Current Affairs

US needs price controls to tackle inflation: ‘We need to dare to think outside the box’ | This economist says Economic inflation


As Donald Trump noted, grocery prices were one of the deciding factors in his election victory. But there was a moment when Kamala Harris led that discussion.

When Harris rolled out her economic platform in August, a new proposal captured the public’s attention: a federal ban on food and grocery price gouging. Although many voters seemed to support this idea, economists at the time scoffed at it. They claimed that if the federal government restricted prices, supply and demand would become mismatched and shortages would ensue.

This gut reaction from her fellow economists alarmed Isabella Weber. “It really broke my heart, in a way, to see those reactions,” Weber said. “They were completely parallel to what I went through.”

In 2021, Weber wrote an op-ed in The Guardian that contradicts the way economists typically believe inflation should be managed. Most of them believed that the only way to combat inflation was to increase interest rates, which at that time were at zero.

But fluctuating interest rates can have an unpredictable impact on the economy. If the Fed raises interest rates too quickly, inflation will fall, but unemployment will also rise, and millions of Americans will be laid off from their jobs. But if interest rates do not rise fast enough, inflation may persist.

In his editorial, Weber argued that mitigating inflation is not a zero-sum game. “If your house catches fire, you don’t want to wait for the fire to eventually go out. You don’t want to destroy the house by flooding it,” Weber wrote at the time.

She called for an alternative solution: “detailed controls on carefully selected prices.” She pointed to the “profit explosion” seen in the middle of the pandemic: companies were benefiting greatly from government stimulus, and in turn continued to raise prices. The government can intervene by strategically setting price caps.

The response to her op-ed was pathetic. First, it was people in crypto and right-wing groups on Twitter who started piling on Weber. Then economists began to have their say. Nobel laureate Paul Krugman said in a tweet – which he later deleted and apologized for – that the idea was “really stupid.”

“It basically opened the floodgates of hate,” Weber said.

In the years since, Weber has experienced something of a redemption arc. Although her argument for strategic price controls was considered extreme at the time, now that countries around the world are dealing with high inflation and the political fallout it can cause, her ideas now have incredibly clear vision.

Weber worked with the federal government in Germany, her native country, to implement price controls on gas and heating prices after Russia’s invasion of Ukraine. The European Union quickly followed suit by imposing its own cap on gas prices.

Some economists have changed their minds over time. Krugman was one of the economists who defended Harris’ price gouging proposal, writing In the New York Times, “Just because something is popular doesn’t mean it’s a bad idea.”

A customer inspects a Thanksgiving turkey in Richmond Heights, Missouri, on November 15, 2022. Photography: Bill Greenblatt/UPI/REX/Shutterstock

Weber remains concerned about the consequences that high inflation might have on democracies, especially if the tools the government believes it has to manage high prices mean a choice between high unemployment or high inflation.

“We need to do better and think about a toolkit for intervention and not just rely on raising interest rates,” she said.

Weber and her research colleagues used artificial intelligence and natural language programming to comb through hundreds of thousands of company earnings calls that occurred during the pandemic to see how company executives were talking about prices to shareholders.

What they found was that companies were actually talking positively about price flows, specifically increases in oil and gas prices. The companies reasoned that all other companies would also increase prices, so that they could increase prices to ultimately improve their bottom line.

“If there is an economy-wide shock…companies actually express relatively positive sentiment about these cost shocks, because these cost shocks send a clear signal to everyone in this market that this is an opportunity, this is the right moment to raise prices.” Weber said.

While conventional economists have argued that market forces would prevent this from happening—that a company would lose market share if it raised its prices too high relative to competitors—Weber argues that much of the American economy does not operate within conventional market forces. Competition in many industries has been reduced through consolidation, giving more power to the larger companies that dominate the industry.

The power of these sellers only increases when there are shocks throughout the economy, and they increase prices to increase profits in return.

Skip the previous newsletter promotion

This is different from when economic shocks hit an individual firm, and the firm has to adjust its costs. But when it comes to the entire economy, “businesses feel good about cost increases if those cost increases affect everyone at the same time.”

More than half of the inflation seen in 2021 can be attributed to corporate profit margins, according to one analyst. analysis From the Federal Reserve Bank of Kansas City.

Some have called this practice “greed inflation,” but Weber preferred the more academic “supply-side inflation.”

Weber emphasizes that the solution she proposes, which is strategic price control, does not mean setting a ceiling on the price of every good and service. Alternatively, price controls could focus on other sectors in the supply chain, such as oil and gas.

Weber noted that price controls already exist in the United States for some goods and services, such as utilities, rent and medications.

Economists were quick to dismiss the idea that corporate profits played a central role in inflation, and that the federal government should somehow intervene, making Weber believe that many in the profession had become dangerously narrow-minded.

“Economists cannot say, ‘I have studied economics from first principles for twenty years, and this is the only acceptable answer to the problems we face.’ “I think if this continues to be the culture of our profession, we are not part of the solution, but we are part of the solution,” Weber said. The problem.” “We need to dare to think outside the box.”

In the period leading up to the presidential elections, Americans continued to say that the high cost of living was making their lives more difficult, that they were frustrated by rising prices, and that they felt financially backward. In a Harris/Guardian poll in May, a majority of Americans thought the United States was in a recession, even though that was not technically the case.

Instead, economists said the economy was in excellent shape. Inflation has been falling, while unemployment has remained low, a miracle considering how much the Fed has raised interest rates.

The divide between the two viewpoints was called the “shakeout” – in theory, the economy was doing well, but Americans still felt bad. This is what ultimately pushed millions to the polls to vote for Donald Trump, and millions more voted for Joe Biden to skip the election entirely.

When many Americans lose confidence in the economic and political systems, economists “think about the daily lived experiences of ordinary people in economics in a more direct way and make improving these matters a direct goal that may sometimes conflict with efficiency.” Weber said.

The risks for Weber are higher than just rising costs at grocery stores. The anger people feel at sky-high prices can lead to feelings of disenfranchisement and frustration with a government that ultimately drives people to more sympathetic parties – some of which are on the far right.

“I think we are at a historical moment where the far right is as strong as it has been since the 1930s and 1940s, and I think that is very dangerous,” she said.

“It’s not enough to go around and say: ‘I stand for democracy, so please vote for me.’” To defend democracy, you have to implement policies that the majority of people feel make their lives better. Otherwise, it will be very difficult to prevent a slide down the slippery slope toward more fascist-looking political arrangements.

Leave a Reply

Your email address will not be published. Required fields are marked *