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Cato Podcast: Can Government Run a Grocery Store?

Host: Rikki Schlott, Cato Media Fellow Guest: Donald Boudreaux, Adjunct Scholar at the Cato Institute and Professor of Economics at George Mason University

Rikki Schlott: When it’s time to shop for groceries, Americans have lots of options. Wegmans, Kroger, Aldi, Albertsons, Trader Joe’s, Publix, Safeway, Whole Foods, just to name a few. These are a lot of choices, but now New Yorkers are about to have another option: the government. Mayor Zohran Mamdani is looking to open five city-owned grocery stores across New York City’s boroughs with the goal of selling everyday groceries at roughly 30% below market rate. But private grocery stores already only make at most a 4% profit. So how is the city going to support a permanent 30% discount? I’m Rikki Schlott and welcome to the Cato Podcast. Joining me today is Don Boudreaux, adjunct scholar at the Cato Institute and professor of economics at George Mason University. For decades, Don has studied how markets coordinate complex economic activity, so he’s the perfect guest to help us unpack New York City’s grocery store proposal. Welcome to the podcast, Don.

Donald Boudreaux: I’m happy to be here.

Rikki Schlott: So obviously this idea has generated a ton of headlines, but what exactly is New York proposing to do? What are the details here now that Mamdani is actually in office?

Donald Boudreaux: As I understand it, he’s going to open, in the city, five — I assume in each of the five boroughs — one government-owned store. Each store, as I understand it, is going to be franchised out basically to a private operator. The mayor’s administration is going to identify certain staple goods that the grocery will sell. That basket of goods is going to sell at prices 30% below market price. The other items in the stores, I understand, they’re going to sell at whatever the market price might be. In exchange for selling these staple items well below market, the city is not going to charge rent to the operators of the store.

One of the ideas Mamdani has proposed for setting up the stores is to prevent New York City from having so-called food deserts. Another one is that he doesn’t seem to like the competition of private supermarkets and grocery stores and bodegas making a profit. He’s an admitted socialist. He doesn’t like profit, doesn’t think it’s right for people to profit off the needs of other people. So he sees these supermarkets as a way of driving profit out of the system, and he’s going to set up these five stores. As I understand it, it’s going to cost a total of 70 million dollars to start — that’s the capital upfront cost. One of them, I’m not sure in which borough, probably Manhattan, is going to take a full 30 million of that 70 million. Estimates I’ve seen are that, given the city’s ongoing need to keep subsidizing these stores because they’ll be selling products below cost, the annual operating cost to the city will be roughly 100 million dollars every year. So 70 million upfront to build the stores, and then upwards of 100 million every year just to operate them.

Rikki Schlott: Wow. And so do we know what these staples are that the government’s particularly interested in?

Donald Boudreaux: I looked, and I couldn’t find any detailed list. One may exist out there, but I’m sure it’s things like ground meat, bread, fresh broccoli, maybe some fresh fish — probably not paper towels or toilet paper, probably not more exotic things like salsa or potato chips, but basic things. I couldn’t find the precise list, although I’m sure it might be out there — probably just my inability to locate it.

Rikki Schlott: So one thing that, for me as a New Yorker, I’ve never quite understood about Mamdani’s policies — like, for example, rent control or subsidized rents — is that they’re not means-tested. It doesn’t matter what your income is; if you happen to slip into the right rental at the right time, good for you, and you just stay in that rental, like Mamdani himself did. What about in this proposal — can anyone go and show up to this grocery store?

Donald Boudreaux: Yes. So at first, when it was announced, one of his aides — I forget the person’s name — said, no, no, it’s going to be means-tested. I think the person said it would be like a library card system: you’d get a card that indicates you’re appropriately poor enough to shop at the store. But Mamdani himself has since contradicted that. He’s said, no, all New Yorkers — anyone can shop in the store. Not just New Yorkers — someone visiting from Utah could just wander into the store and buy subsidized broccoli.

Rikki Schlott: So you’ve written in your blog recently that there is no greater testament to the productive powers of capitalism than the American supermarket, and I think that list we ran through at the beginning is probably a further testament to that fact. But Mamdani says that we live in a nation full of prices that are extorting Americans, and food deserts. What’s the truth here — do we have a grocery store problem?

