Regulating Prices Not Such a Crazy Idea

Kamala Harris’s entry into the U.S. presidential campaign has had a dramatic impact on political discourse there – not just in the opinion polls, but in policy thinking, as well. For example, in her recently-unveiled economic platform she advocates new federal laws against price-gouging, to limit the power of private businesses to unreasonably jack up prices for groceries and other essentials during emergencies or disruptions (such as the COVID pandemic).

Harris’s pledge has led to renewed attention on the idea of price regulations as a potential measure in combatting inflation.

Here is a longer version of an article by Centre for Future Work Director Jim Stanford, originally published in the Toronto Star, discussing the relevance of Harris’s proposal for Canada.

Kamala Harris Would Bring in Price Caps to Fight Corporate Gouging — It Could Work Here Too

By Jim Stanford

As economies around the world grappled with inflation after the pandemic, one idea has spurred both interest and controversy. Prices for some essential goods rose far faster in 2021 and 2022 than their costs of production, as companies fattened profits to their highest level in history. That was the leading edge of economy-wide inflation.

The traditional medicine for this problem is to forcibly slow the whole economy with high interest rates. But that further punishes the victims of this profit-led inflation. Could government instead use pre-emptive price caps on strategic commodities to prevent those shocks from spreading into economy-wide inflation?

The idea has been debated for years. Now, Kamala Harris’s surging presidential campaign has seized on it. She pledged last week to strengthen existing U.S. laws against price-gouging, especially for groceries.

At least 38 different American states already have laws prohibiting price-gouging, especially during emergencies or natural disasters. These laws typically define price-gouging as large increases in prices (10% or more) that cannot be justified by higher costs. The State of New York used these laws against three companies that jacked up prices for hand sanitizer by up to 400% during the initial COVID-19 outbreak. The firms were levied fines totaling $52,000 (U.S.), and had to reimburse customers for the excess charges.

The effectiveness of state-level anti-gouging measures can be undermined by firms conducting cross-border sales, and Harris’s proposal seems aimed at closing that loophole with new federal powers – and clarifying their application to staple products like groceries. Massachusetts Senator Elizabeth Warren has proposed legislation to ban price-gouging nation-wide in any industry, by firms with annual sales over $100 million (U.S.).

Several Canadian provinces have similar laws. Ontario’s broad Anti-Price-Gouging Act, for example, prohibits companies from raising prices for essential goods during an emergency, above what they were before the emergency, unless justified by their own higher costs. One firm in Alberta was even charged under that province’s laws, for excess price hikes on sanitation supplies during pandemic lockdowns.

Price regulation has been ridiculed by conventional economists as a return to Soviet style central planning, sure to cause a breakdown of the market economy. Donald Trump claimed Harris’s proposals would turn America into Venezuela. But ignore the gotcha politics, and price regulation is in fact a normal and accepted element of economic policy.

Indeed, the potential scope of price regulation in controlling inflation goes beyond just preventing excess price hikes during an immediate emergency. It plays a broader role in preventing profit-seeking businesses from exploiting any competitive advantage beyond reasonable grounds. It’s a normal element in the repertoire of macroeconomic policy.

Here in Canada, the NDP’s Jagmeet Singh has called for price caps on essential foodstuffs. Meanwhile, in other countries (including Spain, France, and the U.K.), price controls have been established for food, housing, energy and other strategic commodities to help reduce inflation.

We already use price regulations in many areas of Canada’s economy.

For example, energy utilities are usually subject to price regulation, to prevent them from abusing their natural monopoly power. When those regulations are strong (especially when backed with public ownership of the system), undue price hikes can be prevented.

In B.C., Manitoba, and Quebec, strong regulation and public ownership held electricity price increases to just 7-10% over the last five years. In Alberta’s wild west electricity market (privatized and largely deregulated), prices soared 45% in the same time.

The Atlantic provinces even regulate gasoline prices, on the basis of allowed mark-ups over international crude oil prices. This doesn’t fully prevent energy price shocks (as occurred after Russia’s invasion of Ukraine), but it moderates them.

Six provinces have rent controls that limit how much landlords can raise rents (at least for existing tenants). Again, that doesn’t single-handedly fix the housing crisis – but it protects long-term tenants and reduces inflation.

Meanwhile, the federal government regulates certain pharmaceutical prices under Canada’s patent laws. This system isn’t perfect, and the drug-makers hate it. But it helped hold average price increases for prescription medicines to just 5% since 2019 (compared to the 18% rise in overall consumer prices).

Prices for other public services are also directly set by government, and can help reduce inflation. Average urban transit fares, for example, increased just 9% over the last five years, half the pace of overall inflation.

Child care is an outstanding example of how government pricing policy can reduce inflation. Average child care fees have fallen 25% since 2019, thanks mostly to the new federal child care program, which is moving toward $10-per-day services. Those lower fees have measurably reduced the consumer price index.

In short, price regulations are not a bizarre, untested idea. They’re already in place, and already working.

Even the Bank of Canada acknowledges the importance of price regulations in moderating inflation. Its research shows that what it calls “regulation-affected services” (including sectors like communications, whose prices are subject to government oversight) have consistently dampened inflation since the COVID pandemic. They constitute over 8% of all consumer spending. Their prices have increased 2 to 4 percentage points less than expected, slower than any other sector of the economy.

Yes, price regulations must be carefully designed and enforced. They are not a magic bullet to single-handedly cure inflation. They are just one tool in the overall anti-inflation toolbox.

But given that the global economy will surely face more inflationary shocks in the future (from war in the Mideast, climate disasters, or future health crises), it’s a tool that should be kept at the ready. In times of trouble, quickly short-circuiting the inflationary impulse arising from undue profit-seeking is much preferable to imposing mass suffering through economy-wide austerity.