Instead of blaming corporations, politicians and Fed officials must acknowledge their own culpability for today’s high inflation.
Instead of blaming corporations, politicians and Fed officials must acknowledge their own culpability for today’s high inflation.
A s the Federal Reserve raises interest rates to try to curb inflation, politicians such as Senator Elizabeth Warren have criticized the central bank’s approach. It’s true that rising interest rates make it harder to borrow money and could lead to a recession and rising unemployment. However, these critics believe that rising interest rates won’t bring down high gas or food prices, which they claim are at least partially caused by greedy corporations taking advantage of quasi-monopolistic power and collusion. For example, economist Hal Singer argues that the government should pursue “anticompetitive conduct by companies in concentrated industries” to bring down inflation.
If firms have monopoly power, or something akin to it, the prices they charge may be excessive. But Warren, Singer, et al. misunderstand an inflation problem which is not just about high prices. If anything, overzealous antitrust policy could backfire.
First, keep in mind that inflation is the rate of increase in prices, and there is no reason why a monopoly (or something similar) should increase its prices faster than a competitive firm. Both are subject to limited consumer demand. A monopolist sets a price that will maximize profits but is constrained by the fact that higher prices lead to reduced sales. Therefore, it is only logical to raise prices when demand is increasing.
There is no doubt that we’ve experienced rising demand and rising prices, but this is largely because the Fed has increased the money supply by over 30 percent in the past two years to accommodate government stimulus programs. So, to bring down inflation, the Fed must reverse the trend and reduce the rate of money-supply growth. Here is where raising interest rates enters the picture.
Higher interest rates and reduced spending might not directly lower food or energy prices, but they will reduce the rate at which prices increase, thereby allowing the economy to catch up. The reason for this is that as money becomes tighter, consumers and businesses save more and borrow less, which slows inflation.
Other policies that reduce prices can complement monetary policy, but antitrust, to the extent that it focuses on attacking large firms, could make inflation worse.
Large firms often have economies of scale, which enable them to charge lower prices than smaller firms. We should not confuse this advantage with monopoly power. Breaking up large firms only causes the production costs of their products to rise, leading to even higher prices for consumers.
Proponents of ramping up antitrust enforcement are right that competition keeps prices down, but their solution — such as the recent competition-themed Federal Trade Commission policy changes — is unlikely to successfully enhance competition. Instead, they may end up protecting smaller competitors without contributing to lower prices.
A common mistake when discussing inflation and antitrust is assuming a simple relationship between the two. The main goal of antitrust policy is to promote consumer welfare. Lower prices are one important component of the consumer-welfare framework, but so are innovation, choice, quality, and efficiency. The latter increase consumer welfare considerably but are notably absent from recent remarks by the current Federal Trade Commission Chair, Lina Khan, who asserted that the “consumer-welfare framework . . . should be abandoned” in favor of a focus on concentration. She is now pushing to block nearly all mergers, target successful platform companies, and make it harder for companies to prove their innocence.
While concentration within industries can lead to reductions in consumer welfare, that’s only true when those industries experience reduced competition. That this relationship is automatic is far from proven. A recent NERA study finds that competition actually increases when concentration increases in markets for specialized consumer goods such as hardware and furniture, stemming primarily from more efficient business practices and innovation from online marketplaces. The authors note that increasing concentration is associated with output growth, job creation, and higher compensation.
This all reveals that breaking up firms in the name of lowering prices may lead to less industry concentration and — somewhat counterintuitively — less competition. With less competition and without some of the maligned economies of scale, we’d lose a degree of the efficiency that we count on to keep prices low, as well as some of the innovation, product quality, and consumer choice we enjoy. Ultimately, using antitrust to fight inflation will probably lead to significantly worse outcomes for the average consumer.
So rather than scapegoating “greedy” corporations that, while imperfect, are mostly trying to satisfy customers, politicians and Fed officials must at least tacitly acknowledge their own culpability for today’s high rates of inflation. Increasing competition and reducing regulatory market distortions, along with ending the war in Ukraine and fixing our supply chains, would result in lower prices for some goods and services. But inflation, especially in the long run, depends on monetary policy.
Tracy C. Miller is a senior policy research editor with the Mercatus Center at George Mason University. Andrew Mercado is a Mercatus research assistant and an adjunct professor with GMU’s Antonin Scalia Law School.