Prices in the Presidential Race

Harris vs. Trump

The War on Prices isn’t going away anytime soon. This week in Atlanta, Vice President Kamala Harris, the prospective Democratic nominee, pledged to uphold the Biden administration’s existing price controls, as well as introducing the price regulations that Biden championed during his aborted presidential campaign.

She said:

But while inflation is down and wages are up, prices are still too high. You know it and I know it. And when we win this election, here’s what we’re going to do about it.

On day one, I will take on price gouging and bring down costs. We will ban more of those hidden fees and surprise late charges that banks and other companies use to pad their profits. We will take on corporate landlords and cap unfair rent increases and we will take on Big Pharma to cap prescription drug costs for all Americans. Our plan will lower costs and save many middle-class families thousands of dollars a year. But Donald Trump has a different plan in mind. One that would raise prices on middle-class families.

To translate: that means more misguided “anti-junk fee” regulations that control many businesses’ prices or pricing structures. It means a highly damaging national rent control plan for landlords with more than 50 units. It means new price caps on prescription drugs that will make consumers even less sensitive to underlying market prices than they already are. And all this policymaking is based on the misapprehension that corporate greed from companies helped push up inflation and that individual product price controls could ever help reduce it!

The downsides of these price controls (and many others) are covered extensively in The War on Prices and I’ve written about them a lot here too. Yet when I discuss these bad policies, people write to me and say “what about all the ways that Donald Trump would increase prices?! Doesn’t that warrant some attention too?”

In my defense, there’s a category difference here. Most of the things I write about are direct government price control proposals. But there are indeed many other ways politicians (Trump included) affect market prices through policy to the detriment of economic efficiency. That includes failing to price certain externalities, yes, but also imposing tax and regulatory measures that distort relative prices, often driving up the out-of-pocket costs of essential goods to consumers by restricting supply. Maybe in future I need another book called The War on Household Budgets to assess the damaging impacts of these supply-constraining government policies.

Let’s take one politically salient example from this presidential election: grocery prices. The surging price of food - reflective of a high inflation environment, exacerbated by excessive macroeconomic stimulus - has been an albatross around the Biden administration’s neck. Since January 2021, the price index for “food at home” has jumped by 20.9 percent. Polling in February showed that among the 88 percent of voters concerned about inflation, 57 percent of them cited grocery prices as the reason for their angst. For context, the next biggest reason (19 percent of people) was inflation’s manifestation as increases in rent or house prices.

My colleague Scott Lincicome has discussed the existing government policies that raise relative food prices. On trade policy alone, the U.S. bans Paraguayan beef, imposes duties on numerous countries’ shrimp, and has “38 antidumping or countervailing duty orders on various foodstuffs and several more investigations now ongoing—all pursuant to laws expressly intended to increase domestic prices.” That’s not to mention all the tariffs and tariff-rate quotas that apply to foodstuffs from countries outside of the scope of the U.S.’s free-trade agreements (FTAs), many of which are displayed below.

Now, in the grand scheme of things, these tariffs have a relatively small impact on households’ overall dollar grocery bills. The point is: politicians knowingly make essentials like food more expensive than they need to be under a free trade policy. And Democrats are certainly correct that some of Donald Trump’s policies would raise grocery prices further.

Trump has suggested he would introduce a new 10 percent global tariff on imports from non-FTA countries and 60 percent tariffs on Chinese goods. This would raise grocery prices further through two mechanisms. First, at least part (and evidence suggests the lion’s share) of any tariff increase on specific foodstuffs would be passed on directly into higher consumer prices borne by Americans. Food would become more expensive to import and there would be less competitive pressure on domestic substitutes, increasing domestic prices too. Second, domestically produced food would also see price hikes due to increased costs for certain imported inputs to food production. For example, any imported packaging materials, fertilizers, mechanical tools or more would jump in price if subject to the tariffs, increasing overall production costs for domestic farmers or manufacturers.

The magnitude of the total impact on grocery bills after producers substitute to alternatives is an open question. But the direction of the price effect from this inefficiency is not. And this price uplift is compounded by the fact that Trump is promising mass deportations of illegal migrants. The Center for Migration Studies has estimated that 45 percent of agricultural workers in the United States are undocumented migrants. Across the country as a whole (and in 22 states), “farming” is the occupation with the highest proportion of illegal migrant workers. If Trump could deliver a successful deportation program of many of these workers (and it’s a big if), this major negative labor supply-shock would raise overall food prices higher still, with much larger price increases for the most labor-intensive foodstuffs.

Why? Well, because although the evidence suggests low-skilled migrant flows don’t have hugely depressive effects on domestic wages, nobody denies demand curves for labor remain downward sloping. A fall in the supply of workers would thus still modestly increase agricultural wage rates, raising farmers’ costs of production.

Where farm owners are able to, the higher price of labor will encourage them to substitute away somewhat from labor-intensive food production to more capital-intensive crops or production techniques, as happened after the end of the bracero migrant worker visa program in the 1960s. For foods which see an increased supply from this substitution effect, prices might actually fall. But for other goods that require physical human picking or treatment, like many fruits and vegetables, prices will rise, reflective of the somewhat higher wages of the relevant workers and the fact that for some produce it will just become uneconomic to farm it. And given that, overall, the deportations would encourage farmers to pursue investments and crop production that would be inefficient without the removals of these migrants, overall food prices would go up somewhat.

Democrats therefore have a point that Trump’s policies on trade and immigration risk higher food prices. Of course, as I’ve written before, Team Trump’s mooted proposal to compromise the Federal Reserve’s independence and its interest in continuing to run unsustainable budget deficits risks higher inflation as well (a rise in the general level of all prices). On the flip side, we could go through a similar exercise with Democratic macroeconomic and microeconomic policies - where I’m sure the latter would push up the relative price of energy compared to Trump’s agenda.

The point is that these types of policies (while damaging) are distinct from attempting to directly control market prices, which, as our book documents, has a terrible record of failure: creating shortages, black markets, and deteriorations in quality.

Other Links

• Chris Freiman addresses the morality of “price gouging.”

• I wrote my columns for The Times this past fortnight on the economic views of J.D. Vance and Kamala Harris.

• Speaking of J.D. Vance, he apparently was very fond of the old Becker-Posner blog. Here are interesting takes from both Gary Becker and Richard Posner on whether it should be legal to sell kidneys.

• Why so-called “conflict theories of inflation” are a dead end.

• Google searches for “inflation” are still elevated relative to pre-pandemic, but searches for “prices” are back down again. (h/t Adam Ozimek)

• Monetarists to be vindicated again? U.S. unemployment ticked up to 4.3 percent in July after the money supply shrank last year. My Cato colleague Jai Kedia made a slightly different case for the Fed cutting rates recently.