Larry Summers Is Wrong: Corporate Consolidation Fuels Inflation

In the face of rising inflation, the Biden administration has moved to use antitrust powers to combat corporate price hikes. This has led to pushback from prominent macroeconomists, including the disgruntled tweeting of former Treasury Secretary Larry Summers.

"The emerging claim that antitrust can combat inflation reflects 'science denial,'" tweeted Summers last month. "There are many areas like transitory inflation where serious economists differ. Antitrust as an anti-inflation strategy is not one of them."

Antitrust policy would not have been an option to tackle the high inflation of the 1970s, which was driven largely by oil shortages during the height of the Organization for Petroleum Exporting Countries' power. OPEC acted as a global oil trust, but not one that the U.S. had jurisdiction to bust. That historical "stagflation," and the interest rate hikes that the late Paul Volcker used to end it, drove a lot of the thinking about inflation for Summers' generation of economists. And it is true that inflation can result from, and be reined in by, monetary policy. When you hear about inflation, it is usually the result of a country's central bank printing more money to allow for spending in the immediate future, which then tanks the value of the currency. (The more supply of a currency floating around, the less every individual unit is worth.) But Summers et al. miss a crucial chapter of the story that is specific to the inflation the United States is dealing with now.

The fundamental reason that prices are rising now is because of a mismatch of high demand and constricted supply. The Covid-19 crisis has led to snarls in America's importation supply chain, and since America imports just about every consumer product these days, there's simply not enough stuff to go around.

This mismatch between the number of dollars floating around the American economy and the amount of stuff to purchase with it is what's actually leading to high prices--price-gougers can get away with ramping up price tags when consumers are desperate for things they can't get anywhere else. In other words, we don't have a problem with an oversupply of money, we have a problem with our supply chains.

What the Biden administration is actually citing as their reasoning is corporations using the supply-demand mismatch and the resulting inflation, along with shipping issues, as a way to pad their own profits. And that is precisely what is going on now. Through a combination of poorly aligned incentives and simply forcing price increases onto consumers, corporations are making massive windfalls. That's on top of the windfall they've already made: according to the Bureau of Economic Analysis, domestic corporate profits soared up to $2,400 billion as a whole, well above pre-pandemic levels, which hovered between $1,800 and $1,900 billion (see graph below).

According to Summers, the resulting profits are merely "How a market system operates": because of a surge in demand, profits will increase. That's the first half of the econ 101 story; the second half is that supply will increase as firms try to capitalize on those high prices, which will then equilibrate the market.

But that second half does not work in consolidated industries like shipping or meatpacking because the existing companies have already secured so much market share that they can largely control the supply independently. This is where antitrust policy comes back into the picture. Supply can't increase if no other suppliers can penetrate a hyper-consolidated market, and the handful of titans who do control the market have no reason to change their hyper-profitable status quo.

Shippers and logistics companies are making money hand over fist right now. This gives them no real incentive to make the shipping backlogs better. That is why David Dayen at The American Prospect has covered the recent reform of federal ocean liner oversight (including more power for the Federal Maritime Commission to investigate potential antitrust violations) as an "inflation-fighting" law. In 2021, the seven largest ocean liners saw their collective profits soar by 2,200%. Companies like Cosco, Maersk, and Hapag-Lloyd have all seen record-breaking profits as the industry made more money in a year than it had in the previous decade.

The party is not confined just to shipping and logistics firms' C-Suites, they just got the ball rolling. Inflation started as shippers booked extra profits with the increased shipping costs driving it. Then other large corporations started to raise their prices, using higher transit costs and the existing inflation as a smokescreen to increase their own bottom lines; companies claim they have to raise prices because of rising costs, but then hike prices so much that those costs are more than offset. In an environment of rising prices, price hikes become normalized, resulting in less pushback from media and public interest groups, especially in industries with high levels of consolidation. In consolidated industries, this is extremely successful because of the fact that the prices are all being raised. When there's no competition, there isn't a cheaper alternative to turn to. This is only heightened by the fact that most of the monopolists continue to operate multiple brands, giving the illusion of widespread price increases, even as it can be driven by the greed of only a handful of corporations. In fact, large companies as a whole had their second most profitable quarter on record during the supply chain crisis.

One very clear example of profiteering is in the supply of meat, which the Biden White House called out. But despite rising prices, ranchers are not seeing that money. But while everyone else suffers, the meat-packing mega-corporations continue to soak up profits rather than investing in expanded capacity.

