Moneybeat: Price gouging and price controls

JENNY ROUGH, HOST: Next up on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Good morning, Nick. Good to be with you.

EICHER: Alright, let’s talk about Kamala Harris saying she’s going to tackle inflation.

KAMALA HARRIS: As president, I will take on the high costs that matter most to most Americans. Like the cost of food.

Proceeding then to say how …

HARRIS: And I will work to pass the first ever federal ban on price-gauging on food.

Gouging, of course, what she had to have meant. But she talked about grocery prices, some tax policy, and housing, which we’ll want to talk about, too. But lots of economic policy stories last week.

BAHNSEN: Well, I think Nick, the first thing I should say is, when we say "lots of economic policy this week," it is by far the least amount of policy that we've ever seen in a campaign. And so, now the reason why we're really focusing on your question about what Kamala Harris said this week around price gouging of groceries is those are the only two areas that there's been any sort of policy discussion.

And lest I be accused of being overly partisan here, even President Trump has put out very little specificity in this campaign about policy. This week, they said to him, What are you going to do to change the economy? And he said, "Drill, baby. Drill." You know, so there's a platitude about being pro-energy, but there's not a lot of specifics out there with either candidate. Yet maybe that will change.

This week, we got a little bit of specifics from Vice President Harris, and I think surprisingly, it didn't focus on a lot of the normal areas that are within the Democratic Party platform. It focused on grocery prices, which are up 1.1% year over year, but are up substantially between 20 and 30% since President Biden took office, and there's a whole lot of reasons for that.

And what she stated was that she wanted to appoint and empower—and this would require legislation—federal government ability to intervene on prices to essentially —and again, it's always clouded with really vague rhetoric, excessive profit taking and prices that reach a level where it would allow The Federal Trade Commission authority to intervene.

It isn't just crazy for a free marketeer, right wing conservative like myself. CNN went ballistic about it. The Washington Post wrote one of the best op-eds I've read, saying it was not just bad, but dangerously bad. Price controls when they were done by Richard Nixon were a bad idea, and price controls when they're done by Kamala Harris are a bad idea. They facilitate hoarding, they facilitate shortages, they facilitate a black market for product. And worst of all, they are driven by a very, very faulty and disproven premise, that somehow the local time and place on the spot, farmers and manufacturers and producers and grocers and people with skin in the game in these transactions, that somehow those people know less about where prices ought to be than a bureaucrat at a regulatory agency in Washington, DC.

The price control rhetoric that she's leading with may or may not prove to be politically interesting, but economically, it's disastrous.

EICHER: Well, she didn’t stop at the grocery check-out counter. She continued on to housing. Talk about that, David.

BAHNSEN: So coupled to her price gouging policy this week, she also came out last Friday with a proposal to boost home ownership and $25,000 subsidy from the government for first time home buyers who they could establish had faithfully paid their rent on time for two years, was part of it. President Biden had proposed something similar earlier in the campaign, but it was a $10,000 level, so she went two and a half times the level President Biden did.

I was critical of President Biden then, and I'm critical of Vice President Harris now for attempting to solve a supply problem with a demand solution that will make it much worse. You cannot subsidize something without it getting priced in when there is more money coming into something, the price of that thing naturally, organically actually creeps up. This is non-controversial. It's known. And if anyone says, “Well, what's an example of something that the government subsidized and it's made prices go higher over time?” Look no know further than health care and college education.

But the one thing I'll say is that Vice President Harris did say, “and I want to oversee the construction of 3 million new homes when I am president.” Now, I don't know what in the world the president can do to facilitate 3 million new homes, but at least she was acknowledging that one of the reasons we have a housing affordability problem is we don't have enough homes. So in a lot of ways, I was encouraged that she at least, whether she knows she's doing it or not, was conceding the supply side point. But the reason we have too few homes and the reason we need more homes built, isn't really at the federal government level, it is almost entirely state and local regulatory land use zoning, a general cultural mentality of what we call nimbyism, not in my backyard, where people are opposed to the construction of new housing and new projects. None of these things would be under the purview of the White House or any aspect of the executive branch of government at all.

