidation in the food industry.” She pledged to block “unfair mergers and acquisitions” among big food corporations, and to “support smaller businesses, like grocery stores, meat processors, farmers, and ranchers, so those industries can become more competitive.”
She also called for the “first-ever federal ban on price gouging on food and groceries,” though was not specific on what that meant. And again, I think that lack of specificity is good, for a couple of reasons. The first is most people think price gouging is screwing someone with pricing, not a narrow technical practice of excess price over cost during a market disruption. So a broad law that encompasses, say, Wendy’s surge pricing under the guise of price gouging would be good. Second, we see new weird pricing games every day, and it’s critical to put forward a basic posture of being anti-pricing scam. The important part is to say ‘pricing bullshit is bullshit.’
In health care, Harris calls for Medicare price negotiations on pharmaceuticals, and seeks to cap insulin prices. She also wants to ensure no one pays more than $2000 out of pocket for medicine. She gestured at middlemen in health care, saying she will “crack down on pharmaceutical companies who block competition and abusive practices by pharmaceutical middlemen who squeeze small pharmacies’ profits and raise costs for consumers.” PBMs and wholesalers are in the crosshairs.
Finally, there’s a bunch of standard Democratic stuff that involves subsidies. Harris wants tax incentives for starter homes, Federal funds for housing construction, and streamlined permitting. There are also tax cuts for the middle class and a larger child tax credit. (These are not in my wheelhouse, so I’ll refrain from comment.)
Why Is Harris Embracing Antitrust?
I am certainly surprised that Harris is going full-on into this area, but maybe I shouldn’t be. Nuch of the politics of the early 1900s, when antitrust law became meaningful, happened as the “cost of living” was a huge political problem, with similar disputes over tariffs, trusts, monetary policy, and government spending.
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Trump and Harris both read polls about inflation. To that end, Donald Trump’s general approach is to argue that cost is driven by government regulations, limits on oil drilling, and high corporate taxes, whereas Harris sees the issue in terms of big business having too much power to set prices. In other words, both articulate a frustration with centralized power, though Trump points only at government, while Harris points at both large corporations and government.
Will these policies matter in the 2024 election? I don’t know. Biden has done a lot on antitrust and junk fees. And in some places, there have been impacts, but in others, reviving the law is taking far too long. That said, voters had no idea Biden was doing anything, as his administration had been actively hostile to touting its own policies. So Harris’ proposals seem new, just because she’s talking about it.
The final element is that a lot of media outlets covered this plan as if Harris is a Communist weirdo seeking to impose price controls on the economy, or as if the idea of pricing power is some kooky theory. Neither make sense.
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Economist-ish writer Noah Smith, for instance, wrote a column criticizing Harris for seeking to administratively set prices. The hook is Harris’s call for a law against price gouging, but it’s a weird argument, since there are a bunch of price gouging laws on the books at a state level, and none of them involve price controls. Smith, like most economist types, admires the price controls at the Fed, but the moment someone in the democratic realm talks about pricing, he sees red.
Similarly, Obama White House economist Jason Furman, who falsely said inflation would never come down without a deep recession and joblessness, is outraged at the very notion that anything but supply and demand should organize prices. Furman is consistently wrong on the most basic facts about the economy, but nonetheless gets quoted extensively because he’s an economist. CNN splashed a full page story on its website purely based on the comments from an economist at Weber State, the Financial Times is tut-tutting. There’s also plenty of evidence, even from fancy people, that pricing power drove inflation.
It’s all predictable, both the economist revolt, and reporters who interview economists as if they know anything. I suspect what’s going on is that economists, as moral reformers who ordain truth, believe price-setting is beyond the realm of elected leaders or normal people. Harris has interfered with that belief, leading to an angry reaction of religiously scorned zealots. Another possibility is that those who think the most about how to set prices are monopolists and economists. And like anyone who sees someone new coming into one’s realm of expertise, they are angry at Harris. Regardless, I can’t see much of a downside to being attacked by economists and experts, after all these are the elites who got us into this mess.
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