Economic Analysis and Competition Policy Research

Home   •   About   •   Analytics   •   Videos

With the New Consensus on How Profits Are Driving Inflation, We Must Pivot to New Policies

Paradigm change is hard. It took over a year to overcome significant ridicule from neoliberal economists and pundits for the evidence to be so compelling as to flip the consensus on the causes of inflation. Business press outlets from the Wall Street Journal to Bloomberg to Business Insider now perceive what some heterodox economists have recognized for a while—that companies in concentrated industries were exploiting an inflationary environment to hike prices in excess of any cost increases they were incurring. (Alas, The Economist refuses to see the light.) Even Biden’s director of the National Economic Council, Lael Brainard, refers to this bout of inflation as a “price-price spiral, whereby final prices have risen by more than the increases in input prices.”

It’s hard to assign credit for flipping the script, but a few brave economists deserve mention. Isabella Weber, an economist at the University of Massachusetts, published a provocative article, co-authored with Evan Wasner, titled “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” They explain how firms with market power only engage in price hikes if they expect their competitors to follow, which requires an implicit agreement that can be coordinated by sector-wide cost shocks and supply bottlenecks.

Josh Bivens of Economic Policy Institute debunked the neoliberal claim that wage demand was driving inflation, showing instead that corporate profit was responsible for more than one third of the price growth. Mike Konzcal and Niko Lusiani of the Roosevelt Institute demonstrated that U.S. firms that increased markups in 2021 the most were those with the higher mark-ups prior to the economic shocks, an indication that concentration was facilitating coordination. (If one were to expand the list of thought influencers beyond economists, you’d have to start with Lindsay Owens of the Groundwork Collaborative, who has been analyzing what CEOs say on earnings calls since the onset of inflation.)

With the new consensus, we need think creatively about attacking inflation. We have more than one tool at our disposal. Rate hikes might ultimately slow inflation, but at enormous social costs, as that mechanism requires putting people out of work so they have less money to spend. What’s worse, rate hikes are regressive, with the most vulnerable among us bearing the largest costs. Solving the inflationary puzzle calls for a scalpel not a chainsaw: We need to identify the industries that contribute the most to inflation (e.g. rental, electricity, certain foods), and then tailor remedies that attack inflation at its source. To use one analogy, it wouldn’t make sense to bulldoze a house because a fire was burning in one room. You’d find that room and put out the fire. I am calling for seven policies in particular.

(1) More Bully Pulpit. The President should use the bully pulpit more—recall JFK’s turning back steel price hikes in 1962. Biden called out junk fees in his state of the union address, causing airlines to remove unwarranted fees for families sitting together. Clearly, Biden can’t hold a press conference about a misbehaving industry daily. But he has not come close to tapping this well.

(2) More Congressional Hearings. Congress should hold hearings to call executives to account for price gouging. Although Congress has held hearings with experts, they have yet to summon the CEOs of industries employing massive price hikes, seemingly in coordination—as if they were some tacit agreement to raise prices in unison. I’d start by calling the CEOs of the packaged food makers, PepsiCo, Unilever, and Nestlé, who bragged last week to investors about record profits, massive price hikes, and enduring pricing power.

(3) The FTC to the Rescue. The FTC should investigate firms for announcing current or future price hikes (or capacity reductions) during earnings calls under the agency’s unique Section 5 authority to police “invitations to collude.” These cases of “tacit collusion” are much harder to prosecute under the Sherman Act. If the FTC were to publicly announce an investigation into a firm or industry—airlines (admittedly outside the FTC’s jurisdiction) or retail would be a good place to start—it would force CEOs economywide to exercise more caution about sharing competitively sensitive information on earnings calls.

(4) Limits on Concentrated Holdings: The cost of shelter makes up a significant share of the core CPI. Cities or states should move to limit the holdings of any individual firm within a given census tract. My OECD paper, co-authored with Jacob Linger and Ted Tatos, showed the nexus between rental inflation and concentration in Florida. A natural cap for a single owner would be five or ten percent of all rental properties in a neighborhood. Raising interest rates, our default anti-inflation tool, perversely puts home ownership out of reach of millions of families, driving them to the rental markets, which bids up rental rates, which is one of the primary drivers of inflation.

