The Solution to Price Gouging

 Everybody in America is feeling the pinch at the grocery store. Democratic presidential candidate Kamala Harris did not discuss how she was going to lower inflation in her recent acceptance speech but she did address the issue in a previous speech on economic policy. In that speech she blamed inflation on price gouging by greedy corporations. Everybody knows that the solution to price gouging, should it exist, is competition – not governmental regulations.

Think of price gouging as an incentive. If, in the aftermath of a hurricane, there is a shortage of gasoline, the gas station that has some gas to sell raises the price to $5 a gallon, that’s price gouging (except in California where that’s the normal price). But all the gasoline wholesalers in the region realize, “hey, if I take my supplies to where the hurricane hit, I can get extra profit for my effort.” So everyone starts shipping gasoline to the hurricane ravaged area. Gas shortage solved. But if government regulations say that they will claw back those excess profits, then the wholesalers will not make the extra effort to ship gas to the people that really need it. Gas shortage persists. Progressive politicians chortle, “ha, ha, we stopped those greedy bastards from making extra profits.” People in the hard hit area say, “hey, where’s our gasoline?” Progressives might say, “no problem. We will just have FEMA ship gasoline to the hurricane victims.” So the progressive solution is to get government to solve the problem that the government caused. But we must keep in mind that FEMA does not have any gasoline or gasoline tank trucks to haul the gasoline to where it is needed so it must contract with the wholesalers to use their fleet and their gasoline. And because it is an emergency it will be a no bid contract at above market rates.

In an inflationary period, if companies maintain their historic profit margins, they will have record profits from the record high prices. Progressives say that these record profits are price gouging. But all the companies are doing is keeping margins more or less the same. By calling this price gouging progressives are blaming companies for not absorbing the costs of inflation caused by government.

Let’s take the case of Kroger. Kroger is the 3rd largest grocery store chain in America after Walmart and Costco. But Walmart and Costco sell a lot of stuff other than groceries so let’s concentrate on Kroger as a pure grocery play to see how much they gouged out of the consumer. Kroger sales in 2023 were about $150 billion. Net profit was a little less than $2.2 billion or about 1.5% of sales. That does not appear to be too egregious an amount of gouging to me, but let’s look at it another way. Shareholders earned a profit of $2.2 billion, but the market capitalization of Kroger is around $37 billion so shareholders earned a little less than 6% on their investment. Earning 6% on an equity investment when government bonds are paying around 4% doesn’t strike me as gouging.

Politicians could say (and probably will) that the executive compensation at Kroger is excessive and that they will pass some laws to claw back that excess. But the top five executives at Kroger earned only about $35 million in cash and stock awards for all five according to Salary.com. That’s a lot of money but it represents only about 0.2% of total wages and an infinitesimal percentage of total sales, so unless the government wants to control all wages at Kroger there is not much here to pass on to consumers. Besides ,companies have to pay for talent even if the talent gets paid hundreds times more than a night stocker or check-out clerk. Think about it. Steph Curry gets paid over $55 million dollars a year, way more than the hotdog vendor up in the stands. But nobody is asking to claw back his salary.

As Milton Friedman famously said, “Inflation is made by Government and no one else.” And of course he’s right. Think about it. You can’t print money. I can’t print money. Even greedy corporations can’t print money. Only governments can print money. And boy do they. In Economics 101 we learned that in a free market there is supply and there is demand and there is a price where the supply will equal the demand. Increase the supply with no change in demand will create excess supply unless the price is lowered. If there is more demand but no increase in supply prices will rise. If that increase in demand is caused by lots of money printed by the government that is inflation. Another way of looking at is if the supply of money increases but demand remains unchanged, the value of money decreases and things cost more. That is also inflation.

So why do our progressive friends always blame inflation on greedy corporations and price gouging (other than it is always easy to blame someone else for something you did. We all learned that as a kid.). It all comes down to Marxist thinking. Marx said that profits are derived by the exploitation of the workers, so profits – any profits – are bad. Progressives will claim that they are not communists and that not all profits are bad – only excess profits. Of course, only they are qualified to determine what is excessive. To them, profits are either due to price gouging or labor exploitation. Either way you need more government to get rid of all that gouging and exploiting. By force if necessary because greedy corporations spit on the common good.

But if politicians were truly interested in the common good they would work together to pass a balanced budget, eliminate deficit spending, reform entitlement programs and start reducing the enormous public debt. While they are at it they could reduce excessive regulation and unleash the productive power of American business. Good public policy is the best way to whip inflation now.