“The country’s ongoing shortage of infant formula has been exacerbated and prolonged by a long list of counterproductive government interventions: from tariffs and trade restrictions to price-distorting subsidies and nonsensical labeling requirements.
New York City Mayor Eric Adams has decided to throw one more log on the fire by issuing an emergency order limiting price increases on infant formula.
“The nationwide infant formula shortage has caused unimaginable pain and anxiety for families across New York—and we must act with urgency,” said Adams on Sunday. “This emergency executive order will help us to crack down on any retailer looking to capitalize on this crisis by jacking up prices on this essential good.”
The mayor’s order invokes city rules that prohibit merchants from raising prices more than 10 percent from where they were 30–60 days preceding the emergency. Adams urged people to report potential gouging to the city’s Department of Consumer and Worker Protection.”
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“sudden price hikes discourage people from engaging in harmful and unproductive hoarding.”
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“Higher prices make once unprofitable activities suddenly lucrative. For example, it’s usually not profitable to drive 100 miles to sell people bags of ice. That calculation changes when a hurricane drives up the price of ice to $15 a bag.
Conversely, if price gouging laws force a bag of ice to be sold at $1, hurricane or not, a lot fewer potential suppliers are going to be induced to take that trip. The result is more people go without ice.
Adams’s order will similarly deprive New Yorkers of much-needed formula. Out-of-city suppliers who might have incurred higher transportation costs to reap the rewards of higher prices in the Big Apple will instead sell off closer to home. That’ll be particularly true if they’re located in a jurisdiction that hasn’t banned market prices on baby formula.
The federal policies driving the formula shortage—whether that’s prohibitive tariffs on baby formula or labeling rules that keep European products off the market—are outside the control of local officials like Adams, who are nevertheless expected by their constituents to do something.
The least the mayor could do, however, is not make the formula problem worse. His emergency order shows he can’t even clear that bar.”
“Those who desperately need rides can pay extra for them. Those with spare time can take a bus, walk, call a friend, etc., or just wait for prices to drop.
Higher prices also mean higher pay for drivers, which encourages part-time drivers to drop what they are doing and start offering rides.”
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“Uber and Lyft are great innovations. They forced taxi monopolies to treat customers better and let ordinary people use their cars to drive for money.
But businesses get clobbered in the media whenever there’s an aberration. On that day, social media exploded with comments like, “Fare surge after a mass shooting….Shame on you @Uber.”
The companies quickly went into damage control mode. “Our hearts go out to the victims,” tweeted Uber Support. “We disabled surge pricing in the area.”
Disabling surge pricing may be good PR, but it’s a terrible practice. At the beginning of the pandemic, when toilet paper and hand sanitizer were scarce, politicians told people, “Report merchants who raise prices!” They called that “illegal price gouging.”
But “gouging” was a good thing even then. It disincentivized hoarding and got suppliers to make more of the products we need most.”
“Value grocery chain Smart & Final has agreed to pay California $175,000 because, between March and June 2020, it increased the price of four different types of eggs during a period in which stores were struggling to keep their shelves stocked.
This was in the early days of the pandemic, when Democratic Gov. Gavin Newsom declared a state of emergency. That declaration triggered California’s “price-gouging” law, which says that businesses cannot raise prices by more than 10 percent during state emergencies unless they can prove the price increase is due to increased production or labor costs. According to Attorney General Rob Bonta, Smart & Final raised prices for some eggs by as much as 25 percent.
The Los Angeles Times notes that Smart & Final did have a reason for raising the prices—suppliers were also jacking up prices of eggs. But apparently Smart & Final acknowledged that suppliers were raising the prices of “standard” eggs, and that the chain commensurately raised the price of “premium” eggs.
Laws against price-gouging are bad, wrong, and counter-productive, and Bonta’s own observations about this case, quoted by the Times, explain why. He notes that, “When California first went into lockdown at the beginning of the pandemic, there was a run on essential supplies, and unfortunately, some businesses saw this as an opportunity to pad their bottom line.”
“While these were premium products, remember that during this time, shelves were often bare, there weren’t a lot of choices. Consumers had few, if any options.”
This is an economically illiterate grasp of why stores jack up prices in a crisis situation. The “run on essential supplies” caused absurd amounts of hoarding and over-purchasing, which many customers were able to do largely because stores were prohibited from raising prices. That sharp increase in demand travels up the supply chain, ultimately leading to some combination of empty shelves and higher prices as suppliers ramp up production.
Price-gouging laws simply attempt to legislate away basic economics at the retail point, and the end result is reasonable prices for goods that are seldom or never available. It doesn’t matter how much eggs cost when a supermarket doesn’t have any in stock. If people actually had to pay more for goods in an emergency situation, they’d be more careful about what they bought and we wouldn’t have had people pushing entire carts of toilet paper out of the grocery stores (and then attempting to resell them online).
