Inflation and Antitrust: Right Target, Wrong Weapon

M ilton Friedman famously declared that inflation is “always and everywhere a monetary phenomenon.” A statement of the obvious that cannot be said enough, it essentially tells us that inflation can occur only when the quantity of money increases faster than the rise in output. Simple as it may be, it’s an excellent starting point for understanding where inflation comes from, not least at a time of fiscal and monetary largesse. Nevertheless, we are now seeing the Biden administration blame some of today’s inflation on malevolent behavior by large corporations — behavior, they claim, that ought to be addressed by antitrust officials. To believe that is not only to believe in nonsense; it’s to accept a radical interpretation of decades of antitrust law.

Since the 1980s the key metric by which antitrust law has been conducted has been the consumer-welfare standard. Simply put, this forces courts to analyze the effects of business conduct on their customers. If that conduct is found to harm them, then it will violate the standard.

To some progressives, that is insufficient. They have begun to argue for what former U.S. senator Orrin Hatch referred to as “hipster antitrust” — or, as Larry Summers recently said, decrying the notion that antitrust could be used as a weapon against inflation, “hipster Brandeisian antitrust.” In other words, these progressives advocate that we look to the market structure as a whole rather than specific conduct. Such a view is more than a nod to the beliefs of mid-20th-century structuralist economists such as Joe Bain and Edward Chamberlain who held that it was inherently damaging when one company reached a certain level of dominance in its market sector — beliefs reflected in the jurisprudence of Justice Louis Brandeis.

Adopting anything resembling this doctrine would provide regulators with a much wider definition of what constitutes illegal actions. Under this standard, moreover, it wouldn’t be a stretch to hold that higher prices are the product of malfeasance by big business — an idea with obvious appeal to the current administration. It’s politically easier for an administration to pin inflation on large corporations than to accept its share of the blame for our current mess.

It’s also politically easier for an activist Federal Trade Commission to use inflation-fighting as cover for the pursuit of its own progressive agenda. The problem faced by both the administration and the FTC is that their arguments rest on shaky foundations. Essentially, they rest upon the simple premise that monopolies — or near monopolies — are in a position to increase their prices more than companies in more-competitive markets. This is not particularly controversial, but to suggest that it is a significant reason for the general rise in prices is wrong. When demand increases but supply remains constrained — as would be expected as we exit a lockdown — prices ought, quite naturally, to increase. They would increase by an even greater amount, too, if the same supply disruptions increase costs.

Furthermore, as Joey Politano has explained, the data that the “hipsters” are using are massively insufficient. This is because profit margins lack any historical correlation with inflation rates and also are extremely volatile. This means that they rarely, if ever, are transmitted into general increases in the price of goods.

To penalize companies that are able to increase prices in response to an increase in both costs and demand, simply because of their market position, would be self-defeating. That market position may, in the longer term, help them to keep prices down. Take the example of Amazon’s logistics service. The company is able to use its market power to negotiate better deals with existing delivery services than would either consumers or smaller intermediaries. This means that when Amazon contracts with small businesses to offer its warehouses and delivery services, which (in the latter case) are often sub-contracted out to existing firms such as UPS, they can pass those cost-savings on to the businesses themselves, leading to lower prices.

Moreover, where a market has “too many” firms at different stages of the production process, profit will have to be baked into each step if those firms are to survive. However, if a single company owns many of the stages that take a product from production to the end buyer, then profit need not be made at each step along the way. The general consequence, then, is that the company is in a position to deliver lower prices to consumers. This is why Francine Lafontaine and Margaret Slade, in a 2007 paper published in the Journal of Economic Literature, found that requirements by antitrust authorities that integrated companies break up typically led to higher prices and lower service levels for consumers.

Sadly, the inflation-based argument for legal intervention on allegedly antitrust grounds is not the only way that “antitrust” is being used as a cover for progressive activism. We have seen calls for breaking up firms because of concerns related to worker safety, inequality, the environment, and a range of other reasons that have little or no relation to traditional understandings of antitrust. To be sure, these issues matter. But to maintain that it is the place of antitrust to deal with them is, to put it mildly, a stretch.

In the Constitution of Liberty, Friedrich Hayek famously railed against judicial activism. While laws are often an imperfect expression of principles, the underlying principles should be simple — or, at least, relatively easy to grasp — if the rule of law is to work well. If instead, laws or regulations are drafted or interpreted in a way that gives those administering or enforcing them too much discretion, it undermines the predictability that ought to be provided to market actors. Put another way, people ought to be able to know with a high degree of certainty what conduct is permitted and what is not.

The application of the consumer-welfare standard to antitrust is an example of the perfect Hayekian rule. Although its underlying principle is clear enough, it also allows judges the degree of flexibility necessary if they are to keep up with changes in our understanding of what harm is. For example, during the 1980s, not a single vertical merger was challenged. Despite the fact that, as discussed above, vertical integration ought to offer the consumer lower prices, that will not always be the case. Our understanding of the harm that vertical integration can cause has advanced since the 1980s, and now economists agree that under rare circumstances the foreclosure risks feared after the Second World War can hurt consumers. For example, the 2015 merger between Comcast and Time Warner was abandoned after the Department of Justice feared it would “make Comcast an unavoidable gatekeeper for Internet-based services” — a fear that related to the effect it may have on consumer welfare. But if market structure had been the basis on which the case had been decided, then it’s easy to see how many possible mergers would have been abandoned, given the lack of certainty. (And with them, of course, would have gone the opportunities for consumers to reap the many virtues of vertical integration.)

No one should believe that antitrust could work as an effective method for stopping or slowing down inflation. Attempting to use it as such would introduce an element of unpredictability into the law that would be destructive and serve no good purpose. Efforts to take us down that route should be rejected.