Inflation Isn’t about Antitrust

T he Biden administration and key Democrats such as Senator Elizabeth Warren have trotted out a new idea about inflation: It’s caused by greedy monopolies. It’s not a monetary problem or a fiscal problem. It’s an antitrust problem.

Paul Glastris, editor in chief of Washington Monthly, asks why most economists have dismissed monopolization as an explanation for inflation. He’s responding to the Washington Post editorial board, which wrote a strong editorial against the idea. Glastris writes, “I’m not sure why the Post editorial board, much less economists like [Larry] Summers and [Dean] Baker, are so dismissive of the idea that monopolistic corporations might choose to exploit their pricing power at this moment of maximum leverage.”

To understand the argument, let’s start with the economic theory on monopolies. One of the symptoms of monopoly is higher prices than those in a competitive market. In a perfectly competitive market, firms have no price-making power at all because the market participants bargain their way to an equilibrium price that no single participant has any control over.

That is, of course, a blackboard abstraction, and in the real world, firms set their own prices. But they can’t just set them at whatever they want. If McDonald’s set the price of a burger at $1,000, they probably wouldn’t sell any. They have to keep in mind what Wendy’s, Burger King, Five Guys, etc., are offering. You can see how more competitors would make it more difficult to raise prices; in our example, burger customers could just seek out another restaurant for a similar product.

There’s economic logic, then, to the idea that lack of competition would result in price increases. It’s standard textbook theory. It’s an idea with which economists such as Larry Summers and Dean Baker are very familiar.

The reason they won’t give credence to the White House’s narrative on inflation is because it simply isn’t true. Glastris’s counterexamples illustrate why.

First and foremost, inflation is defined as a general increase in the price level. “General” is the operative word there. Glastris writes, “Thanks to lax antitrust enforcement, four companies now control 55 to 85 percent of the markets for beef, pork, and poultry. Since the fall of 2020, the price of beef has risen by more than 20 percent, far higher than the inflation rate.”

Possible monopolization, it’s true. But that would only explain why the price for meat is increasing, not why we’re experiencing a general increase in the price level.

As to whether it’s even monopolization in the first place, an increase in prices is not the only textbook symptom of monopoly. If an increase in prices is due to monopolization, it would coincide with a reduction in supply. We haven’t seen that in the meat industry. According to the USDA, total red-meat and poultry production was higher over the period of January through November 2021 than it was over the same period in 2020, when inflation was at normal levels. And U.S. meat production has been increasing steadily since the early ’60s, more than doubling over that time span.

Glastris goes on to note the case of semiconductors. At first blush, the logic is reasonable: Semiconductors are used in many products, so their unavailability would result in many prices increasing across many sectors. “As recently as a decade ago,” he writes, “America was producing vast numbers of cutting-edge semiconductors right here on our shores.”

But that “decade ago” part causes problems. The disparity between domestic and international semiconductor production is not a new development. It has gradually developed over years and cannot explain the surge in inflation that began last summer.

Another common denominator for many goods is ocean shipping. Glastris writes (correctly) that “three vast carrier alliances, all foreign owned” have gained control over almost all of the ocean-freight market. He says, “These alliances then built super-sized cargo ships that can only dock in a few ports, like the ones in Los Angeles and Long Beach, which now service 40 percent of all U.S. traffic.” That’s all correct. Then, he says, “This highly consolidated system kept shipping prices, and hence overall inflation, low for years. Now, its brittleness is contributing to inflation.”

Wait a second, consolidation was keeping prices low for years? Then it caused inflation, starting in late summer of 2021? Ocean shipping isn’t any more monopolized today than it was in 2020. And yet according to the Freightos Baltic Index, the price of a shipping container has gone up over 600 percent since January 2020. Something else must be going on.

Glastris brings up land transportation as well. He says that in the past, many goods were delivered by rail but now move on trucks because “the federal government allowed the railroad industry to monopolize.”

First, it must be noted that for passenger rail, the federal government was the monopolizer when it created Amtrak in 1971. For freight rail, it is true that there are fewer Class I railroads in the U.S. today than there were before the industry was deregulated in 1980. But since deregulation, freight rates and operating costs have been lower, and innovation has been higher. That’s not symptomatic of monopolization, even though there are fewer competitors, and it wouldn’t explain a general increase in prices, either. And the mere fact that goods are being shipped by truck instead proves that freight railroads have competition, even if it isn’t from other freight railroads.

Specific examples of potential monopolization are worth debating. It’s not silly to be concerned that global ocean shipping is effectively controlled by a cartel. But none of these sector-specific examples is sufficient to explain a general increase in the price level.

Aha, but they’re all happening at the same time! Exactly, which is why monopolization can’t be the answer. For the monopolization theory to work, proponents would need to explain why nearly every sector of the economy decided to start using its monopolistic price-making power at roughly the same time late last summer after not using it at any time in recent memory before then. That’s not economics; it’s a conspiracy theory.

The cause of the current bout of inflation is the fastest increase in the money supply in the history of the Federal Reserve system combined with record levels of fiscal stimulus combined with supply constraints that are limiting GDP growth. Too much money, not enough goods. The supply constraints are largely due to decades of bad transportation policy and pandemic-related labor shortages. But there wouldn’t be an issue if it weren’t also true that consumers are buying more stuff than ever before with an economy juiced with money from the Fed as the backdrop.

Those are separate concerns from antitrust. Economists understand that, which is why even most left-leaning economists aren’t playing ball with the Biden administration as it tries to pin inflation on the “greed of meat conglomerates,” or whatever industry it decides to single out next.