Debt Digest | Kamala Harris Proposes Price Controls

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts:

• Kamala Harris proposes price controls. Liz Wolfe, an associate editor at Reason, critiques Kamala Harris’s campaign proposal to impose a federal ban on price gouging on food and groceries. Wolfe writes: “Price controls have been disastrous whenever they've been implemented. Prices are signals, ways of communicating how much of a good is needed by consumers and how much ought to be produced. Interfering with these signals will create terrible shortages.” Wolfe correctly points out that the real cause of high prices is inflation, which was driven by pandemic-era government spending. She argues: “Both former President Donald Trump and President Joe Biden share blame for this profligate government spending, and both parties manage to obfuscate, trying to convince voters that some other force (greed?) is at work. But make no mistake: It was government recklessness that got us into this mess, and it won't be government price controls that get us out.” As Catherine Rampell, an opinion columnist at The Washington Post noted, price controls could lead to extreme government overreach, where “the FTC would be able to tell, say, a Kroger in Ohio the acceptable price it can charge for milk.” Cato’s recent book—”The War on Prices”—delves into the historical failures of price controls and explains why they will have the same negative effects today.

• Entitlement programs are the key drivers of persistent deficits. David Ditch, a Senior Policy Analyst at The Heritage Foundation, highlights the troubling state of the federal budget: “In 2023, the Treasury raked in $4.44 trillion, or over $13,000 for every American. Despite that, the government racked up a $1.7 trillion deficit because it spent $6.14 trillion. If we want lower inflation and interest rates, Congress needs to get deficit spending under control.” The figure below shows that only 28 percent of total spending is discretionary, while the remainder goes to mandatory programs like Social Security and Medicare, as well as to interest costs on the debt. As I have written before, “major entitlements are driving the US deeper into debt and exploding interest costs in the process.” In fact, Medicare and Social Security alone account for 100 percent of US unfunded obligations over the next 75 years. For more details on how these entitlement programs contribute to fiscal unsustainability, see here.

  

• Entitlement programs are pushing the US toward a predictable fiscal crisis. Manhattan Institute’s Brian Riedl writes: “[B]y 2034 Social Security and Medicare will be collecting $2.6 trillion annually in revenues while costing $4.8 trillion in benefits and associated interest costs.[...] Baby boomer retirements, health care costs, and rising interest rates combine to create what Bill Clinton's former White House chief of staff, Erskine Bowles, in 2012 called ‘the most predictable economic crisis in history.’” While unsustainable growth of entitlement programs drives the United States to a predictable economic and fiscal crisis, politicians are reluctant to pass politically disadvantageous reforms. This is why I have supported establishing a BRAC-like fiscal commission made up of independent experts, as it “holds immense promise in surmounting the political hurdles that have plagued past entitlement reform efforts.”

• Student loan forgiveness worsens deficits and incentivizes higher college prices. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, addresses the White House’s latest push to cancel student loans, stating: “The Administration has already implemented or begun to implement over $600 billion of student debt cancellation and is trying to roll out $220 to $750 billion more. Combined, that’s more than all nominal federal higher education spending in the nation’s entire pre-pandemic history.” As I’ve noted recently, the cost of this plan “adds to our already staggering deficits and normalizes the kind of fiscal irresponsibility that threatens our economic future.” Additionally, beyond the direct costs, this policy could create adverse incentives, potentially driving already-high college prices even higher. Cato’s Clark Neily and Neal McCluskey argue: “[T]here is powerful evidence that colleges raise prices as students get access to more taxpayer funding—and an expectation of future cancelation would de facto increase how much debt students could take without really incurring debt.“

• Hold the Fed accountable through rules-based monetary policy. Earlier this month, presidential candidate Donald Trump suggested that the president should be directly involved in how the Federal Reserve sets interest rates. Explicit presidential consultation risks worsening the quality of the central bank's decision-making, introducing a presidential wild card that could make committing to a stated policy of disinflation harder. As Cato’s Norbert Michel argues, “[I]nflation, unemployment, and monetary policy are always going to bepart of politics. But it’s also a great opportunity to discuss ways to improve monetary policy and to make politicians more accountable for the policies they force Americans to accept. […] One better way is for Congress to require the Fed to implement rules-based monetary policy.” As Michel explained in a 2015 policy report, “A clear policy rule commitment would bind the Fed to a future course of action based on clearly defined economic outcomes, thus drastically reducing uncertainty with respect to future policy changes.”