The vice-president’s campaign promises make no sense to people acquainted with supply and demand—but they might win elections.
Until recently, the Kamala Harris campaign seemed allergic to setting a policy agenda. Finally, the campaign is starting to roll out its economic platform, and the substance likely won’t appeal to many people who actually know about economics. But it’s hard for me to argue with the politics. As someone who has often said Democrats need to compromise their ideals to win, I don’t exclude my own ideals from that. And I see that when Harris rejects my economic preferences, she’s doing it in a way that will help her win.
The first example is Harris’s proposal to fight inflation through a new federal law on price gouging. My guess is such a law would be designed in such a way that it would have little effect on the market. But if it did have effects on the market, they would tend to be negative, as with President Richard Nixon’s price and wage controls in the 1970s.
According to the Econ 101 model of prices and supply, when a product is in shortage, its price goes up to bring quantity demanded in line with quantity supplied. This price increase sends a signal to producers to make more stuff. If you cap prices, you get shortages. That’s because there isn’t enough of the demanded good to go around, and producers don’t have sufficient incentive to start making more of the good to meet demand in the future.
I agree with this model. “Price gouging,” anyway, is kind of an incoherent concept; there’s no fundamental reason of “fairness” that shortages shouldn’t be managed with price hikes. Yes, periods of shortage drive up profit margins. Higher profits are part of what brings new producers into constrained industries. And in a robustly competitive market, those profit margins get forced down as supply expands. Price controls inhibit that process and are a bad idea.
All of that said, Harris is trying to win a presidential election, and to win elections, you run on popular ideas. And the voters, in their infinite wisdom, strongly favor laws against “price gouging.” Evan Ross Smith, a pollster for the center-left Democratic research initiative Blueprint, shared a survey on X showing voters’ opinions on various proposals to fight inflation. The two most popular ideas for disinflation—lower interest rates and lower taxes—are in fact inflationary.
