Opinion: Harris’s price controls are a solution in search of a problem

Vice President Kamala Harris has proposed controlling prices on food products to prevent food companies from “ripping off” American consumers. It’s a terrible idea on the part of the Democratic presidential candidate, as many have already pointed out, because price controls lead to shortages and other negative outcomes. It’s also doubtful that Harris could get such a policy passed through Congress.

But before we debate the merits, there is a question about whether food companies are in fact ripping people off. There has been talk of price gouging since inflation soared in 2021, so in early 2022, I analyzed the financial results of companies in the S&P 500 index to see if they were exploiting consumers or simply passing on their own higher costs. At the time, it looked to me like they were raising prices to boost profits.

For example, the S&P 500’s operating margin — that is, the percentage of revenue that companies keep after deducting operating expenses like materials, salaries, rent and utilities — was significantly higher in 2021 than it was before the COVID pandemic, and Wall Street analysts expected it to stay that high. The same was true for the S&P 500’s equal-weighted index, which suggested that most companies were exploiting a post-pandemic surge in consumer demand by raising prices faster than they were raising their own costs.

After hearing Harris’s plan, I decided to take another look at it, and now I’m forced to come to the opposite conclusion. Operating margins have declined since 2022. The S&P 500’s margin is back to where it was before the pandemic, and the equal-weighted index’s margin is even lower, all of which suggests that most companies haven’t raised prices enough to fully absorb their own higher costs.

Financial results for the consumer staples sector, where food and beverage companies are located, tell a similar story. The sector’s operating margin rose to 10% in 2021 from 8% in 2019, but is now down to 7%. Here too, companies appear to have absorbed more inflation than they have passed on to consumers.

I suspect what happened was that companies raised prices in 2021 in anticipation of higher operating costs, but those higher expenses didn’t show up until 2022 or later. The mismatch caused margins to inflate with higher revenues in 2021 and deflate when higher operating expenses hit subsequent years’ financial statements, leaving companies overall in a similar position to where they were before the pandemic, and perhaps slightly worse.

There’s a related question about whether mega-companies have used their size to raise prices more than smaller ones. I don’t see any indication of that in the numbers. The Big Three in the commodity sector — Walmart Inc., Procter & Gamble Co. and Costco Wholesale Corp. — have maintained their pre-pandemic margins, as have more than half of the companies in the sector.

To be clear, businesses have the right — but not the duty — to charge for their goods and services as much as the market will bear. Indeed, free markets depend on that right. The fact that margins have stabilized since the pandemic is a sign that markets are working as they should to match supply with demand even in very chaotic times.

At the same time, limited government intervention is appropriate if companies take advantage of a crisis that disrupts the normal functioning of markets and the economy, as the pandemic did for a time.

But the United States is no longer in crisis, and Harris did not offer enough details on how she would handle price gouging now or in an emergency like this one. She might be better off abandoning the idea because, at least for now, price controls appear to be a solution in search of a problem.