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Harris's fight on price gouging is good economics [1]

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Date: 2024-08-22

In fact, US egg production peaked in 2019 and then fell slightly, through last year. Egg prices spiked from early 2022 to $4.82 a dozen on average in January 2023 , before falling back again, with no gain in production. High prices did not stimulate America’s hens to greater effort. On these points, Furman laid an egg.

The idea that prices serve to balance supply and demand — and should be left free to do so — is bred in the bone of economists. So much so that facts barely matter. Thus on Aug. 15, Furman told The New York Times : “Egg prices went up last year — it’s because there weren’t as many eggs, and it caused more egg production.”

Former president Donald Trump has called Vice President Kamala Harris “ full communist ” for her attacks on price gouging. Jason Furman, a Harvard professor, says her anti-gouging proposals are “ not sensible.” Big things are clearly at stake: the election and the very sanctity of textbook economics.

Here’s a better story: 2022 was the year of peak cost increases, in feed and fuel. Egg prices surged because costs did. Production then dropped again — partly due to avian flu (it has since begun to recover). When feed and fuel prices receded in 2023, egg prices came back down.

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Have egg farmers gouged the public — in 2022 as recently alleged or before? Yes, they have, a jury has ruled, in a conspiracy of the big players from 2004 to 2008 by exporting eggs and culling flocks, creating a scarcity they could exploit. But many small producers were not directly involved. They value their reputations, their customer relations, and they know that if they overprice, someone else may undercut them. Eggs, after all, are not very different from one hen to the next.

Most businesses, most of the time, are like the honest egg farmer. But some do gouge the public some of the time. Companies that use eggs have invested heavily in branding, packaging, and ads to distinguish their mayonnaise or pasta from the field. When the price of eggs goes up, those firms “take price” — as they say on their earnings calls, meaning they jump on the chance to raise prices and count on their competitors to do the same so that everyone can protect their margins. But when egg prices fall, they are in no rush to bring prices down — and so they reap a windfall.

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Drug companies are notorious for gouging, especially if the bill is picked up by insurance companies or Medicare. That is why drug prices must be controlled — and are, in most countries. In 2021, Texas oil producers — many owned by private equity — had a field day, as demand recovered while supply lagged (it was deliberate business strategy, reported in the local press at the time) and prices and profits soared. That is why it was good policy for sales from the strategic petroleum reserve to knock oil prices back down. Landlords are a mixed lot — some gouge while others do not; here again private equity is rapacious, buying up homes to rent at premium prices. That is why rent stabilization is needed.

Most of the time, price gougers are exceptional and can be dealt with case by case. But there are moments when gouging becomes the rule. If basic costs spike, as they did in 2021-2022, business plans are disrupted. Uncertainty and fear take hold. Some businesses will react by raising their margins — because they can, without sticking out. Their goal may be to lay in a cushion in case costs jump even more. Others may take advantage — as the big egg companies did — to get what they can. But then their customers are squeezed and a scramble for margins ripples through the supply chain. That is when general price controls or guidelines can help.

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In 1962, then-president John F. Kennedy had achieved nationwide wage and price restraint with guidelines accepted by the most powerful trade unions, in steel, automobiles, and rubber. Roger Blough, the head of US Steel, busted the deal with a major price hike. Kennedy forced him to back down. Kennedy was right about that — and Harris is right about going after price gouging now.

Harris’s policy is popular. That is a sign that Americans still have some common sense. That is a good thing. It shows that all of the efforts of free-market economists to beat it out of them have not yet worked.

James K. Galbraith teaches economics at the LBJ School of Public Affairs at the University of Texas. Isabella Weber is associate professor of economics at the University of Massachusetts Amherst.

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[1] Url: https://www.bostonglobe.com/2024/08/22/opinion/kamala-harris-economy-price-gouging/

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