Should Democrats go back to neoliberalism?

Adam Ozimek had an interesting tweet today:

It’s a compelling point. The op-ed he’s referring to is by law professor Zephyr Teachout, in which she accuses grocery stores of using market power to squeeze out smaller competitors and raise prices for consumers. I’m not sure who has “mocked” Teachout’s article, but Alex Tabarrok did a very good job of dismantling its arguments. As Tabarrok points out, Teachout’s argument is simply incoherent; she blames big grocery stores for jacking up the price of eggs, but then she cites lower egg prices at big grocery stores as evidence of this wrongdoing:

Cities have the power to bring down food prices…Big retailers often flex their muscles to demand special deals [from suppliers]…Those discounts are…a major reason that prices are so insane…

Consider eggs. At the independent supermarket near my apartment, the price for a dozen white eggs last week was $5.99. At a major national retailer a few blocks away, it was $3.99…

So the next time you’re staring down a $10 carton of eggs, remember: Call the mayor.

How can big grocery stores raise the price of eggs by charging lower prices for eggs? It seems obviously nonsensical. Teachout argues that big stores use their market power to force suppliers to give them discounts, which in turn forces those suppliers to jack up prices for small stores. She thinks the latter effect outweighs the former — if not for market power, she thinks, eggs would cost $3.99 at the small stores too.

This story requires some pretty heroic assumptions. For Teachout to be right, we have to assume that the suppliers have insufficient market power to resist the big stores, so that they’re forced to offer Costco lower prices. But we also have to assume that the suppliers are able to squeeze the small stores in response, which means we need to assume that the suppliers have some market power of their own — just not as much as the big stores. All of the market power has to work out just right, or the whole story falls apart.

But here’s the thing. We don’t have to just assume all of that stuff; we can easily go check the data. It turns out that even the biggest grocery stores make almost no profit. Costco and Walmart, the biggest and presumably the most powerful grocery stores in the country, both have profit margins of less than 3%, compared to around 12% for the S&P as a whole. Other big stores like Kroger make even less. The big-box grocery stores therefore have very little market power, and are operating at close to cost.

And this makes sense given the fact that the grocery industry is very fragmented — Walmart has a 25% market share nationwide, but everyone else is in the single digits. (And there aren’t even any Walmart stores in NYC!) As Tabarrok notes, the obvious reason the big stores getting better deals from the suppliers is that they’re buying in bulk — which of course is perfectly legal.

Going after grocery stores doesn’t make sense. But Democrats just keep doing it — Elizabeth Warren blamed grocery stores for rising food prices during the post-pandemic inflation, and Joe Biden blamed them later on. Kamala Harris wanted a law against “price gouging” for groceries.

What’s going on? The likeliest answer, I’m guessing, is that Democrats think that by going after grocery stores, they can harness populist rage. The 2010s were a time of popular anger in America, and it felt like whoever could harness and direct that roiling energy would reap political dividends. And since the end of the pandemic, Americans have been mad about inflation. Food is an absolute necessity of life, so higher food prices really hurt the average American. Groceries are something that people buy very frequently, so they tend to notice price changes.

And just like with health insurance, Americans probably tend to get mad at the consumer-facing company who actually charges them money, rather than at the shadowy suppliers who are billing the consumer-facing company — or at external forces like supply shocks. Indeed, grocery stores have become less popular as prices have gone up, even though the stores aren’t profiting much:

So it might make political sense to raise a hue and cry against grocery stores, even if the economics doesn’t make much sense.

But there are at least two big problems with this strategy. First of all, since grocery stores aren’t the actual source of high food prices, coming down hard on them won’t actually help American consumers. Laws against “price gouging” will just force grocery stores to lose money when supply shocks raise their costs. Their thin margins — which don’t actually rise during inflationary episodes — will go negative. They will probably have to close some stores, leaving consumers less well-served, and ironically increasing concentration of the grocery industry at the local level.¹

If progressives try to get the government involved in the grocery business, as Zohran Mamdani wants to do, it probably won’t end up going well. In fact, Kansas and other states have experimented with government-owned stores, and they have — pretty predictably — underperformed:

KC Sun Fresh was the city’s attempt to alle