Political Sense but Economic Folly

The presidential election is looming and both candidates are pushing their economic plans for the nation.  Predictably, each promises to lower inflation, to increase employment, and to build the middle class, while warning us that the insane plans of their opponent will bring about a recession, unemployment, and genital warts.   

I want to discuss the economic plan broadly outlined by Vice President Kamala Harris today.  The key word in that sentence was “broadly” since few details were given.  In case you think I’m picking on Harris, let me say I am not fond of the economic plan of former President Trump, either.  Since both candidates seem to be moving away from free trade, I think that both need a semester of freshman economics.  Nonetheless, Harris proposed hers today, so I’m talking about hers now.

The proposal to provide first time homebuyers with up to $25,000 assistance for a down payment doesn’t need much scrutiny, because such a bill has little likelihood of passing.  If it were passed, this bill would increase demand while doing nothing to increase the supply of homes for sale.  Since increasing demand faster than increasing supply guarantees both shortages and higher prices, this proposal would be dead on arrival (at least as it was presented today).

If you really want to reduce the cost of housing, the fastest route would be to lower the cost of production, thus increasing supply.  The easiest way to do that would be to reduce the cost of government regulations on home construction.  According to a study by the National Association of Home Builders (NAHB), the regulations imposed by all levels of government account for approximately $93,870, or about 24% of the current average sales price of $397,300 of a new single-family home.  While this is a national average, the cost of regulations in some areas—think California—is twice that.  (And this regulatory cost has increased by more than 10% during the Biden Administration).

Harris proposed a new federal statute limiting the sale of homes to corporations seeking rental income.  Ignoring the problematic constitutionality of such a proposal, wouldn’t it be better to focus on the cause of the problem?  If government regulations limit production while our country’s immigration policy insures a growing demand, why wouldn’t corporations in search of a steady profit stream invest in housing?  I would also point out that large corporate landlords have a lower overhead cost due to a larger economy of scale and may very well offer lower rents and better service than private owners renting out single houses. 

Nor am I going to spend much time discussing the idea of controls.  Vice President Harris didn’t actually mention price controls, she called it “federal laws against price gauging”.  (We can only assume she meant price gouging.)  Strangely, Harris believes that central regulation is necessary to control the price of food in an industry where the current average profit margin is a measly 1.6%.  Since price controls have a long, long steady record of complete failure in lowering prices, it is hard to believe that Congress would risk almost certain failure to lower prices 1.6%.  I would point out that oil rich Venezuela’s price controls on food have been so successful that the inhabitants of Caracas broke into the zoo and ate many of the animals.

I would also point out that Vice President Harris, the former senator from California and a long-term resident of San Francisco, did not mention controlling prices in Silicon Valley, where the average profit margin is 44.13%.  As a point of reference, the national average profit margin for businesses is roughly 8.5%.

For me, the most disturbing parts of Vice President Harris’ economic plan are the areas that she only hinted at.  For example, there are vague references to giving the Fair Trade Commission (FTC) more power to prosecute price gouging.  The FTC is already tasked with this job but over the last three and a half years has been remarkably unsuccessful in any of its attempts to prosecute  companies.  Without specific details, the voters can only speculate as to how Harris intends to implement her economic policies, but we can project that she will propose legislation similar to what Senator Elizabeth Warren has introduced—a bill that Harris has strongly endorsed.

One of the measures in the bill would empower the FTC to “require companies to publish detailed internal data about costs, margins, contracts and their future pricing strategies.”  What Warren—and evidently Harris—seem not to understand is that published pricing plans allows companies to legally and publicly collude to set prices artificially high.

Allow me to demonstrate.  I collect Golden Age Mystery novels, particularly hard back editions of books by Rex Stout and Ellery Queen.  If, for example, I needed a copy of The Doorbell Rang by Rex Stout, I could easily search the internet for copies available from used book stores.  Right now, I could take my pick of purchasing a good quality hardback edition of this book from stores in Reno, Dallas, Atlanta, and Phoenix.  All four stores will sell me a copy for $6.24.

Doesn’t that seem strange?  $6.24 is a rather odd amount, and how is it that all the stores have the same price, exactly to the penny?  If I search for the same book on Amazon, they list almost a dozen used bookstores eager to sell me a copy for $6.29.  Exactly $6.29.

This is not a coincidence; it is an example of what happens when retailers publicly publish prices.  Almost every used bookstore in America lists its books for sale on Abebooks.com, a central listing point for used books.  When a bookseller obtains a new book, it can easily check for the prevailing price for that book among its competitors.  If you are curious why the bookstores on Amazon are a nickel higher than those listed on Abebooks, I presume it is a handling fee for Amazon.  You see, Amazon, the world’s largest seller of new books owns Abebooks, the world’s largest seller of used books.

Somehow, this price collusion is legal and absolutely results in me paying a higher price for books.  If grocery stores were forced to publish their prices, we could expect the same result for food prices.

So much for the Harris economic plan.  Even if she is successful this fall and becomes our next president, none of the policies listed today is likely to ever become law.  None of the proposals makes any economic sense, but all do make political sense.  This nonsense will probably become popular with some voters.

Unfortunately, the people who have taken freshman economics are outnumbered by those who haven’t.