Donald Boudreaux: No. There’s no more competitive industry in the United States than food retailing. This is testified to by the fact that restaurants are constantly opening and closing, and the profit margins in supermarkets — the upper estimate is 4%. I think the better estimate, certainly the consensus estimate, of the profit margin in supermarkets is about 2%, or 2.1% to be precise. That’s nothing.

One of the many problems with Mamdani’s proposal comes from his fundamental misunderstanding of economics. These people think that profit is some kind of extortion drawn out of consumers or workers — some unjustified payment that business owners or shareholders get. That’s a complete misunderstanding of profit. Profit is the return to entrepreneurship and risk-taking that owners undertake in order to carry out that business. The profit that supermarket shareholders are getting is the return they get for putting their money at risk, and in the case of owner-operated stores, also their time and energy, in engaging in this very competitive — and incredibly complex — industry. Think of the logistics: the typical US supermarket today carries about 30,000 SKUs, stock-keeping units — think of it roughly as 30,000 different kinds of products. Many of these, at least, are perishable — not just fresh fruits and vegetables, but a lot of what’s in the frozen foods too. The logistics are remarkably complex; you have to get this stuff into the store and make sure it sells. Anyone can enter that industry — you have Walmart, Target, Amazon doing groceries online. It’s an incredibly complex business, and the return — this 2%, or call it 4% if you like — is the payment to these people for engaging in that entrepreneurship and risk-taking. Take that return away and you do not get that entrepreneurship and risk-taking.

Rikki Schlott: So if we’re talking about grocery stores having a 1% to 4% profit margin, where could New York City theoretically chip away at these prices?

Donald Boudreaux: There’s so little room. What they can do is subsidize — there are ways to entice those government-owned supermarkets to charge prices lower than market. But the real price of those groceries is not going to be below market. The price the paying customer pays out of pocket might be lower, but the additional costs are going to come from subsidy — mostly from taxpayers. And when those costs are hidden, that further distorts the price signals that are out there in the market to tell people how to best conduct supermarket operations.

Rikki Schlott: So the city says that it’s going to at least cut down on costs by centralizing distribution, buying wholesale, and using public buildings. Would any of that actually work? Can they out-optimize companies that have been in the market for decades?

Donald Boudreaux: No. First of all, everybody in New York City’s government — they may be the world’s greatest bureaucrats and politicians — has no experience running supermarkets. Why would we think they’re going to outdo people who’ve worked all their lives in retail? It’s ludicrous to suppose they can do that. Secondly, the major supermarket chains, many of which are in New York, already have widespread distribution. They already operate at scale, and they’ve optimized that scale. There’s no reason to think all these supermarkets are making some big, gigantic collective mistake that New York City politicians and bureaucrats have somehow detected and are going to correct. The one thing government can do that private operators can’t is forcefully take money from some people and transfer it to others. It’s only those transfers that will allow the stated prices to be lower than the market price — but they’re not going to lower the cost, they’re going to raise the cost. And those costs are going to be paid by New York City taxpayers.

Rikki Schlott: So the city has released its request for proposals for these grocery stores. Do we know if anyone has already started to chomp at the bit there, and do you think this will actually be a popular proposition for people looking to get into that market?

Donald Boudreaux: I suspect there will be operators — people like to get subsidies. I’m not sure how legitimate they’ll be in the sense of having the skills to do what they’re supposed to do, but I’m quite sure there will be people willing to step in and say, okay, we’ll take that free rent and be your front man for supplying these groceries. But they’re not going to do it better than established grocery stores.

I saw a figure a day or two ago about these supermarkets. He’s proposing five at this point, for a total of 70 million upfront setup costs, and again, one of them is costing at least 30 million. I looked at the average cost for a supermarket chain to set up a new store in New York City — not in the middle of Nebraska, in New York City — and it’s about five to 15 million for a private supermarket. So already they can’t even get the startup cost down as low as the startup cost for private supermarkets.

Rikki Schlott: Why do you think that is? What could be making that so different for the public sector?

Donald Boudreaux: It’s easy to spend other people’s money. I’m sure part of the justification, if someone confronts Mamdani about this, will be, well, Kroger or Albertsons or Stop & Shop use non-union labor and exploit their workers, whereas we — or the companies we deal with — pay fair wages, and that’s why we have to pay higher costs. But again, already the startup costs are well in excess of what the private industry norm for New York City is.