The way Bonta describes the store’s situation is that people were buying the more expensive premium eggs due to shortages of the standard eggs. The same demand issues were most certainly going to come into play if people continued to purchase the premium eggs at the same rate they purchased the standard eggs.”
“At the time I wrote my July 2021 piece, “Don’t worry about inflation,” a prescient copy editor noted that this headline might look bad if I was wrong and inflation got increasingly worse. I responded that I stood by it, and if I was wrong, I would write a groveling follow-up piece.
So here we are.”
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“I unfairly dismissed the most boring, Econ 101 explanation for why inflation happens: that there was too much money sloshing around for the amount of stuff the economy was able to produce — meaning the price of that stuff went up.”
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“Past stimulus checks during non-pandemic episodes have been disproportionately spent on durable goods, rather than services, suggesting that the stimulus checks might have accelerated this phenomenon just as the virus did. And because prices of goods tend to be less “sticky” than prices of services (meaning they tend to rise and fall more easily), this especially contributed to inflation.
This surge in spending led to big, well-publicized shortages in certain areas, most famously cars, as demand for durable goods outstripped the economy’s ability to produce them (sick workers limiting production was a factor, too, if a smaller one). That provoked localized price spikes on a few goods. And because oil producers slowed production in expectation of a big post-Covid recession, they too struggled to keep up with demand, so gas prices rose — which Putin’s invasion of Ukraine only worsened.
For a while, many commentators thought you could wave off inflation fears by saying it was just limited in a few sectors. But at this point, an “inflation in a few places” theory doesn’t really fly.
Some goods, like oil and cars, have specific narratives like a chip shortage or low drilling that could explain inflation. But as Bloomberg’s John Authers has detailed, inflation is still rising even if you exclude those goods. The Dallas Fed’s “trimmed mean” inflation measure, which purposely removes “outliers” where prices are rising extremely fast or extremely slow from the data, started to shoot up recently, too.”
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“Due to a combination of rapidly growing wages through all of 2021, plus trillions in government fiscal support, there has just been too much money around combined with insufficient goods and services to spend it on.
That’s led to not just inflation but accelerating inflation, as wage increases contribute to price increases and higher expectations of future inflation contribute to higher immediate inflation. That’s why you’ve started to see inflation in categories beyond just gas and cars. It’s a situation similar to what NAIRU would predict, except I would argue it’s not really about low unemployment.”
“As the greatest inflation spike of the last 50 years occurs, the utter failure of economists, their models, and many pundits to foresee what was coming is worth highlighting. Of course, the biggest malfunction in the story was that of the Federal Reserve itself, which had a clear mandate to keep prices stable and seems surprised by their lack of stability.
It’s no understatement to say that the Fed failed to properly anticipate the inflation surge. On Feb. 8, 2021, Raphael Bostic, the president of the Atlanta branch of the Fed, said, “I’m really not expecting us to see a spike in inflation that is very robust in the next 12 months or so.” A few days later, Boston Fed President Eric Rosengren echoed this sentiment, noting that he would be “surprised” to see broad-based inflation sustained at a level of two percent before the end of 2022.
As the saying goes, problems often start at the top. When testifying before the House Financial Services Committee in February 2021, Fed Chair Jerome Powell predicted that it might take more than three years to hit the two percent inflation goal.
Around the summer of 2021, inflation became hard to ignore. Yet Fed officials insisted that it wasn’t yet time to roll back their temporary policies because they weren’t responsible for the rise in prices. The main villain was identified as supply-chain restraints. Once resolved, we were told, inflation would prove to be transitory. Testifying in June of last year before a House subcommittee, Powell said:
“If you look…at the categories where these prices are really going up, you’ll see that it tends to be areas that are directly affected by the reopening. That’s something that we’ll go through over a period…then be over. And it should not leave much of a mark on the ongoing inflation process.”
During a speech in Jackson Hole, Wyoming, last August, Powell again echoed this sentiment. He also noted that “longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory.”
But as Hoover Institution economist John Cochrane has been reminding us all along, long-term inflation expectations are notoriously poor predictors of inflation. Sadly, few listened, and team “transitory” was born.”
“many economists say that the foundering supply chain has played a heavy hand in driving up prices”
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“it’s become clear to many economists that American inflation isn’t just a supply chain issue: Our economic response — namely, the trillions of dollars of COVID-19 stimulus paid out over the last 24 months — appears to be a meaningful differentiator.
A good way to tease this out is to look at Europe, which has faced similar supply chain issues and an even worse oil shock, as it is more dependent on foreign oil than the U.S. And yet, European countries have experienced lower inflation, perhaps due in part to their smaller government response.”
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““If you look compared to Europe, in the United States goods consumption is higher, and services consumption is higher than what it is [in Europe].”
