Right problem, wrong solution. It’s one of the most familiar stories in politics.
Thanks to inflation, every American is paying higher prices for groceries and housing than before the pandemic. But politicians’ proposed solutions would make those problems even worse.
The right solution is to attack inflation’s root cause, a money supply that ran amok during COVID. When the amount of money grows faster than the amount of real goods and services, you get inflation. Conversely, inflation stays low when money and goods grow in sync.
In September 2024, we’re most of the way back to that point, but keeping inflation low for the long haul means reducing deficit spending, which neither party will do.
Instead of fiscal and monetary restraint, Democratic presidential nominee Kamala Harris pledged to enact a grocery store price-gouging ban “to make clear that big corporations can’t unfairly exploit consumers to run up excessive corporate profits on food and groceries.”
A problem with this is that the industry average for grocery store profits is 1.6 percent. This leaves little room for price gouging. For context, the stock market averages an 8 percent return.
This is a perfect example of the right problem, wrong solution dynamic. Price controls have failed everywhere they have been tried because they aim at symptoms of inflation and not its root cause.
Since COVID-19, grocery prices have risen at about the same rate as overall inflation. Inflation is the culprit here, not a sinister CEO cabal. Over the past year, grocery prices have gone up slower than inflation, according to the Bureau of Labor Statistics. While overall inflation was 2.9 percent over the last year, food prices rose 2.2 percent.
Housing prices also have a wrong-solution story. Unlike groceries, housing prices are going up faster than inflation. But even here, price controls and price-gouging laws will not make housing more affordable. The best way to make housing more affordable is to build more housing.
Instead, President Joe Biden floated a plan to cap rent increases at 5 percent annually. Harris endorsed the plan after becoming the nominee. Rent controls create shortages. They reduce housing construction. They reduce the maintenance of existing housing. This has been the experience everywhere, from San Francisco to Minneapolis.
There just isn’t much the federal government can do here. Zoning laws and permits are mostly set at the state and local levels. Modernizing local codes and taking on NIMBY (Not In My Back Yard) activists in city council meetings is a city-by-city project for which presidential candidates can’t take credit.
Harris’ rent-control proposals are about virtue signaling, not substance. On an issue with little federal role, Harris is letting voters know she still hears their problems and wants to do something about it. That is a good message, but Harris supporters should not be defending price controls on the merits.
There are a few things the federal government can do. It can speed up federally required environmental reviews, which can average 4.5 years to complete before construction may begin. Removing tariffs on building supplies like steel and lumber can save thousands of dollars on homebuilding costs.
Instead of those helpful things, the administration is up to something else highly unhelpful.
The Justice Department has sued RealPage, which uses AI technology to comb through comparable real estate listings in various markets and suggest rents to landlords. This price-fixing lawsuit will do nothing to increase the housing supply. And it could keep rents higher for longer. RealPage’s algorithm brings price signals to markets faster than going through listings manually.
Republicans are no better. Donald Trump’s proposed 20 percent across-the-board trade tariff would cause at least as much damage as Harris’ price controls. New tariffs would pile onto existing steel and lumber tariffs.
Both parties have identified the right problem — rising prices — but have proposed the wrong solutions. Our best hope is that these policy promises are empty campaign rhetoric.
Ryan Young is a senior economist at the Competitive Enterprise Institute. He wrote this for InsideSources.com.