(5) Price Controls Should Be on the Table. Price controls are the ugly stepsister in economics. But when backed by a public campaign, they have proven to be effective. Congress imposed price caps for insulin copays in the Inflation Reduction Act, but only for those patients covered by Medicare. Insulin makers, beginning with Eli Lilly, saw the writing on the wall, and voluntarily imposed the $35 cap on all patients. So long as caps are sparingly used in mature industries, the standard investment concerns of economists should be mitigated. The lesson from insulin is that the mere talk of price controls can induce an industry to temper their enthusiasm for price hikes.

(6) Government Provisioning. The threat of government provisioning is another lever that may force private industry to behave. To wit, California offered a $50 million contract to makes its own insulin, which coincided with Eli Lilly, Sanofi and Novo Nordisk preemptively reducing their prices. This playbook could be used in other industries where inflation remains stubbornly high. We can anticipate libertarians screaming “socialism,” but if the cost of inaction is more rate hikes and unemployment, I’d take the libertarian jeers any day.

(7) Fix Antitrust Law. Congress should amend the Sherman Act to give the DOJ, state attorneys general, and private enforcers a better shot at policing tacit collusion among firms in concentrated industries. Courts have implicitly adopted the notion that oligopolistic interdependence is just as likely to achieve prices inflated over competitive conditions as agreement, and so “merely” alleging or putting forward evidence of parallel pricing, excess capacity, and artificially inflated prices is insufficient to prove agreement under Section 1. But why should we presume that it is just as easy to maintain artificially inflated prices tacitly than through agreement?

Congress should flip the presumption. In particular, Section 1 of the Sherman Act should be amended so that the following shall create a presumption of agreement: Evidence of parallel pricing accompanied by evidence of (a) inter-firm communications containing competitively sensitive information, or (b) other actions that would be against the unilateral interests of firms not otherwise colluding, or (c) prices exceeding those that would be predicted by fundamentals of supply or demand. Moreover, the Sherman Act should be amended to permit courts to sanction corporate executives who participated in any price-fixing conspiracy upon a guilty verdict, by barring the executives from working in the industries in which they broke the law, either indefinitely or for a period of time.

Industrial organization gatekeepers like to poo-poo the idea of using competition tools to attack inflation, noting that antitrust moves too slowly. This is needlessly pessimistic. It bears noting that none of the seven remedies suggested here involve bringing a traditional antitrust case against a set of firms pursuant to the Sherman Act. The common thread that binds the first six remedies is inducing a short-run shift in industry behavior. A forced divestiture of rental properties over a holding limit would inject downward-pressure on rents in the short run. CEOs don’t want to be called out by the president or called to testify before Congress to explain their record-breaking profits attributable to massive price hikes above any cost increases. A public investigation by the FTC into invitations to collude via earnings calls would also have an immediate effect on CEOs. Nor would CEOs take lightly to being barred for life from an industry for participating in a price-fixing scheme.

The seven interventions outlined here will require an all-of-government approach. Biden should create a task force to carry out these policies and issue an executive order to signal his seriousness to other agencies. There are two paths for Biden’s legacy: Do nothing about inflation and leave it to the Fed to engineer a recession that likely ends his presidency, or grab the reins himself. With the new consensus emerging that profits (and not wage demands) are driving inflation, the time has come to change our approach.

Share this article:
Share this article:

Subscribe now to get email updates about The Sling

Related Articles

Image: Austin Frerick is the author of the book "Barons: Money, Power, and the Corruption of America’s Food Industry," out later this month.
Austin Frerick is the author of the book Barons: Money, Power, and the Corruption of America’s Food Industry, out later this month, which explores the powerful corporations that monopolize entire sectors of the U.S. food system: from pork, beef, and dairy, to grains, coffee, berries, and grocery stores. In his book, Frerick illuminates the ugly... Read More
Image: Angus Deaton's Economics in America explores the causes of inequality and offers a roadmap how to tame it.
After about a decade of teaching, it finally occurred to me that interviewing an accomplished economist (or economic critic) would be more entertaining—and hopefully more educational—than asking students to listen to me wax on about economic expert “war stories” for two hours. Also, by inviting a book author, I could compel students to digest the... Read More