One reason for that higher consumption is government spending. In 2020, a divided Congress under former President Donald Trump passed two separate pieces of legislation — first the $2 trillion CARES Act in March, which doled out $1,200 checks to most single adults and even more to families, then a $900 billion package in December that, among other aid, issued $600 targeted checks. But then in March 2021, Democrats passed another round of government stimulus in a $1.9 trillion relief package — including $1,400 direct payments to individual Americans — which some experts warned at the time might cause inflation.”
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“Furman stressed to me that inflation likely would have been high even without a COVID-19 relief bill, however, because of a reopening economy and base effect distortions. Moreover, rising gas prices — one of the most tangible ways in which Americans process inflation — likely have nothing to do with the American Rescue Plan and much more to do with the dynamics of global oil. There is at least some evidence, though, that government spending has caused inflation, beyond the explanation that it’s merely been a supply chain issue.”
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“not all government spending has the same effect on inflation. In fact, historically government spending hasn’t usually led to inflation. A 2015 paper in the European Economic Review found, for example, that the effect of government spending on inflation post-World War II was “not statistically different from zero.” But Bill Dupor, a co-author of that study and vice president of research at the Federal Reserve Bank of St. Louis, told me that the size of the intervention matters — and that could help explain why government spending today has spurred inflation but hadn’t in recent memory.”
“Democrats have a multi-pronged strategy for addressing drug prices in the Build Back Better Act. First, they would allow Medicare to negotiate with pharmaceutical manufacturers on the prices of a certain number of prescription drugs, something they have been promising to do for years. But Democrats also want to limit drug companies’ ability to hike the prices of their medications for everyone — regardless of what kind of health insurance they have — in the future.
To do that, Congress has proposed requiring drugmakers to pay rebates for any price increases, in either the Medicare health program or the commercial health plans that cover 180 million Americans.
But, as Politico reported this week, the plan to apply the inflation-indexed rebates to the commercial market could be in trouble.
Senate Republicans — at the urging of the drug industry — plan to challenge whether the rebates for commercial health plans are permissible in a bill passed through the budget reconciliation process.”
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“the Byrd Rule requires that all the provisions in a budget reconciliation bill directly change federal spending or revenue.
Republicans will argue that the purpose of the provision is to control drug prices for the private plans, full stop, and that does not have anything to do with federal spending or revenue — at least not directly.
The Democratic counterargument would be that applying these rebates to commercial plans would have a serious, more than incidental, effect on the federal budget. The federal government subsidizes almost all private insurance plans in one way or another, and so lower or higher costs for those plans could have major implications and lower costs for private health plans could also mean higher wages for workers, who would then pay more in taxes.
Who wins is likely ultimately a decision for the Senate parliamentarian.”
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“what would happen if the parliamentarian determines rebates covering commercial plans cannot be allowed under the Byrd Rule?
The big fear, voiced by advocates of the Democrats’ plan, is that drug companies would extract higher prices from the commercial market in order to make up for the revenue they would lose from Medicare once that program’s new price controls take effect.
According to several experts, that appears unlikely. Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy, covered why in a lengthy analysis published in September.
“Fundamentally, for this to occur, it would have to be the case that drug companies are benevolently choosing not to profit-maximize at present,” Adler told me this week, “which I find rather difficult to believe.””
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“Under the current plan, drugmakers would pay a rebate based on their sales volume in both the Medicare and commercial markets. In that scenario, there would be little reason to raise list prices faster than inflation, because you are paying the penalty based on the entire market.
But if those rebates can’t include the commercial market, the penalty will be based on the Medicare market only — making it a smaller price to pay if a company does decide to hike the list price of a drug at a rate higher than inflation.”
“More than 580,000 Americans are homeless. The median sale price for a home has just surpassed $400,000. Homeownership is on the decline.
This, by all accounts, is a national emergency — and one House Democrats had proposed $330 billion to tackle as part of their Build Back Better plan. This package was both a once-in-a-generation investment and also barely enough to scratch the surface. Now, even those proposed investments are being cut down as part of negotiations over the final package.”
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“some in Congress were willing to make substantial investments, very few were willing to tackle the fundamental problem that was making homes so expensive in the first place: lack of supply.
Yes, it’s easier to try to help people afford something expensive than to try and make it less expensive to begin with. But many of the policies that try to subsidize housing can actually make it more expensive. “What you really need if you want to lower those new home prices, is you need to build more homes — and there’s not that much of that in this bill,” says Paul Williams, a fellow at the Jain Family Institute.”
High-Deductible Health Plans Reduce Health Care Cost And Utilization, Including Use Of Needed Preventive Services Rajender Agarwal et al. 10 2017. HealthAffairs. https://www.healthaffairs.org/doi/10.1377/hlthaff.2017.0610 Does High Cost-Sharing Slow the Long-term Growth Rate of Health Spending? Evidence from the States Molly Frean and Mark