As lawmakers scramble to try to find ways to mitigate the inflation crisis, Sen. Elizabeth Warren has had a particularly bad idea for how to solve the crisis.
Warren, Democratic senator from Massachusetts, has proposed the Price Gouging Prevention Act of 2022 as a plan to fight inflation.
However, if Warren gets her way, you can actually expect to see inflation get worse. Get ready for higher prices for gas, groceries, utilities and more.
The problem with Warren’s basic idea of preventing price-gouging is that the current inflation crisis was not created by price-gouging and “corporate greed.” So she’s trying to fix a problem that is not a problem.
Warren’s flawed ideas of price gouging
In her proposed bill, Warren wants to “allow the FTC and state attorneys general to enforce a new standard against sellers charging an unconscionably excessive price during periods of exceptional market shock.”
She also wants to specifically “target dominant companies that have exploited the pandemic to boost profits.”
Warren has stuck to her guns for months in claiming that big corporations and industries took the pandemic and supply-chain issues as an opportunity to increase prices and make a profit.
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“What has also happened is that now that we’re living in America where there’s a lot more concentration in certain industries, look at the oil industry, look at the meat industry, look at groceries generally. What’s happened is that these companies have said ‘you know, we’ll pass along costs, but while we’re at it and everyone’s talking about rising costs let’s just add an extra big dollop of cost increases to expand our profits,’” Warren said.
— Tom Elliott (@tomselliott) March 16, 2022
Inflation is caused by COVID stimulus
But the cause of the current inflation comes largely from the government stimulus during the pandemic.
Of course, the pandemic was the first thing to naturally cause economic damage by shifting the supply and demand curves so that the demand for products was excessively high, but the supply was short due to labor shortages and supply-chain issues.
But the U.S. government decided to tamper with the economy and try to give it a shot in the arm with billion of dollars in stimulus.
“There would be a catch, though. As U.S. prices continue to rise by rates not seen in decades, it’s become clear that the stimulus came at a significant, unintended cost: inflation,” FiveThirtyEight reported.
In fact, the stimulus handed out to all Americans actually just seemed to make the supply-and-demand issue worse.
“The demand boost was very large in the U.S., and the stimulus checks were a large part of it,” Thomas Philippon, a professor of finance at New York University’s Stern School of Business, told FiveThirtyEight.
That then spurred inflation.
Warren now thinks that she can just turn the “inflation tap” off by trying to control prices from going too high.
But it’s not that simple.
“Inflation is not like a light switch. It ramps up and comes back down, maybe, if the right things are done,” economist Axel Merk said on an episode of Wealthion.
Warren’s idea that price-gouging is the problem that has to be fixed is simply inaccurate.
First, the pandemic itself proved that anti-price-gouging laws do not fix price problems. Research shows that states with anti-price-gouging laws actually struggled more with short supplies.
“If the prices of hand sanitizer and toilet paper were allowed to rise, then people would be less likely to hoard them,” Gavin Roberts, assistant professor of economics at Weber State, found in a Weber State study.
“We always think about the businesses selling these products because they make a profit from price gouging, but we don’t often realize that when you hold the price down, people will buy an aisle’s worth of toilet paper because it’s super cheap,” Roberts added.
The economy is self-correcting if you leave it alone
In fact, if Warren’s plan to essentially ban price-gouging were to succeed, it could put the country into an even worse situation.
Economies are set up on with “laws of nature,” if you will. They are meant to be self-correcting when things go awry.
That means when there is a scarcity of a particular supply, prices have to go up. That’s inconvenient for buyers for a period. But overall, high prices will actually attract more businesses to enter the marketplace to try to provide the goods that are in short supply.
When that happens, there is suddenly more supply, which begins to answer the demand, causing prices to stabilize again. Supply and demand begin to re-align and the economy begins to recover.
To ban price-gouging throws a wrench into the whole system of the economy being able to correct itself.
“What’s more, high prices during periods of high demand for a product are the force that attracts more businesses to come in and provide more of the good or service, which eventually alleviates the shortage and lowers the price again over time,” Brad Polumbo wrote for the Washington Examiner. “But if the price is kept capped low, there’s no market force naturally bringing in more investment to boost the supply to keep up with increased demand.”
Yes. It is awful that gas is so expensive, that eating, paying for rent, water and electricity are costing more. But these things will simply get more expensive if Warren is allowed to carry on with her non-solution of ending price-gouging.
This is simply not the answer for inflation.