Rikki Schlott: So within this request for proposals, there are a lot of demands, including lowering prices, having better wages, sourcing locally, and using fewer subsidies, which all seem a little bit contradictory to me. What’s your sense?

Donald Boudreaux: Because the supermarket industry is so competitive — grocery selling is really competitive — every grocery seller in the United States, from the smallest bodega or farmer’s market vendor to Kroger or Safeway or Walmart, has an incentive to source optimally. There’s no reason to think these bureaucrats and subsidized operators are going to do it any better. People in Mamdani’s circle, who find his rhetoric appealing, like the idea of locally sourced goods. But — and you’re familiar with New York, I love New York — there’s not a whole lot of agriculture taking place in Gotham. You’re not going to have locally sourced wheat, or, I don’t know, maybe a handful of people grow corn out on Staten Island. They say all these things and it sounds nice, and uncritical listeners think, oh, that sounds great, they have locally sourced this and that. But they’re not going to get their prices and costs anywhere nearly as low as private operators can.

Rikki Schlott: So at this point, these operators who would like to move into the public sector are being asked for proposals pertaining to unknown store locations and neighborhoods, plus they’re being asked to present an affordability payment estimate assumptions table. How can anyone possibly predict all of these factors, and what level of scrutiny do you think the city is applying to these proposals?

Donald Boudreaux: They can’t. I don’t know the details of that, but just the very mention of it is an invitation to cronyism — an invitation for people to use discretion to help their family, their friends, whoever they happen to like. It’s not going to work.

If you don’t mind, just a quick word about supermarkets generally: I teach 18-year-olds, lots of them, and I tell them very often that I’m going to use supermarkets as my great example of the power of markets. Any American supermarket is a great testament to capitalism. The typical supermarket carries roughly 30,000 different items, and every one of those items is affordable to any American of ordinary means. The shelves are stocked, the things are fresh. If there’s any industry that works about as well as a perfectly competitive industry can work in the United States, it’s supermarkets — it’s the grocery industry, it’s food retailing. The notion that it’s failing in New York City is just ludicrous. The big chains, I’m sure, don’t like it, but they’re not that threatened by Mamdani’s supermarkets. They know that, depending on the specifics of how they’re operated, these government stores are eventually going to be decrepit and inefficiently run. But the small bodegas and mom-and-pop stores may well be run out of business by these artificially low-priced offerings from government-owned supermarkets.

Rikki Schlott: Well, there’s already an immigrant business coalition that’s planning to sue on the basis of these plans. Do you think that might be a realistic avenue toward slowing them down or stopping them, or do you think, in general, these proposals are likely to actually come to fruition?

Donald Boudreaux: I don’t know what the legal standing would be. I’d like to think there’s some way to legally challenge it. My guess is that what Mamdani is doing will pass legal muster — I don’t anticipate a court striking it down. I anticipate the laws of economics eventually proving it to be a failure. We have a track record: Kansas City had a government-owned supermarket, maybe more than one, and none of these things succeeded. It’s not too much of a stretch to say we have other, much bigger experiments in government-owned things — the Soviet Union, Eastern Europe — all of these things were government-owned, and they didn’t work. There’s no reason to think it’s going to work this time.

Rikki Schlott: Sure. So I think it’s fair to say this is being viewed as this bold new idea on Mamdani’s part, but it has been tried in various iterations across the country. Generally, how does that go, and why does it fail? And why haven’t we learned from that?

Donald Boudreaux: Again, it’s easy to spend other people’s money. So much of politics happens not because of the plausibility or realism of what politicians propose, but because it sounds good to a majority of voters, and they don’t reflect deeply enough on what the proposal entails. So Comrade Mamdani gets elected mayor, he’s got a majority, and he’s got access to taxpayer funds that he can allocate. He’s choosing to allocate hundreds of millions of those taxpayer funds to subsidizing these supermarket operations. For a while, it’s going to look good — a new supermarket that wasn’t there before. By the way, these so-called food deserts he’s identified — if you look at the locations in New York City, they’re all within a short walk of existing supermarkets.

Rikki Schlott: Yeah.

