Progressives blame ‘corporate greed’ for inflation. Does that explanation hold up?

Facing the steepest and fastest price hikes across the economy in 40 years that many voters say is their No. 1 issue, the White House and other progressive groups have found a culprit: a decades-long trend toward greater concentration in the economy, which gives corporations more power to extract price hikes from consumers.

Even Nobel Prize-winning New York Times columnist Paul Krugman, who has expressed more openness to it, has cautioned, “monopolies aren’t the reason inflation shot up in 2021,” even if he conceded they could explain some of the price increases.

The debate is crucially important for the Biden administration — if it’s true that market concentration is egging on inflation, then it could pursue an aggressive antitrust agenda that it wanted to implement anyway while also combating its No. 1 economic liability. If it’s in fact the case that some mixture of economic distortion from covid and expansive fiscal and monetary support for the economy is the cause, then the set of solutions is far less palatable.

Why some are saying market concentration is causing price increases

President Joe Biden underlined the point in his State of the Union address earlier this month: “When corporations don’t have to compete, their profits go up, your prices go up, and small businesses and family farmers and ranchers go under.”

Overall, the company’s profits almost tripled, while its volume of sales stayed roughly flat compared with a year ago. (Tyson has argued against claims that current high prices are due to consolidation, instead attributing them to “unprecedented market conditions … including a global pandemic and severe weather conditions.”)

There was a “merger wave” accompanying the pandemic, and while “there are real supply chain constraints and increased demand for certain types of goods … that has resulted in increased prices,” she explained to Grid. “The underlying market failures involve supply chains that have purposely been whittled down as a result of just-in-time business practices and ways to squeeze every last drop out of a slimmed-down supply chain that’s been driven by market power and this notion of efficiency of all cost versus resiliency and redundancy.”

Finally, she said, “Pricing decisions are made by people, when there is a narrative around inflation that’s permeating the public discourse, that’s an important opportunity to flex pricing power more. When you add that to a higher concentrated economy with limited completion, you have the ability to push prices well beyond what cost increases are beyond inputs and labor.”

This view has not just won the endorsement of the White House and some progressive senators, but also regulators that work on antitrust. Lina Khan, the Federal Trade Commission chairwoman and one of the most prominent voices in a new wave of concentration-conscious scholars, has announced an investigation into “whether supply chain disruptions are leading to specific bottlenecks, shortages, anticompetitive practices or contributing to rising consumer prices.”

Why some skepticism is warranted

The challenge for linking corporate concentration and the exercise of market power with inflation is that rising concentration is hardly the only thing that’s been strange or novel with the economy recently.

As many anti-monopoly activists argue, rising concentration has been a multi-decade trend, while inflation came only with the pandemic; No. 2 is that there have been very clear major changes to the economy that could account for at least some of the inflation — namely the disruption of supply chains for goods like cars — as well as demand side explanations like low interest rates and government stimulus.

“Has anything that’s happened lately vis-à-vis the inflationary things people are upset about, big fiscal [policy], supply shocks? Has any of that changed market power? Does that have any effect on how prices move around? Do I think there’s been some large and sudden increase in market power that’s accompanied what we’ve been seeing in fiscal and monetary policy over the last year? I would say no — I think that’s where a lot of economists are,” Chad Syverson, an economist at the University of Chicago, told Grid.

While the debate does not strictly fall across these lines, the dispute could be seen as one between those who look at the economy as a whole and those who look at specific markets and industries.

A macroeconomist might see an economy distorted by supply chain issues, consumers having a preference for goods over services or large amounts of monetary and fiscal stimulus. A lawyer or antitrust specialist might see a company flexing its power to raise prices more than it might if it had more competition.

“My sense is that what’s going on with inflation is a classic situation of increased demand and not an associated increase with supply. Market power can add to that, it can be a contributor. I don’t personally think market power is the primary driver of what we’re seeing, but it can contribute,” Gaynor said.

Gaynor explained that it’s possible for market power to give companies more leeway to set prices in an already inflationary environment. “You have firms with market power. There’s a demand shift and no associated increase in capacity or supply. Firms can take advantage of that. If you have a bunch of that happening, you can have price increases,” he said.

Blaming corporate profits for inflation isn’t new

“Of all our weapons against inflation, competition is the most powerful. Without real competition, prices and wages go up, even when demand is going down. We must therefore work to allow more competition wherever possible so that powerful groups — government, business, labor — must think twice before abusing their economic power. We will re-double our efforts to put competition back into the American free enterprise system,” President Jimmy Carter said in an address in October 1978, when inflation was running at almost 9 percent.