Suppose that you wake up tomorrow and discover that a sadistic alien has turned you into an economist. You are just getting over your shock at your new predicament (“How will I make friends? Will anyone ever trust me again? At least I’m not a lawyer.”) when Kamala Harris, responding to voter concerns about inflation, makes a vague statement in favor of government restrictions on the price of groceries. It just so happens that you have a regular gig writing columns for a national newspaper. You think that price controls are generally a bad idea, and the proposal made by Harris seems likely to be either ineffective or harmful. What should you say in your next newspaper column? The case for constructive alternatives Roughly speaking, as an
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Eric Kramer considers the following as important: Featured Stories, Food Reserves, Healthcare, Ozempic, price controls, US/Global Economics
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Suppose that you wake up tomorrow and discover that a sadistic alien has turned you into an economist.
You are just getting over your shock at your new predicament (“How will I make friends? Will anyone ever trust me again? At least I’m not a lawyer.”) when Kamala Harris, responding to voter concerns about inflation, makes a vague statement in favor of government restrictions on the price of groceries. It just so happens that you have a regular gig writing columns for a national newspaper. You think that price controls are generally a bad idea, and the proposal made by Harris seems likely to be either ineffective or harmful. What should you say in your next newspaper column?
The case for constructive alternatives
Roughly speaking, as an economist with a newspaper column, you have three options for responding to bad proposals for price controls:
- Education: Teach people about the drawbacks of price controls
- Scare tactics: Claim that proposals for price controls signal the impending end of civilization
- Present a constructive alternative: Come up with an alternative proposal that is responsive to voter concerns about price increases but less harmful than price controls, or even beneficial
In response to Kamala Harris’ recent proposal to limit increases in the price of groceries, most economists resorted to education or scare tactics. (Of course, those who use scare tactics would claim that they are just trying to educate people about the true dangers of price controls.) I want to illustrate the third option above, presenting a constructive alternative. I will return to the first two options in a later post.
I understand the temptation to respond to every proposal for price controls by lecturing people about supply and demand. Price controls are often ineffective or harmful. Educating the public about economics is important, and even politicians may sometimes be seduced by the superficial logic of price controls.
But it is naïve to think that lectures about supply and demand will always be sufficient to win over voters. Price controls appeal to common sense. And Harris has an important election to win and a credibility problem on affordability issues due to the recent inflation.
The upshot is that it is worth asking if the Harris campaign can respond to voters’ understandable unhappiness with inflation without proposing some form of price controls.
My suggestion is to propose 1) making Ozempic available for all who want it, free or at a modest cost, and 2) establishing a strategic food reserve.
Ozempic for all who want it
The political case for making Ozempic (or a similar GLP-1 agonist) available for free or at a modest cost to people who want it is simple (I think the medical case is strong as well, but I won’t argue for that here):
- Many people want to lose weight.
- Losing weight through diet and exercise changes is very difficult.
- Ozempic is highly effective at helping most people to lose weight.
- In most cases, insurance does not cover Ozempic for weight loss.
There are probably several tens of millions of people who want to try Ozempic for weight loss but who cannot afford to pay the retail price, which is currently around $1,000 per month. It is difficult to think of another policy that could help so many people in such a tangible way.
Would making Ozempic (and similar drugs) more widely available be socially beneficial? In the short run the answer is probably “yes”, but the devil is in the details. If the government just mandated coverage for Ozempic without negotiating a price discount, the cost would be very high. But simply negotiating prices down may not lead to a great outcome. If the government lowers prices too far, it may discourage research on new drugs. In addition, the world supply of Ozempic will need to be greatly increased – we do not want to take Ozempic away from diabetics in other countries by offering to pay high prices. It might make sense to offer manufacturers some kind of advance purchase commitment and to share the costs of new facilities to encourage investment in new manufacturing capacity. In exchange the government could limit payments for additional doses to marginal cost plus a modest allowance for profit, while continuing to pay high prices for diabetes patients.
The point is that it should be possible to come up with a payment system that improves on the current situation. Right now, a highly beneficial drug is being withheld from patients to keep prices up, even though the cost of producing additional doses is quite low. And since developing better pricing schemes for drug development and production is important, this seems like a perfect opportunity to try a new approach.
Food reserve
My second suggestion is to propose a establishing a strategic food reserve. The idea here is to create a stockpile of nonperishable foodstuffs, so that the next time global food supplies are disrupted we can release supplies and moderate shortages and price spikes.
I am not sure if establishing a strategic food reserve is a good idea on the merits. But it’s probably a better idea on the merits than price controls on groceries, and it may be more useful politically.
There are no doubt many people who want politicians to pound the table and demand price controls. But it is not obvious that promising price controls is the best electoral strategy because (as we have seen) it will inevitably lead to widespread elite criticism.* A proposal to establish a food reserve would show that Harris is taking the issue seriously and thinking about constructive solutions. It would be popular in farm states. And because establishing a food reserve is hard to criticize using basic Econ 101 reasoning, many fewer commentators will be tempted to join a pile-on.
*It is possible that the elite criticism of grocery price controls actually helped Harris by publicizing her proposal. I doubt this, but if it is true then opponents of price controls have a reason to support a strategic food reserve rather than lecturing people about supply and demand.