Kamalanomics: Assessing Kamala Harris' Economic Plan

Public policy is, for all intents and purposes, an inherently political endeavor, even when the focus is economic, and the analysis and implication of the policy are unambiguous. What wins elections are promises, even empty and potentially dangerous promises. Feel good policies, what we might call in economics ‘expressive policies’ tend to be winners and politicians of all stripes tout them in the familiar refrains of “creating more jobs”, “bringing jobs back”, “curb big business”, “protect American workers”, "secure our borders", and of course the always trending one, “punish China for cheating”. As you can tell I strive to be politically neutral.

Don’t get me wrong, patriotic national pride is not a bad thing. When economists analyze economic policy, we do not necessarily do so thinking about global net benefits. We do so, thinking about national welfare and maximized net benefits either at that level or subnational levels. When we advocate for free trade for instance, it is not so that some relatively poor developing country can grow through taking advantage of us. No, it is that trade provides positive net benefits for us. Our case is only made easier since the other country also benefits, but make no mistake, optimal trade theory where a large country, like ours, can benefit from imposing tariffs is sound economic policy, if the stars align – that is, if the assumptions for such a policy are in place.

So, hear me out. What follows is not partisan.

Good politics is all too often... bad economics

Vice President Kamala Harris as the Democratic party presidential candidate in the upcoming elections later this year in November unveiled today an ambitious economic agenda that, among other planned policies, in summary includes the following six key plans:

·      Eliminate medical debt for millions of Americans;

·      Put in place a ban on price gouging for groceries and food;

·      Put in place a cap on prescription drug costs;

·      Provide a $25,000 subsidy for first time home buyers;

·      Put in place a $6000 per child tax credit for the first year of the baby’s life;

·      Restoring of the child tax credit of $3000 per child.

Unfortunately, as economists have long recognized, bad economic policies, often are the best political strategies. This is true for both conservative and liberal policies. So, what is not to like about these? I think it is important to pause for a second to ask two questions. First, in light of explicit statist intervention in markets, do we sill have our liberties in the sense of individual freedom of choice and enterprise? Second, how are these objectives going to be paid for?

The first question is loaded because I am asking a question that touches on American founding principles, and on the proper role of government in what is, assumedly still, a market economy, and on the economic reality of unintended consequences, if liberties are still guaranteed, post-policy implementation.

The second question relates to the age old “no free lunch” principle in economics. Policies that presumably provide benefits come with costs. It is not immediately clear how these will be paid for, but anyone’s guess is as good as mine, and therein is the problem.

Give me liberty or give me transfers

Admittedly the strongest case for not interfering in market allocations is the inefficiency induced and resulting policy-defeating unintended consequences when the markets are perfectly competitive. A condition that many point to as failing woefully across industries and so justifying government intervention.

That is fine. However, the fundamental freedom of choice to acquire assets and resources, and to employ them freely in production, in anticipation of benefit is violated when after the investment has been made, the government abrogates that freedom. A major part of that initial choice was the anticipated benefit, and the reality of the existence of this incentive permeates all choice in a free economic society. Participation in all markets is voluntary, even if out of individual necessity. Unless public resources were employed in the market activity, that have not already been paid for through taxes, price controls of any kind infringe on freedom of choice and enterprise.

Eliminating medical debt, putting a price ceiling on groceries, placing a cap on prescription drugs amount to a forceful transfer of property rights from medical providers, grocery providers, and prescription drug providers, to those that are in demand for their services and products. I am on the demand side as well and should cheer, actually I will cheer, but I will also lament  because I will likely face this cost implication through a different avenue, and in whatever form I am connected with the supply side (I may have stocks in these companies, I may be a manager or work at a grocery store, I may have kids pursuing pharmacy or other medical degrees etc.), I will also suffer losses. Worse, I will realize that no private investment is safe from its returns being expropriated through public policy. We would have arrived at Hayek’s predicted end of the road, the land of modern serfdom.

Policymakers want us to focus on the benefits. Indeed, ignorance is bliss. These policies will only plausibly lead to shortages in quality medical provision, and in groceries, and in the availability of prescription drugs. They will encourage black markets for these things, along with the proliferation of counterfeits, with even more life-threatening outcomes, and potentially more spending by the government to try to curb these. Ultimately who loses from these? The very people who were intended to be the beneficiaries.

Affixing the label of price gouging to products whose prices are simply responding to increased demand or reduced supply is a political method of taking advantage of the public’s failure or unwillingness to think clearly about the source of high prices in a competitive environment. To keep things honest, it is the same political drivel when those on the right argue that a rising tide lifts all boats, but discussing that is not my objective today. Price gouging policies and similar actions to restrict payment on private debt obligations are both self-defeating and an abrogation of individual liberties and should be called out as hypocritical.

OK, what if a producer is not reacting to demand or supply changes in raising prices and simply wants to do so because she can? It is her loss if she cannot sell, but if she can, then why should she sell at a lower price? If a worker can be paid a wage he announces, why should he be prevented from being paid that. If no one will hire him at that wage, it is his loss, but if he is hired why should he accept a lower wage. I understand that the "power dynamics" are different but the principle is the same, productive resources are privately owned, as is a worker's labor and human capital. The choice of where and how to employ these (so long as lawful) are private choices which means any price or wage asked for or sought that is interfered with through policy, violates that freedom.

Deficit spending as the free lunch holy grail

There are policies that never go out of fashion, even when they are correctly fingered as responsible for economic maladies. They are just too political attractive, and well, we have short memories, or don’t care. We must keep up with the Joneses. We must live the American dream. I guess the subprime mortgage crisis that sunk the U.S. economy into what has been termed the Great Recession was no lesson to be learned. The roots of that crisis developed from the seeds of making house buying cheap and affordable.

The problem with subsidies, as with adjustable-rate mortgages, and with elimination or reduction of down payments is simply this. It removes/defers/ hides the “cost” associated with taking on risk (the personal responsibility of making the mortgage payments and all other related costs of home ownership), so individuals bite, and find out later that they have bitten off more than they can chew.

At the risk of generalizing, this happens with child tax credits. Babies proliferate, but their cost is more than that credit provides, and so there is a subsequent under-provision of care for these children who, for those born in mostly poor households, continue to find it very difficult to get out of poverty and so continue to rely on the poorly incentivized Welfare system and campaign for its propagation.

And so the federal government budget deficit must grow each year to fund this largesse, as also the Federal Debt as the reservoir of these deficits, and which is now past the $35 trillion mark.

Of course, there will be the “higher taxes on the rich” campaign to mitigate this deficit spending problem. Again, what will be obscured is the reality of how tax incidence (who really pays any tax) works. The “rich” do not want higher taxes, as they will invariably bear some of the burden, but to be sure, as a group, whether corporations or income earners providing valuable services, the ability to pass on much of that tax burden through higher prices is not hindered by competition, as they are jointly incentivized to raise prices on their products and services, which taken together is very demand inelastic. This makes it easier to pass on the burden of the tax in the form of higher prices, as their total revenues increase because of negligible substitution effects.

Unfortunately, there is still no such thing as a free lunch. The Harris packaged plan is good populist politics but bad economics and therefore ultimately bad for the American people.