Why Food Prices Are Surging

U.S. Vice President and Democratic presidential candidate Kamala Harris recently delivered her first campaign speech on economic policy, and her points of emphasis surprised many observers. Harris promised to ban price gouging on groceries, and to also make tips tax-free. Some economists doubt the effectiveness of such policies.

How would the government go about banning price-gouging? What is the history of tipping in the United States? And what would the fiscal effects be of making tips tax-free?

Those are a few of the questions that came up in my recent conversation with Foreign Policy economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

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

Adam Tooze: I think for the sake of clarity, it’s important to insist that there is, in fact, a legal definition on the statute books of 42 U.S. states of gouging, and it follows the strict meaning of the word also in regular language use, which is not just that prices are high and that somebody is making excessive profit—it also implies an aggressive attack. And the statutes on the books of, say, California, for instance, are quite clear, because gouging is defined as charging excessive prices under the conditions of a state of emergency as declared by the governor of the state of California. And these things have been found to be constitutional by the Supreme Court.

What that’s come to mean in the present context in the United States is something really quite different, which is a general sense of grievance about the fact that grocery prices have gone up by 20 percent in the past four years. And there is some evidence—disputed, but nevertheless quite strong—that a contributing factor to this is an increase in profit margins. And that’s sometimes been labeled an inflammatory thing, like “greedflation,” for instance.

And I think that then extends the obvious, I think, moral and ethical meaning of taking advantage in a cynical way of somebody’s particular disadvantage or exploiting a state of national emergency to charge a profit to a generalized discourse about excess profit taking.

If you sort of dig in to those in the Harris campaign and what they mean by it, they’re not very precise at this point, and they’ve been taking a lot of heat from the Republicans on this, because though U.S. consumers don’t like the fact that grocery prices have risen by 20 percent, the Republicans, at least, figure that their base will not like any talk of government regulation and prices, and this sounds like communism.

And so what Harris herself has actually said is that many of the big food companies are seeing their highest profits in two decades, and while many grocery chains pass along these savings, others still aren’t, and that’s just not right, and we need to take action when that’s the case. And when an ally of Harris, such as Gina Raimondo, the commerce secretary, talks about this on U.S. TV, she says, “This isn’t price fixing, that’s a distortion, that’s a Republican talking point,” what she means is not broad price controls. She’s saying something along the lines of, ‘Let’s go after companies in a narrow way if there’s evidence’ and so on and so forth.

So, in fact, what you’re seeing is the Democrats walking this back under pressure, because to extend this to a generalized system of investigations into grocery prices might be interesting from an academic, economic point of view, but it’s very unclear and very hard to see how that would translate into a real policy. And to the extent that it’s basically just the federal version of the emergency powers, they have very little actual grip, because none of the states in the United States really has the means to conduct investigations.

So it’s an effort, I think, to craft a political answer to a feeling of stress. The social cost of living in crisis in the United States for stressed families is real, but it’s the employment of a term that has a specific and very polemical meaning to address that in a way in which it’s hard to see how it could be translated into actual policy.

CA: Another of the Harris campaign’s policies is making tips tax-free. Tipping, obviously, is a very widespread practice in the United States. How did that become established, and is there any other country that tips quite like the United States does?

AT: The practice of tipping, we think, appeared in Tudor England. It was quite common for gentlemen and gentlewomen who were visiting their friends to leave tips for the servants of the people that were hosting them, who had to do a lot of extra work accommodating the arrivals. This was the manner of aristocratic tipping that was then picked up by American visitors to Europe in the 19th century, which is how the practice begins to translate to the United States in the 1850s and 1960s.

But it then also has this notorious and sort of characteristically American racialized history, in that the first institutionalized practice of large-scale tipping in the country took place in the Pullman Company railway service, the waitered-and catered-sleeper service that George Pullman put on from 1859. And Pullman made a habit from 1868 onwards of hiring freed Black men, ex-enslaved people who were correspondingly very poorly paid by Pullman and whose compensation was made up by tips.