So, while I'm happy she conceded the supply side dilemma, I don't think there's anything she can do about that, nor did she propose such. What she did propose on the federal side is demand fuel, and I think it's a terrible idea.

EICHER: Alright, before we go on to defining terms, is there anything David in the economic data or in the markets that we need to talk about?

BAHNSEN: Yeah, just very quickly on markets and economic data. This week, I wrote a whole Dividend Cafe about how you just had that one week where everything was really headed down, and then the next week, where everything turned back up, and largely just for the inverse reasons that the next week of earnings results looked better than the prior week had and the economic data this week, retail sales were up far more than expected. The PPI and CPI inflation data definitely showed continued downward pressure.

The weekly jobless claims came in less than expected. So one week, there's this sort of second guessing. Hey, are we about to see some economic vulnerability in the very week following? It's second guessing. The second guessing, so that will continue for a bit around, you know, what the strengths of the economy and markets really are. We saw a lot of that in the first couple weeks of August to just a ping pong match back and forth.

EICHER: OK, defining terms for this week. Two of them: price gouging, a political term, and price controls, a proposed solution. What’s meant by gouging? And then price controls, how do they operate and what’s the downside?

BAHNSEN: Well, I think that one of the very interesting things about being asked to define price gouging, and again, any term that's going to become important in the sort of national policy lexicon ought to be defined. And yet, the irony is that for those of us who would critique the concept of gouging, one of the arguments we'd make is it doesn't have a definition.

What is price gouging other than something very subjective, and subjective for who? Politicians, bureaucrats, regulators. If one were to say right now that they believe eggs are being price gouged by egg producers, which are up, the prices are up five and a half percent year over year. It would be interesting to ask why bread and cereal prices are down over 1% year over year. Is there corporate greed with egg manufacturers and corporate benevolence at bread and cereal? It's a bizarre argument.

Now, for those of us that study economics, or people who haven't studied economics, who are just regular human beings with eyes and ears, you might assume that there are just different supply and demand circumstances, generally, conditions affecting producers that will impact prices.

But of course, price gouging implies that there's not competitors who want to take advantage of one other party's price gouging. In other words, if one is pushing up prices very high and getting exorbitant profits, exorbitant profits are a signal to another producer that there's a lot of money to be made here. And so, how do you capture market share from someone making a lot of money? You charge less. And if there's much wide margins, you have plenty of room to do so. This is what an economy is. This is what markets are doing all day, every day, with every product.

And so, unless you have a monopoly, which can only happen because the government created one, as long as there's competitors with bread and cereal and eggs and any other product, price gouging is nothing more than a political term to demonize profit making. And therefore, the term should be rejected out of hand. Price controls are the way politicians say they want to deal with things like price gouging or with just high prices. Price controls can be soft, like, for example, President Biden's prior proposal to limit the percentage of growth in rent year over year. Others in the way Nixon did, it can actually come in and set an absolute level around a given price.

Essentially, price controls are an attempt to remove the market from setting prices, buyers and sellers, and impose a disinterested third party, obviously a politician in setting and controlling prices. The criticism of price controls from left and right economists over the years is that they don't work. That price controls disincentivize production of new product, which is itself the solution to high prices.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group.

A couple of things, one, I’ll put a link to David’s essay in the September WORLD Magazine. It’s free if you don’t have a subscription and haven’t used up your free articles, otherwise, you really ought to subscribe. There’s no free lunch, as David has taught, and the wonderful buffet we serve up in exchange for that subscription is quite good and worth the price. No gouging and no price controls.

Second, check out David’s latest book, Full Time: Work and the Meaning of Life at fulltimebook.com.

David, I hope you have a great week!

BAHNSEN: Thanks so much, Nick. Great to be with you.

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