The truth about high prices
Prices still rankle Americans. Inflation fatigue seems to have turned to anger at the country’s long-standing, stubborn affordability crisis. And for good reason: Housing is, by at least some measures, more unaffordable than ever; workforce problems are driving up child care prices and causing widespread shortages; health care costs are driving families into debt and causing them to forgo care; and Americans are spending a larger share of their disposable income on food than they have in the past three decades.
That’s why Kamala Harris has made the cost of living the centerpiece of her new economic campaign. She has some good ideas that rightly focus on the financial health of middle- and low-income Americans. But as with all attempts to cut costs, there’s a big problem: The White House simply doesn’t have the right tools to bring prices down, and the tools it does have could make the cost of living worse before it gets better.
In recent days, Harris has floated proposals for a federal ban on gouging on food and grocery items so that “big corporations cannot unfairly exploit consumers to generate excessive corporate profits.” There would also be an increase in the child tax credit; a cap on prescription drug costs; and a series of housing measures, including $25,000 assistance for first-time homebuyers, regulations to make it harder for corporations to buy large numbers of homes, and a call to build three million new housing units. Put all of that together, and food should be cheaper, there should be more and more affordable housing, and health care costs should go down—or should they?
Maybe in time. But crises decades in the making can’t be resolved in a president’s first 100 days. Prices for expensive necessities—housing, child care, out-of-pocket health care costs—have been rising faster than the general rate of inflation for many years. COVID took an existing trend and made it much worse. The pandemic disrupted the world’s supply chains, causing huge, if short-lived, price spikes for everything from gasoline to furniture to groceries. Stimulus payments increased consumer demand and rising wages, driving consumer prices further up. To combat inflation, the Federal Reserve raised interest rates, making debt-financed purchases like cars and homes more expensive. expensive. Finally, inflation has returned to reality, but the new price levels feel normal for the voters.
The White House and Congress are adept at creating demand by doling out money to families and businesses or by increasing spending by the federal government itself. Washington can resort to tax cuts, tax credits, stimulus checks, unemployment insurance payments, mortgage subsidies, student loans, direct employment programs, and so on. But it has fewer options to increase the supply of goods normally provided by private businesses. And this tends to be a slow-moving affair that is inherently inflationary, especially when financed by deficit spending. Pouring money into building new housing, for example, means driving up the prices of land and raw materials and stimulating the job market for construction workers.
The government has even fewer opportunities to attack Prices directly. There was not much the White House could do about the temporary inflation boost from COVID, and there is not much the White House can do about high consumer goods prices now. Imposing price caps could make shortages worse. And now that annual grocery inflation has dropped to just 1 percent, Harris’s suggestion of price gouging seems less relevant.
Addressing the massive underlying cost-of-living crisis will take years, if not decades. An expanded child tax credit should ease the child care crisis and boost supply with billions in new money. Housing is harder to build. Excessive local restrictions have made it expensive, if not impossible, for developers to build new housing where homebuyers want it. (And existing homeowners benefit from high property values, giving them a huge incentive to block construction if they can.) At the same time, high interest rates keep sellers in line. Harris’ housing proposals will only improve the situation if developers are allowed to build.
Some of the Harris campaign’s most compelling policies — those aimed at increasing competition, more price transparency, and less corporate concentration — are the hardest to justify in simple terms. America’s excessive health care costs are in large part the product of hospitals and medical groups controlling so much of their local market that patients and insurers have no choice but to pay the price they set. That’s a more complicated story than “corporate greed,” and no simple policy change will immediately untangle it.
The impact of Donald Trump’s economic proposals is easier to play out: Some would do nothing to solve the financial crisis, others would actually make it worse. Trump has proposed eliminating taxes on tips and benefits. That sounds great, but it’s a gift to corporations and rich Americans that would do little to help waiters, baristas, and cash-strapped retirees. Most tipped workers pay little or no income tax anyway, and the change could create a loophole that encourages hedge fund managers, for example, to convert their earnings to tips. (Harris has also promised to eliminate taxes on tips.) Trump’s Social Security proposal would also help rich retirees, not poor ones: Those who rely on Social Security to make ends meet almost by definition don’t earn enough from other sources to pay income taxes. Trump has also promised mass deportations (which would create a huge shortage of immigrant labor and drive up prices in jobs including agriculture, child care, and construction), high general tariffs (i.e., raising the price of all imported consumer goods), and increased oil and gas production (which could help marginally, since prices are primarily set by global markets).
Regardless of who is elected in November, the cost of living crisis will be with us for a long time. Harris is promising voters relief from high prices. If she wins, all she will need from voters is time.
