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Elizabeth Warren has introduced a bill that would attempt to limit “price gouging”, by imposing price controls in cases of “exceptional market shock”. This bill has generated a large amount of highly contentious public debate. So far I’ve held back from writing about this, since A) other people have written a lot of good stuff that covers most of it, and B) I said much of what I wanted to say about price controls back in this post in January:
Noahpinion
Why price controls are a bad tool for fighting inflation
Economist Isabella Weber caused a stir when she wrote an op-ed in the Guardian calling for price controls in order to fight inflation. She wrote: [A] critical factor that is driving up prices remains largely overlooked: an explosion in profits…[L]arge corporations with market power have used supply problems as an opportunity to increase prices and scoop …
Read more
4 months ago · 46 likes · 29 comments · Noah Smith
But since so many people are talking about this, I figured the public could use some help in sorting out the debate.
There are really three questions here:
Is corporate greed contributing to inflation?
Is market power contributing to inflation?
Are price controls a good way of addressing market power and/or inflation?
So let’s go through each of these questions.
Greedflation is not a thing, and nobody really thinks it is
Elizabeth Warren and the people pushing price controls don’t really believe that a sudden surge in corporate greed is responsible for our recent surge of inflation. But their rhetoric can sometimes give the impression that they do believe this:
Twitter avatar for @SenWarren
Elizabeth Warren
@SenWarren
Giant corporations are making record profits by increasing prices, and CEOs are saying the quiet part out loud: they’re happy to help drive inflation.
American families pay higher prices and corporate executives get fatter bonuses. See for yourself what executives are saying:
February 15th 2022
3,513 Retweets9,538 Likes
I poked fun at this rhetoric by creating the following (sarcastic) chart:
Catherine Rampell has an excellent column in which she makes a lengthier, more detailed version of the same argument.
The reason it would be silly to blame inflation on greed is that companies are always greedy; if they could have raised prices this much back in 2019, they could have. Thus, corporate greed is a constant; inflation is not. There’s no chance of dealing with inflation by hectoring companies to want profits less.
As I said, progressives know this. Unfortunately, some appear to think that rhetoric implying this “greedflation” story will be good populist politics and get people riled up at corporations. Rampell writes:
I’ve been scolded before, including by White House senior aides, for making a fuss about Democrats’ demagoguery on this issue. So what if Biden and Democratic lawmakers want to grandstand about corporate greed? Who cares whether Biden asks for another gratuitous investigation into whether “illegal” conduct is driving up gas prices? This kind of populist anti-corporate rhetoric polls well, they say. It does no harm. It’s just cheap talk, so Democrats can show they’re Doing Something about inflation.
But such allegedly cheap talk has become very expensive…it is encouraging Democrats to pursue policies that could be actively harmful. These include a proposed tax on “windfall” oil profits, which would likely reduce oil production exactly when we want output to increase.
Rampell is right. Even if it rousing anti-corporate sentiment were good for Democrats’ electoral prospects (which I highly doubt), it pushes Democrats’ governance toward questionable policies. Lashing out at corporations by any means available will not bring down inflation, and voters in November are still going to be mad.
But underneath the layer of overheated and probably-unhelpful rhetoric, there is the core of an interesting economic argument. Though greed isn’t driving inflation, there is a chance that monopoly power is making it worse.
Price gouging is sort of real, but it’s not so simple
The non-ridiculous version of the “greedflation” story is the idea that monopoly power is exacerbating inflation. When politicians like Elizabeth Warren say “greed”, maybe they’re just using that word as a rhetorical stand-in for “monopoly power”, since the latter is a term that few people know and even fewer understand.
In a perfectly competitive economy, companies don’t make profits (except what’s needed to pay back their cost of capital). But in the real world, companies make quite a lot of profit. In fact, since the early 2000s, profits have risen as a share of the economy:
Economists argue back and forth over why this happened. I won’t go over that whole debate here, and it’s not yet resolved. But some economists believe that the reason profits have risen is that companies have more market power now than they did two decades ago. Suffice it to say that this explanation is fairly plausible.
