Kamala Harris’s cost-of-living plan will end in failure
It is easy enough to understand what is motivating Kamala Harris’s economic strategy. Poll after poll demonstrates that many Americans consider the cost of living to be their main concern heading towards the presidential election in November, and Ms Harris is at a disadvantage, having served as vice-president during a time when inflation soared to a four-decade high. Rather than gloss over this ugly reality, she is trying to confront it. “Lower costs for American families” is the centrepiece of her economic agenda, a message she is likely to deliver again on August 22nd, after we go to press, in a speech to the Democratic National Convention.
But just because her strategy is understandable does not make it sensible. Her proposals risk taking America further down the road of self-defeating economic policies. The blame for this trajectory is certainly not Ms Harris’s alone: many other Democrats and Republicans, starting with Donald Trump, have already been pushing in such a direction, albeit with different emphases. Nevertheless, Ms Harris’s cost-of-living plan may mark the start of a new phase in America’s worrying odyssey. The Democratic presidential candidate takes aim at four categories of costs: housing, groceries, medical and taxes. Although some of her ideas are good, many more would drive up prices—the exact opposite of their intended effect.
Ms Harris’s central focus is housing. On this issue, her policies are encouraging, if taken at face value. She has called for the construction of 3m new homes over the next four years, and wants to provide federal funding and permit-issuing reform to make this happen. Analysts reckon that America is suffering from a shortage of about 4m to 7m homes, so the additional supply would narrow the gap. Yet can Ms Harris actually get the houses built?
Never mind that her plan is light on details: the construction funding (she targets $40bn) would go to local governments, which would need to find their own solutions. Meanwhile, other elements would cut against her ambitious supply targets. She vows to go after Wall Street investors, whom she decries for “buying up and marking up homes in bulk”. They actually own less than 1% of America’s single-family homes, and have been building, rather than just buying, homes. Another pledge—one that received loud applause when she unveiled it in a speech in North Carolina on August 16th—is to give first-time homebuyers $25,000 towards downpayments on mortgages. With demand for homes still outstripping supply, extra cash of this kind may just translate into higher prices.
Ms Harris’s plan on groceries has come in for the sharpest criticism. She wants to pass the first-ever federal ban on price-gouging on food and groceries. This may not herald a return to the price controls under President Richard Nixon in the 1970s, but the intellectual underpinning for such a policy is half-baked. A common charge of the left wing of American politics is that firms fuelled inflation during the covid-19 pandemic by taking advantage of shortages to jack up prices. But researchers with the Federal Reserve have concluded that there was no evidence of higher markups at the aggregate level, which would have been a precondition for pricing decisions to truly cause inflation. Moreover, higher prices for everything from cars to ham served as a crucial signal to firms to make more and to consumers to curb demand.
Concerns about Ms Harris’s anti-gouging proposal should be tempered by the fact that it is unlikely to pass through Congress. Yet legislative infeasibility does not excuse sloppy thinking, and a focus on corporate greed indicates that she is at least partly in thrall to the progressive flank of the Democratic Party. Although Ms Harris’s promise to crack down on unfair mergers and acquisitions in the food industry that lead to less competition is unobjectionable, in reality it is little more than a restatement of America’s existing anti-monopoly policy. The Federal Trade Commission is currently embroiled in a legal battle to block the biggest supermarket merger in American history.
Some of the medical elements of Ms Harris’s plan are, in theory, more welcome. She is right to want to bring down America’s outrageously high medical costs. But as with any price controls, caps on the cost of insulin (at $35 a month) and out-of-pocket expenses for prescription drugs (at $2,000 a year) risk generating unwanted outcomes. Similar steps by the Biden administration to cap drug costs for old folk are now threatening to cause hefty increases in their insurance premiums.
Ms Harris has also said that she would work with states to cancel medical debts. Again, her aim is laudable: it is scandalous that so many Americans are saddled with medical debt. Yet just cancelling debt would only reset the clock for them, with debts once again piling up whenever they need medical attention. “Why are health-care costs so high in the first place? That’s a legitimate question but it does not lend itself to quick fixes,” says Glenn Hubbard of Columbia University. “I think both parties have devolved into an area where they don’t want to do long-term planning and thinking, and so they do the soundbites, which of course will fail.”
The final part of Ms Harris’s economic strategy involves targeted tax cuts. For low- and middle-income families, she would increase the child tax credit, including $6,000 during a baby’s first year of life, up from $2,000 now. And she would expand the reach of the earned-income tax credit—an important subsidy for poorer Americans—to those without children. Ms Harris can make a strong case for these changes. When the child tax credit was greatly expanded during the pandemic, for instance, it led to a nearly 50% reduction in child-poverty rates. As Ms Harris puts it, that is an investment in America’s future.
They would not come in isolation, however. America’s budget deficit is running at 7% of GDP, a level previously associated with wars or recessions, while the national debt is continuing to climb. Neither candidate has offered serious proposals about how to clean up the country’s fiscal picture, and both would probably make it worse. Ms Harris has said that she will follow President Joe Biden’s plans to raise corporate-tax rates to 28%, from 21%, but to increase income taxes only on those earning more than $400,000 a year. Together, these changes would not generate enough revenue to cover the full cost of her agenda. The shortfall would add $1.4trn to America’s deficit over the next decade, according to Piper Sandler, an investment bank. That is a lot, even if less than the cost of Mr Trump’s tax-cutting plan, which is estimated to be $4.5trn over the next decade.
Indeed, one of the best things that can be said for Ms Harris’s agenda is that it will probably be less damaging than Mr Trump’s. She is against the tariff rises her opponent has promised. Many of her proposals amount to adjustments to existing policies, rather than a wholesale recrafting of America’s economic system, and stand little chance of legislative success. Mr Trump, by contrast, may be able to use the power of the presidency to slap across-the-board tariffs on all imports to America, the central plank of his economic programme—and one Ms Harris has correctly criticised as being a sales tax in disguise.
“Trump really seems to think that we’d be better off as an autarkic economy,” says Greg Mankiw of Harvard University. “The worry for Harris is that she helped to implement industrial policy with a lot of buy-American rules, so it seems she’s bought into the anti-globalisation stuff to some extent.” “Not as bad as the other candidate” would be a poor campaign slogan. It is, however, an accurate summary of Ms Harris’s economic plans. ■
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