Donald Boudreaux: I suppose what he would say is that these existing supermarkets are charging prices that are too high. But they’re surviving — they have customers. No one’s starving to death in New York City. And if the concern — this is a different discussion in a way — is that there are a number of New Yorkers who don’t have access to food because they can’t afford it, their incomes are too low, then supplement the assistance programs that are already in place, allowing those people to go into ordinary supermarkets or bodegas or mom-and-pop stores to buy their groceries. There’s no need for government to run the grocery store.

Rikki Schlott: What might it look like if people are able to use existing programs — how, in a more free-market-oriented way, can you lower prices and improve access to food?

Donald Boudreaux: Well, I don’t think you can lower prices at the local level. At the federal level, we have programs that restrict the amount of output that certain agricultural producers produce, and that causes food prices to be higher — that’s out of the control of New York City. We have tariffs now, which raise food prices. We have the war in Iran raising gasoline prices, and that cost gets passed along. Those things are out of the control of local government officials like Mamdani — he can’t be blamed for that.

What local governments could do — I’m not saying they should, but it’s a better option than operating an actual supermarket — is take the increased taxes they’re now shoveling into these supermarkets and spend them instead as cash assistance to New Yorkers they deem sufficiently poor and in need of help purchasing food. A kind of local or municipal food stamp program, if you will. There might be various problems with that, but whatever those problems are, they’re far exceeded by the problems that are going to arise from these monstrous government grocery stores.

Rikki Schlott: Sure. And so do you see these grocery stores as part of a larger trend of government getting involved in the private sector recently?

Donald Boudreaux: Unfortunately, yes. It’s astonishing, particularly for people of my generation. I came of age when Milton Friedman was a TV star, the Soviet Union was on the brink and eventually collapsed, socialism in Eastern Europe collapsed, Chairman Mao died and China liberalized. Everything looked like it was coming up roses — Ronald Reagan was elected president, Margaret Thatcher became prime minister. People in my generation remember what socialism did to real-world countries. It seems now that memory has been lost. And by the way, not just on the progressive left, where Mamdani is — we have President Trump increasingly using the government to take, not controlling shares, but very influential ownership shares in lots of private companies. That’s a step down the road to socialism, because socialism is government control of the means of production — the capital owned by private companies. To the extent government owns that, and owns it in a way that gives it a significant voice in how that capital is used, that’s definitely a move toward socialism. So we have socialism on the left, and we have socialism arising on the right today. It’s very disconcerting.

Rikki Schlott: Decades ago, the then-mayor of Indianapolis, Stephen Goldsmith, famously held up a phone book and said the government shouldn’t do anything that’s listed in there. Don, do you think there’s anything the government does better than the private market, other than wasting money?

Donald Boudreaux: I’m here at the Cato Institute — I’ve long been associated with the Cato Institute — so it’s hard to come up with something. If I have to, I don’t get too terribly upset about the government doing policing, courts, and genuine national defense, as opposed to policing the world. But no — I study economic history a lot, and I’m convinced that people in private markets, when they’re left free, are entrepreneurial and creative. The profit motive, as well as just the desire to create and to achieve, drives private people to cooperate with each other in nuanced, subtle, and creative ways that tend to solve problems far better than heavy-handed, top-down dictates from the state. In this case of supermarkets, this is a retrograde throwback to 1920s and 1930s naive socialism. This kind of stuff has been proven to fail. We know of no example of these kinds of things succeeding in history, and why would we think they’re going to succeed now?

Some people might think this is a cheap shot, but I don’t think it is: go into a US post office — it’s a government-run operation. Look at what you see. Is it attractive? Is it appealing? Is it a retail outfit you think, “oh, I want to come back here, this is great”? Is the service fantastic? It’s lousy. They have a monopoly on a particular kind of service, and it’s subsidized, and that’s what you get. That’s what a government-run grocery store will eventually turn into, after the initial shiny stuff of the first few days or weeks — it’s going to turn into a decrepit, Eastern European–style piece of nonsense.

Rikki Schlott: Well, I think that’s a great place to end it. Thank you so much for joining the podcast — I appreciate it.

And thank you for listening to this week’s episode of the Cato Podcast. If you’ve enjoyed today’s discussion, please subscribe and leave a review wherever you get your podcasts. To learn more about the ideas and research discussed in this episode, visit Cato​.org. The Cato Podcast is a production of the Cato Institute, dedicated to advancing individual liberty, limited government, free markets, and peace. Join us next time for more insights and conversations on the issues shaping our world.