Against a Two-for-One Offer of Price Controls on Food and Credit Cards

Jared Bernstein, former chair of the Council of Economic Advisers under Joe Biden, has resurfaced with a new affordability wheeze: cap the price of groceries, with grocers compensated by price controls on credit card swipe fees.

Bernstein’s proposal, issued by the Center for American Progress (CAP), is to corral big grocery chains and their suppliers into a two-year “voluntary” price freeze on 24 staples — eggs, ground beef, canned tuna, milk, and the like — hoping that wages will “catch up” while the shock of high prices for shoppers after the recent inflation gradually fades.

Bernstein acknowledges that grocers might pass their revenue losses along to workers and suppliers. To guard against this, he recommends insulating grocers from loss and encouraging their participation in the price-cap plan, with promises of tariff relief and drastic reductions in the credit card swipe fees that grocers pay to Visa and Mastercard.

This price control one-two punch would yield an economic mess. Let’s start with food. Retail food prices give farmers, suppliers, and consumers crucial information about the relative scarcity of foodstuffs. When government forces prices down below market-clearing rates, buyers’ in-store demand will rise, while sellers’ incentives to offer the product will fall. Price caps stop prices from reflecting real-world scarcity.

The result is a gap between supply and demand, which materializes in empty shelves, fruitless consumer searches, rationing, purchase limits, and less variety. Some suppliers would reduce the quality or size of goods. When both buyers and sellers benefit from trading at a higher price, black markets emerge. Even if CAP’s ideas to protect grocers’ profits make grocers whole, they wouldn’t prevent many of these inefficiencies.

The history of food-price controls demonstrates these classic effects unambiguously. World War II price caps required consumers to limit consumption using ration books. When it became uneconomic to produce some foodstuffs at regulated prices, suppliers got around controls by reducing quality. Meat-packers “began filling sausages and hotdogs with soybeans, potatoes, or cracker meal.” Steaks were sold with extra bone weight. Shrinkflation and lower-quality packaging proliferated. Black markets were so extensive that Marshall Clinard of the Office of Price Administration questioned the “moral fiber of the American people.” In the 1970s, Nixon’s price ceilings led poultry farmers to destroy millions of chicks and dairy farmers to cull herds rather than invest in livestock at a loss.

The CAP plan would bind only those sellers that opt in, leaving prices for other sellers uncapped. The system would leak: Suppliers would steer goods to uncapped sellers. Producers would offer more uncapped brands and premium variants or sell them to uncapped outlets. And consumers faced with shortages of their favorite products would substitute premium variants or buy from an uncapped seller, driving the prices of these substitutes higher. Lots of distortions, in other words, for little or no net gain.

Grocery chains and food producers are not charities. Grocers will “volunteer” to sell below market prices only if incentives such as swipe-fee relief, tariff waivers, and Supplemental Nutrition Assistance Program (SNAP) incentives increase profits overall. Tariff relief is a good idea: CAP should have kept it at that. SNAP incentives benefit grocers at taxpayers’ expense. Swipe-fee relief pushes the costs of grocery caps onto the card issuers, who themselves will adjust by raising other fees and cutting benefits. Consumers would ultimately pay.

Merchants pay swipe fees, mostly “interchange fees,” to credit card networks each time a consumer uses a card. The CAP paper reports that those fees are “roughly 2 percent” per transaction and proposes cutting them by half, estimating this would offset the grocery caps by $4 billion–$6 billion. These numbers, apparently based on the average interchange fees paid by all merchants, are too high. Supermarkets, which negotiate from a strong position, pay lower interchange rates than average, usually well below 2 percent. This source, for example, pegs supermarket rates at 1.22 percent plus $0.05 per transaction for Visa and 1.48 percent plus $0.10 per transaction for Mastercard. Supermarkets enjoy additional discounts because they generate a large volume of low-risk transactions. Furthermore, Visa and Mastercard have recently settled a lawsuit that will reduce rates further. Reducing grocers’ rates beyond the discounts that they already get is hard to justify and will not yield the projected savings.

More importantly, savings to grocers from reduced interchange fees must come from somewhere. Card network pricing already balances merchant benefits (e.g., fraud prevention) with consumer benefits (e.g., rewards). If one type of fee revenue falls, other fees rise and benefits fall. When Australia and the UK capped credit card interchange fees, card issuers reduced rewards, increased interest rates, and raised annual fees. In the United States, the Durbin Amendment capped debit card interchange fees, costing consumers, by one study’s estimate, between $22 billion and $25 billion. Debit card issuers increased minimum balances and maintenance fees on checking accounts and reduced offerings of free checking accounts. Low-income consumers were disproportionately harmed.

The CAP proposal reduces interchange fees only for grocers, giving card networks the option of raising other merchants’ fees—which consumers would also pay. If card issuers could not adapt fees to make up their losses, it would devastate small banks, many of which earn much of their revenue from interchange fees.

CAP correctly anticipates that capping grocery prices would have disastrous side effects if grocers were not compensated. But the swipe-fee reduction cure would mean that credit card consumers would pay higher annual fees and enjoy less rewards, while grocery price caps would lead to shortages and harms. Both components of the proposed policy are destructive.

The consumer frustration driving this proposal is real. Grocery prices have risen 30 percent in six years, more than double the increase in the preceding decade. But recent increases are overwhelmingly the result of excessive monetary and fiscal stimulus—the “run the economy hot” policies that Bernstein supported—driving high inflation. To compound that error with “temporary” price controls would be misguided.

Market prices coordinate supply and demand and steer resources toward their highest value uses. We have not avoided food-price controls to protect grocery store profits but because price controls wreak havoc through the economy. If Congress wants to make groceries more affordable, it would be best to start by removing tariffs and other protections on food and agricultural inputs, which drive up the prices of sugar, milk, and other foodstuffs to begin with.