The central flaw in Summers's argument against using antitrust measures to try and curb inflation is that he is blanking on a basic economic concept: rent-seeking. Rent seeking--a concept originated by one of the founding scholars of economics as we know it, David Ricardo in the late eighteenth century--is the abuse of market or situational power to extract extra profits without adding any more value. In other words, it is raising prices not because of any real change in relative worth, but simply because the rent-seeker can. Rent-seeking is one of the oldest telltale signs of monopolistic behavior, and it is--in a nutshell--what is happening right now with the supply chain-induced inflation. Prices are rising naturally to some extent just due to lack of supply, but that natural increase in costs is being used to justify exploiting consumers by raising prices.

Rent-seeking is, by definition, a leech on the economy. It takes money that consumers could have used to stimulate demand for things that actually contribute to society or growth and diverts it directly into the pockets of the already wealthy. Additionally, it can increase the cost of living generally by artificially inflating costs. Antitrust, then, can decrease the upward pressure on prices by combatting the ability of large monopolists to rent-seek. It would not get rid of all inflation, but it would get rid of a significant amount.

Summers also said that monopolists will only raise prices if their consolidation is increasing. This simply flies in the face of basic economics. Firms are profit-maximizing. That means that if they can raise prices, they will, and take that extra profit to the bank. The supply chain crunch gives them just such an opening. If this claim were true, then antitrust measures probably wouldn't exist because monopolies would not cause any harm. The entire reason why trust-busting became popular in the progressive era was because firms that had already amassed huge market shares were using their power both to manipulate prices and to lower quality and safety standards, worsen working conditions, and manipulate political outcomes. To suggest that monopolies simply maintain the price level anytime they are not actively consolidating more market share shows significant historical ignorance.

Recently, the Washington Post ran a story sharing some expert views on the viability of antitrust as an anti-inflation policy. While most of the economists cited by the Post (including Summers) believed that consolidation was not the driving force behind inflation, the article did a poor job of distinguishing between different economic positions. The piece discussed economic views in the context of liberal v. conservative economists, but the fundamental difference has more to do with different economic subfields. The Post mostly talked to macroeconomists, who tend to focus on broad trends without studying the role of social or industrial organization. Indeed, as inflation has been low since industrial organization became resurgent, the field of economics may not have the tools on hand to explain the phenomenon.

Since mean wages have for the past year grown more slowly than either corporate profits or prices, it is hard to see how a story about permissive fiscal or monetary policy leading to wage hikes that are driving prices increases could possibly be correct. The Bureau of Labor Statistics reported in November that real wages had decreased throughout 2021. That is, while prices and profits have soared, wages have lagged. That juxtaposition seriously undermines the idea that corporations are not driving up inflation as a money-making strategy made possible by decades of neoliberal inattention to anti-monopoly laws.

What those macroeconomic views tend to overlook is the political economy of the situation. Economic trends do not happen purely within market systems but are embedded with certain social and political circumstances. Even if someone like Summers were to recognize rent-seeking behavior, they would likely contend that just undoing consolidation would not make inflation go back down once it's already happened.

But, there are three mechanisms that could allow antitrust enforcement to make a meaningful difference with inflation. The most straightforward is that splitting companies up would increase competition, which would then create incentives to undercut prices. There is no need to go that far to see results though. Simply by giving antitrust enforcers more power through heightened presidential support, Biden gives his trust-busters teeth that they can use to stop profiteering. With a more credible danger of antitrust charges, companies may well be deterred from raising prices further to avoid investigation. The Federal Trade Commission and Department of Justice can also use possible investigations to threaten companies to reduce prices, or at least not raise them further.

The downside of antitrust is supposedly the time scale that it operates on; it takes months or even years to litigate antitrust charges, whereas inflation can rise quickly (as evidenced by the massive quarter-to-quarter changes noted above). This is why the threat and deterrence angles are so important. Litigation needn't reach resolution to impact incentives, only the credible threat that Biden will initiate action if corporations try to price gouge. There are already promising signs from Biden's heightened antitrust aggressiveness; Biden singled out the meat industry in particular, and since that call-out, prices have fallen.

If the rising inflation facing the United States were the result of bad monetary or fiscal policy, then the prevailing opinion championed by Larry Summers would be more applicable. But, the crucial link of corporate profiteering is the driver of current inflationary trends. As Lindsay Owens of the Groundwork Collective notes in that same Washington Postarticle, all it takes to confirm this is taking a look at corporate earnings calls. Executives are all too delighted to explain to shareholders how they have been able to increase profit margins by charging consumers more. As such, stopping corporate price gouging should be, at the very least, a key element of any anti-inflation strategy.