Harris’s Plan Is Economically Dumb but Politically Smart. by Josh Barro

Harris proposes housing initiatives

•The Atlantic - Politics / by Josh Barro / Aug 17, 2024 at 2:39 AM

Until recently, the Kamala Harris campaign seemed allergic to setting a policy agenda. Finally, the campaign is starting to roll out its economic platform, and the substance likely won’t appeal to many people who actually know about economics. But it’s hard for me to argue with the politics. As someone who has often said Democrats need to compromise their ideals to win, I don’t exclude my own ideals from that. And I see that when Harris rejects my economic preferences, she’s doing it in a way that will help her win.

The first example is Harris’s proposal to fight inflation through a new federal law on price gouging. My guess is such a law would be designed in such a way that it would have little effect on the market. But if it did have effects on the market, they would tend to be negative, as with President Richard Nixon’s price and wage controls in the 1970s.

According to the Econ 101 model of prices and supply, when a product is in shortage, its price goes up to bring quantity demanded in line with quantity supplied. This price increase sends a signal to producers to make more stuff. If you cap prices, you get shortages. That’s because there isn’t enough of the demanded good to go around, and producers don’t have sufficient incentive to start making more of the good to meet demand in the future.

[Read: The one big policy that Kamala Harris needs]

I agree with this model. “Price gouging,” anyway, is kind of an incoherent concept; there’s no fundamental reason of “fairness” that shortages shouldn’t be managed with price hikes. Yes, periods of shortage drive up profit margins. Higher profits are part of what brings new producers into constrained industries. And in a robustly competitive market, those profit margins get forced down as supply expands. Price controls inhibit that process and are a bad idea.

All of that said, Harris is trying to win a presidential election, and to win elections, you run on popular ideas. And the voters, in their infinite wisdom, strongly favor laws against “price gouging.” Evan Ross Smith, a pollster for the center-left Democratic research initiative Blueprint, shared a survey on X showing voters’ opinions on various proposals to fight inflation. The two most popular ideas for disinflation—lower interest rates and lower taxes—are in fact inflationary. The third most popular idea, and the most popular idea that wouldn’t tend to push prices up, is to “prosecute companies for price-gouging and price-fixing,” which Harris has said she will do if she assumes office.

The public demands action against “price gouging,” my objections to such laws are a political loser, and I should make peace with the fact that I won’t get my way on this issue. That is how democracy works.

Another proposal I’m gritting my teeth and putting up with is Harris’s echo of Donald Trump’s call to exempt tip income from taxes. This, again, is anathema to economists and substantively a dumb idea: A waiter or bartender shouldn’t enjoy a lower tax rate than a salesperson or child-care worker or laborer who earns the same amount of income just because that income happens to come as tips instead of wages. A special tax break for only some kinds of workers creates economic distortions, is unfair, and grows the already-too-large federal budget deficit. Yes, Harris’s campaign has said she would add guardrails to Trump’s original idea, and those guardrails make the idea less dumb. Her team told the Committee for a Responsible Federal Budget that there would be an income limit and other provisions designed to ensure that this benefit goes only to ordinarily tipped employees in leisure, hospitality, and gaming. Still, a less bad policy is not a good policy.

[Read: Trump has somehow stumbled into a very likable policy idea]

That said, again, I can’t argue with the politics. Harris’s shameless glomming-on to Trump’s pandering to hospitality workers in the swing state of Nevada should be seen in the context of her shameless abandonment of the loser leftist positions she took in the 2020 presidential primary, such as banning fracking and imposing single-payer health care. Harris intends to fight Trump hard on the cost-of-living issue—as Axios describes, she is trying to break with Joe Biden’s inflation record and position herself as a different kind of Democrat. And if that means making the tax code modestly less efficient, so be it. Better this shamelessness than the Biden campaign’s complete flat-footedness on the cost-of-living issue that was on track to cost the president the election.

Relatedly, Harris’s choice to pair the no-tax-on-tips idea with a federal-minimum-wage increase—another popular and populist economic-policy idea—is politically smart too. And although minimum-wage policies can be criticized in the same Econ 101 terms as price controls, in practice, I find it hard to spot negative economic impacts from minimum wages set in the typical range from the past few decades.

[Read: The one policy idea uniting Trump and Harris]

If Harris really wants to get popular on the cost-of-living issue, she could also pander harder on energy. Blueprint’s sixth-best-polling policy on inflation—“increase energy production of all types”—happens to be one of the anti-inflation policies that would actually work. And Harris has made an important move in this direction by rescinding (via spokesperson) her opposition to fracking. But a more full-throated endorsement from Harris of an all-of-the-above energy strategy—similar to the kind of rhetoric we used to hear from Barack Obama during his 2012 campaign—would help fight one of Democrats’ biggest weaknesses on cost-of-living issues: that they are seen as the party that wants to make fuel more expensive. There is currently a compromise bill on permitting reform in the Senate that would make both fossil-fuel and renewable-energy projects easier to build, increasing overall energy supply. Harris could endorse it, and make that endorsement part of her pitch about how she really will fight to lower the cost of living, in a way that is different from Biden and other Democrats.

Of course, if Harris does this, she will take flak from left-wing climate activists, a group that is noisier and more feared within the Democratic Party than the economists who hate the ideas of price regulation and tip tax breaks. But she’s already shown a willingness to break with those activists by changing her fracking position. And taking attacks from the flanks is how you show voters you’ve really moved to the center.

When Trump took criticism from anti-abortion activists for pushing the removal of a national-abortion-ban proposal from the Republican Party platform, the criticism was helpful to him politically. The Democratic Party would benefit from understanding that this dynamic works in the opposite direction too: When they disappoint and annoy the purveyors of unpopular and extreme ideas on their side, that helps show persuadable voters that they are reasonable and normal. And the climate activists would do well to remember that in a democracy, we can’t always get what we want—just as I am currently reminding myself.

This article was adapted from a post on Josh Barro’s Substack, Very Serious.

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