One topic in economics where theory and experience are in complete agreement is that price controls don’t work at lowering inflation. In fact, theory and history both show that they have the opposite effect; they tend to worsen inflation, lead to shortages and are likely to create black markets that have all sorts of negative spillover effects.
So why then is Vice President Kamala Harris, the Democratic nominee for president, proposing price controls to bring down inflation? The short answer is that it’s an election year, and politicians are desperate to show that they have solutions to problems. Whether those solutions actually worsen the problem is not their concern, only that they appear believable.
And on the surface, it appears believable that price controls, particularly for grocery items, would work to hold down inflation. But Americans shouldn’t believe this promise, especially those who lived through the disaster that was the Nixon administration’s attempt at price controls or, worse, Soviet and Communist Bloc attempts to control prices of consumer goods. In all cases, the controls failed, leaving behind a trail of higher inflation, shortages and black market trade.
But younger Americans who may not be aware of the history of price controls should also be skeptical of the claims that “corporate greed” is pushing up prices in consumer goods. A quick scan of the largest publicly traded grocers and consumer goods retailers immediately shows that these firms are actually struggling to fully pass on the increasing costs that they’re experiencing. Specifically, of the dozen or so largest publicly traded grocers and retailers, the average profit margin is less than 5%, with most hovering between 0% and 3%. These are pretty dismal figures, and not even remotely indicative of price gouging or excessive profiteering. In fact, they confirm what most equity analysts would tell you: The grocery business is not very profitable. If we saw profit margins in the 30% to 40% range for grocers, then the vice president may have a point. But that’s not the case. This actually begs a good question: Do any of the largest U.S. companies that have big footholds in the U.S. consumer base actually have profit margins in the 30% to 40% range? The answer is yes, and the biggest and best examples are the largest tech companies, which despite having sales that far exceed your average grocer, are not on Harris’ list of corporate greed.
I’ll leave it to you to surmise why those high-earning tech companies are not being called out for excessive profits, while barely profitable grocers are being blamed. But the bottom line is that price controls don’t work. Even when well-intended, price controls lead to higher inflation, shortages and destructive black markets. And in today’s highly polarized world of government, Americans would have to fear a new unintended side effect: Price controls would be easily weaponized for political gain. At a time when faith in government is at a record low in America and neither political party has the trust of the average American, voters should unite on this point – the last thing Americans need is politicians deciding what the price of a banana should be or how many loaves of bread a household can purchase.
Thomas Tzitzouris is managing director and head of fixed income research at New York City-based Strategas Research Partners. He lives in Rhode Island.
