A few weeks ago, I wrote about Kamlanomics. In the last few days, some new proposals have been floated. Let’s take a quick look at them. (Some of you may notice that I’ve put this in the Economist “Humor” category. Try not to laugh too hard while reading this.)
Thanks to Yamiche Alcindor (@Yamiche) Selina Wang (@SelinaWang), Eric Abbenante
(@EricAbbenante), and Robert Sterling (@RobertMSterling) for reporting these proposals on . Full pdfs of each thread are at the end of this article.
First, Kamala wants to fight inflation. Oh, good. Slow the growth rate of the money supply and reduce government spending, right?
Yamiche Alcindor
You must be kidding. Kamala’s solution is to wage a war on prices (h/t Ryan Bourne). From Yamiche’s summary (emphasis added):
On Friday in North Carolina, Vice President Harris intends to announce a plan to prevent corporations in the food and grocery industries from unfairly jacking up prices on consumers, by imposing the first-ever federal ban on corporate price-gouging in these industries.
Grocery stores operate on the thinnest margin you can imagine. The rate of return on sales is generally around 2-3%. And she wants them to cut prices?
(Faces blurred by me)
Let’s review the economics. The demand for food is price-inelastic. That means that price and total revenue move in the same direction. So lowering grocery prices will lower total revenue and profits will nearly vanish. Genius-level stuff there.
What Is Price-Gouging?
But wait, there’s more. How will “price-gouging” be defined?
In economics, there is no such thing as price-gouging. The price of a product reflects supply and demand. A high price indicates an items is relatively scarce. A low price means the opposite.
We do have an example: the diamond-water paradox. Contrary to popular belief, diamonds are not essential to life. But the price of diamonds is very high. Water, however, is necessary for all life. But the price of water is low. Why?
The answer is that diamonds are scarce and water is abundant. Supply is important to determining prices.
The true meaning of price-gouging is, “A price of a product is higher than I would like.” In this case, the determining authority will be the Federal government, specifically the Federal Trade Commission.
It’s Even Worse
Actually, Kamala’s proposals go far beyond the supermarket. From Yamiche’s summary:
in her first 100 days as president, she would also grant authority for the FTC and state attorneys general to investigate and impose harsh penalties on big corporations that choose to break these rules to make a quick buck at Americans’ expense.
In other words, government will have the power to set the price of, well, anything. Guess whose prices will be targeted. I predict companies that do not donate to Democratic candidates’ campaigns will be near the top of the list.
Robert Sterling
Robert Sterling neatly summarizes the effect of price ceilings on groceries.
People need to stop overreacting about Kamala’s plan to reduce food inflation, as if it would lead to communism, mass starvation, and the end of America.
I worked in M&A in the food industry. Here’s a step-by-step summary of what would actually happen:
- The government announces that grocery retailers aren’t allowed to raise prices.
- Grocery stores, which operate on 1-2% net margins, can’t survive if their suppliers raise prices. So the government announces that food producers (Kraft Heinz, ConAgra, Tyson, Hormel, et. al.) also aren’t allowed to raise prices.
- Not all grocery stores are created equal. Stores in lower-income areas make less money than those in higher-income areas, as the former disproportionately sell lower-margin prepackaged foods (“center of the store”) instead of higher-margin fresh products like meat (“perimeter of the store”). Because stores in lower-income areas aren’t able to cover overhead (remember, even if their wholesale costs are fixed, their labor, utilities, insurance, and other operating expenses aren’t fixed… yet), grocery chains start to shut them down. Food deserts in rural areas and in low-income urban areas alike become worse.
- Meanwhile, margins for food producers are also quickly eroding. Their primary costs (ingredients, energy, and labor) aren’t fixed, and their shrinking gross profits leave less cash flow available to cover overhead, maintain facilities, and reinvest in additional production capacity.
- Grocery chains, which have finite shelf space, start to repurpose their stores (those they didn’t have to shut down, I should say) to sell more non-price-controlled items—everything from nutrition supplements to kitchenware to apparel—and less price-controlled food products. Your local Kroger or Safeway starts to look and feel more like a Walmart.
- Food producers stop making products with lower margins. Grocery chain start competing with each other to secure inventory. Since they can’t compete by offering stronger prices (remember, producers aren’t allowed to raise prices here, and, even if they could, grocery chains no longer have the gross profit to bear price increases), they compete on things like payment terms.
- Small grocery chains start to shut down entirely, or get sold to larger chains like Kroger. In addition to not being able to cover fixed costs, a major reason for this is because they can no longer reliably secure delivery of products, due to producers prioritizing sales to larger customers, which are able to leverage their stronger balance sheets to offer superior payment terms.
- Smaller food producers—which typically sell via distributors, rather than directly to grocery chains—start to go out of business. Because these producers have an additional step their value chains, and because they have lower volumes over which to spread their fixed costs, their cost structure is inherently disadvantaged compared to major food producers. When grocery stores aren’t able to raise prices, cutting product costs becomes all the more important, and deprioritizing purchases from smaller producers is an easy way to do so.
- As supply chains break down, lines start to form outside grocery stores every morning. Cities assign police officers to patrol store parking lots, and food producers draft contingency plans to assign armed escorts to delivery trucks.
- The federal government announces a program to issue block grants for states to purchase and operate shuttered grocery stores. The USDA also seizes closed-down production facilities.
- The government announces that prices for all key food costs—corn, wheat, cattle, energy, etc.—are also now fixed, to stop “profiteers” from gouging the now-government-operated food industry.
- Shockingly, the government struggles to operate one of the most complex industries on the planet. The entire food supply chain starts imploding.
- Communism, mass starvation, and the end of America quickly ensue.
Hey wait a second
Now About Housing
There is not enough housing in the U.S. This is reflected in high home prices and rents. To anyone who knows the slightest bit about economics, the solution is to increase supply by building more houses, apartments, condominiums, and so on. That would increase supply, lowering prices.
Selina Wang
But that takes time and involves millions of rules and regulations set by state and local agencies. In a city near where I live, the permits to build a new house cost a whopping $100,000. Kamala has a better idea. From Selina Wang:
campaign official tells me Harris-Walz administration would provide working families who have paid their rent on time for two years and are buying their first home up to $25,000 in down-payment assistance, with more generous support for first-generation homeowners.
As always, there’s even more:
More on Harris housing plan:
-call for construction of 3 million new housing units
-tax incentive for building starter homes
-lower rent by taking on corporate & major landlords
-stop Wall Street investors from buying up and marking up homes in bulk
Note the lack of specifics in the call for more construction. And, once again, there are implicit price controls.
But that $25,000 is the real problem. This will increase the demand for housing, pushing housing prices even higher! Are there any economists in Harris’s campaign? Any? Bueller?
Wage Gender Inequality
Eric Abbenante
Here’s a real goodie. Kamala says that for every percentage point difference between men’s and women’s pay in a company, the government will impose a fine of 1% of the prior year’s profits. Insanity. Thanks to Eric Abbenante (@EricAbbenante) for spotting this.
Conclusion
Kamala got her bachelor’s degree from Howard University. I have no idea what her major was, but I hope and pray it wasn’t economics. If you thought the last four years were bad, things will get much worse if Kamala is elected president.
Here are the promised pdf versions of the X threads.
Yamiche Alcindor:
Selina Wang:
Eric Abbenante:
Robert Sterling:
