Why food prices are skyrocketing

US Vice President and Democratic presidential candidate Kamala Harris recently gave her first campaign speech on economic policy. Her priorities surprised many observers. Harris promised to ban gouging on food prices and to make tips tax-free. However, some economists doubt the effectiveness of such measures.

How would the government tackle price gouging? What is the history of tipping in the US? And what would be the tax implications of making tips tax-free?

These are some of the questions that were raised in my last conversation with Foreign policy Business columnist Adam Tooze in our podcast, Ones and ToozeThe following is an excerpt that has been edited for length and clarity. The full conversation can be found at Ones and Tooze wherever you get your podcasts. And check out Adam's Substack newsletter.

Cameron Abadi: What is the exact definition of price gouging? And how would a law against it even work?

Adam Tooze: I think it's important to emphasize for clarity that there is actually a definition of usury in the statute books of 42 states in the United States, and it follows the strict meaning of the word in ordinary usage, which doesn't just mean that prices are high and someone is making excessive profit – it also implies an aggressive attack. And the laws in the statute books of, for example, California are pretty clear, because usury is defined as charging excessive prices under the conditions of a state of emergency declared by the Governor of the State of California. And these things have been found to be constitutional by the Supreme Court.

In the US, it has a very different meaning in the current context: There is general resentment that food prices have risen 20 percent over the past four years. And there is some evidence – controversial but nonetheless quite convincing – that one factor contributing to this is increased profit margins. And that is sometimes called inflammatory, such as “greedflation.”

And I think that then extends the obvious moral and ethical significance of cynically exploiting a person's particular disadvantage or exploiting a national state of emergency to make profits to a general discourse about excessive profit-taking.

If you look closely at the people on the Harris campaign team and ask them what they mean by that, you will find that they are not very precise at the moment and are under a lot of pressure from the Republicans. Because even though US consumers don't like the 20 percent price increase in food, at least the Republicans assume that their base doesn't like any discussion of government regulation and prices, and that sounds like communism.

Harris herself has actually said that many of the major food companies are seeing their highest profits in two decades, and while many grocery chains are passing on those savings, others still aren't, and that's just not right, and if that's the case, we need to take action. And when a Harris ally, like Commerce Secretary Gina Raimondo, talks about it on US television and says, “This is not price fixing, this is a distortion, this is a Republican argument,” she doesn't mean comprehensive price controls. She says something like, “Let's target companies when there's evidence of it,” and so on and so forth.

So what we're actually seeing is that the Democrats are backing down under pressure, because expanding to a general system of food price investigations may be interesting from an academic, economic perspective, but it's very unclear and hard to see how that would translate into real policy. And because it's basically just the federal version of emergency powers, they have very little real leverage because none of the states in the United States really have the resources to conduct investigations.

So it's an attempt, in my view, to find a policy response to a sense of stress. The social costs of living in times of crisis for stressed families in the United States are real, but it uses a term with a specific and very polemical meaning to address this in a way that makes it hard to imagine how you could translate this into actual policy.

CA: Another issue for the Harris campaign is making tipping tax-free. Tipping is obviously a widespread practice in the US. How did this come about, and is there any other country where tipping is as common as it is in the US?

AT: The custom of tipping, we believe, originated in Tudor England. It was quite common for gentlemen and ladies visiting their friends to tip their hosts' servants, who had to do a lot of extra work to accommodate the newcomers. This type of aristocratic tipping was then adopted by American visitors to Europe in the 19th century, and so the custom began to spread in the United States in the 1850s and 1960s.

But there is also this notorious and somehow typically American story of racial discrimination: The first institutionalized practice of tipping on a large scale took place in the Pullman Company's railroad service, the sleeping car service with waiters and catering that George Pullman offered from 1859. And from 1868, Pullman made it a habit to employ freed blacks, former slaves who were paid accordingly poorly by Pullman and whose remuneration was offset by tips.

This establishes this typical US model of poorly paid service work, supplemented by tips and allowances. So there is a core of the tipping relationship that, in the case of the US, points to slavery and generally speaks for an aristocratic history.

And then there are other layers to the strange effect of tipping. You can think of it as the customer compensating the waiter for his service. But you can also think of it as the customer bribing the waiter to provide extra service at the expense of other customers or the company the waiter works for. During Prohibition and when the big hotel complexes came up in the early 20th century, there were arguments in the United States about whether customers should be allowed to tip waiters in buffet restaurants, for example, where you got a bigger portion for a tip. And of course the waiter was happy to do that because he got the tip, and the customer was happy to get the extra portion, but the restaurant-hotel complex was basically handing out extra meals to people in exchange for this kind of low-level corruption that was going on.

And this creates a kind of semi-formalized agreement that is then introduced during the New Deal. For example, in the labor laws of the 1930s – in the Fair Labor Standards Act of 1938 – the United States sets minimum wages for workers who do not receive tips and no minimum wage for workers who do receive tips. So there is an established differentiation in labor law. And the first time the United States actually introduced a minimum wage for workers who receive tips was not until 1966.

So the long answer to your question is: No, nowhere else in the world is there such an established, complex and multi-layered relationship with tipping as in the USA. And in the USA it has actually been a formalized part of labor law since the New Deal, which is really different from all other countries that I know and have been able to read about.

CA: What would be the impact of making tips tax-free? Could it create an incentive for the wealthy to somehow structure their own income as tips?

AT: The scale is really impressive. According to the US Census Bureau, there are around 2.25 million people working as waiters and waitresses in the United States, mostly young people and often immigrants, some of them undocumented. The total amount of restaurant bills in the United States is over $300 billion a year. So these people are making huge sums of money as waiters. The last estimate I could find is around $324 billion.

And as you know, it's not uncommon in the United States to tip between 15 and 20 percent. So we're talking about between $40 and $60 billion in tips a year. And that's just in the restaurant industry. That doesn't include bars and similar establishments where people also tip. So we're talking about a significant amount. Not all of it is tax deductible, because the majority of workers in these positions pay little or no income tax, but there are tens of billions of dollars paid in taxes.

Estimates therefore suggest that repealing this tax would cost the US treasury between $150 and $250 billion over a ten-year period – and Harris and Republican candidate (and former president) Donald Trump are promising this in various ways. So we are talking about $15 to $25 billion a year, that's logical. With an inflow of $60 billion in income, that would be a tax rate that would not be surprising.

So it's a very significant amount. And the larger the stream of income that was then declared as tips rather than regular salary, the greater the loss to the US fiscal apparatus. And it would only have to double for it to impose a much greater penalty on government spending. These are large amounts of money. We're talking about $15 to $25 to $30 billion a year. That funds a major federal program, a major weapons program, a large part of the, I don't know, funding of the humanities or basic research and development in the United States. That's the amount we're talking about.

Whether anyone in the United States earning a substantial salary would want to accept a large portion of it in the form of a gratuity is, I think, questionable and surprising. The bigger question from a justice perspective is, in my opinion, what on earth it means to say that someone working in a restaurant should not pay taxes on a substantial portion of their income, while someone working a similarly paid job in a warehouse would have to pay the full amount of taxes.

So it is a strange proposal that reflects the everyday reality of life in the United States and would affect millions of people on a significant scale, but with very unpredictable and strange distributional consequences.