So at that point, you establish this typical U.S. model of low-paid service work, being complemented by gratuities and tips that are added on top. So there is a kernel of the tipping relationship, which in the U.S. case points to slavery and generally speaks to an aristocratic history.

And then there are extra layers that have to do with the weird effect of tipping, which, after all, you can think of it as the customer compensating the server for service. But you can also think of it as the customer bribing the server to provide extra service at the expense either of other customers or of the business that the server is working for. And so during the Prohibition period and during the emergence of the big hotel resorts of the early 20th century, there were struggles in the United States over this question of whether customers should be allowed to tip, say, waiters working at buffet-style restaurants where if you gave a tip, you would get a bigger portion. And of course, the waiter was happy to do it because they got the tip, and the customer was happy to get the extra portion, but the restaurant-hotel complex was effectively handing out extra meals to people in exchange for this kind of low-level corruption that was going on.

And it’s out of that that a sort of semi-formalized bargain emerges, which is then instituted during the New Deal, of all periods. So in the labor laws of the 1930s—in 1938, in the Fair Labor Standards Act—the United States passes minimum wages for nontipped workers and no minimum wages for tipped workers. So within  labor law, there is an established differentiation. And the first moment in which the United States, in fact. introduced a minimum wage for tipped workers was not until 1966.

So the very long answer to your question is that no, nowhere else in the world has quite this instituted, complex, layered relationship with tipping as the United States. And in the United States, since the New Deal, it’s actually been a formalized element of the labor code, which is really quite different from anywhere else that I know of and was able to find out about.

CA: What would the effects be of making tips tax-free? Could that create an incentive for the rich to exploit by structuring their own income as tipping somehow?

AT: The scale of this is really significant. There are, according to the U.S. Census Bureau, around 2.25 million people working as waiters and waitresses in the United States, predominantly younger people and often migrants, some of them without official paperwork. The total scale of restaurant bills in the United States is in excess of $300 billion a year. So these people are collecting, as waitstaff, huge amounts of money. About $324 billion was the latest estimate that I’ve been able to find.

And as you know, in the United States, it’s not uncommon to tip in the range between 15 percent and 20 percent. So what we’re talking about is a tip flow of between $40 billion and $60 billion a year. And that’s only in the restaurant trade. This is not including bars and places like that where people also tip. So we’re talking about a substantial amount of money. Not all of this is tax eligible, because the majority of workers in these sorts of positions do not pay much or any income tax, but tens of billions are paid in tax.

And so the estimates are that if this was lifted—and Harris and Republican candidate (and former President) Donald Trump are, in various ways, both promising to—it would cost the U.S. fiscal apparatus somewhere in the order of $150 billion to $250 billion over 10 years. So we’re talking $15 billion to $25 billion a year, which figures. If there’s an income flow of $60 billion, that would be the kind of tax rate that would not be surprising.

So it’s a highly significant scale. And the larger the flow of income that was then declared as tip rather than as regular salary, the bigger the loss to the U.S. fiscal apparatus. And it would only need to double for it to impose a much heavier penalty on fiscal spending. These are big amounts of money. We’re talking $15 billion to $25 billion to $30 billion a year. That, you know, pays for a substantial federal program, a big weapons program, a large piece of the, I don’t know, the funding for the humanities or basic research and development in the United States. That’s the kind of order of magnitude that we’re talking about.

Whether anyone in the United States who is earning a substantial salary would want to take much of it in the form of a gratuity, I find that doubtful and surprising. The bigger question, I think, from an equity point of view, is what on earth does it mean to say that somebody working in a restaurant should not pay tax on a substantial part of their income when somebody who might be doing a similarly paid job in a warehouse would pay tax in full.

So it’s a strange proposal that reflects everyday reality of U.S. life that would affect millions of people on a very substantial scale, but with very unpredictable and weird distributional consequences.