When companies have monopoly power, they raise prices beyond what those prices would be in a competitive market. And they do this by holding back output in order to make goods artificially scarce, thus increasing the price. So with monopoly power, we get a less efficient economy than we would otherwise. Shareholders make out like bandits, but we the consumers pay too much and get too little.
Here’s a picture of a simple, Econ 101 model of a total monopoly. Of course in the real world, companies aren’t total monopolies, at least in America; the truth lies somewhere in between perfect competition and perfect monopoly. But this simple model shows the basic idea of why monopoly power raises prices and lowers output.
So if something like this is going on in the modern American economy, we can raise economic efficiency — meaning lower prices and higher GDP — with better antitrust. It can also provide a rationale for price controls (which I’ll talk about in the next section).
OK, so far so good. Now let’s think about inflation, and how monopoly power might affect that.
First of all, there could be an increase in monopoly power in the economy. That would increase prices, and also increase profits. In the graph of profits shown above, we see that there is a jump in the share of profits as a share of the economy after the pandemic. Did powerful companies get more powerful as a result of their competitors getting wiped out by the Covid shock?
Maybe. But we also see that this jump in profit’s share of the economy is only about the same size as the jump after the Great Recession, at which time inflation was low. The big increases in profit as a share of GDP happened in the early 2000s, when inflation was also low. So it doesn’t seem likely that an increase in monopoly power since early 2020 is likely to be a big part of the inflation story. Also, for this story to fit, we’d probably have to see continuing increases in monopoly power in 2021 and 2022, which doesn’t make sense with the pandemic story. And finally, economists who study monopoly power don’t see much of an increase since Covid.
So we can probably discard the “monopoly power went up” explanation for inflation.
But in fact, Elizabeth Warren and other advocates of the “greedflation” story probably don’t have that story in mind when they accuse companies of price gouging. Instead, they probably believe that companies are using their existing level of monopoly power to take advantage of the current economic situation in order to raise their prices (and profits) more than they would in a competitive market. For example, here’s a thread by Lindsay Owens of the Roosevelt Institute that basically makes this case:
Twitter avatar for @owenslindsay1
Lindsay Owens, PhD
@owenslindsay1
"Rationing" scarce goods by price gouging is still price gouging. It's ok to be fine with that, and to write snide op-ed's defending it. But know this: CEOs are not acting as efficient stewards of scarce resources. That's a fiction. A thread: 1/6
Opinion | An inflation conspiracy theory is infecting the Democratic Party
At best, this approach has done nothing to curb inflation. Worse, it has distracted Democrats from taking actions that could help.
washingtonpost.com
May 13th 2022
223 Retweets711 Likes
Noahpinion
Why price controls are a bad tool for fighting inflation
Economist Isabella Weber caused a stir when she wrote an op-ed in the Guardian calling for price controls in order to fight inflation. She wrote: [A] critical factor that is driving up prices remains largely overlooked: an explosion in profits…[L]arge corporations with market power have used supply problems as an opportunity to increase prices and scoop …
Read more
4 months ago · 46 likes · 29 comments · Noah Smith
But since so many people are talking about this, I figured the public could use some help in sorting out the debate.
There are really three questions here:
Is corporate greed contributing to inflation?
Is market power contributing to inflation?
Are price controls a good way of addressing market power and/or inflation?
So let’s go through each of these questions.
Greedflation is not a thing, and nobody really thinks it is
Elizabeth Warren and the people pushing price controls don’t really believe that a sudden surge in corporate greed is responsible for our recent surge of inflation. But their rhetoric can sometimes give the impression that they do believe this:
Twitter avatar for @SenWarren
Elizabeth Warren
@SenWarren
Giant corporations are making record profits by increasing prices, and CEOs are saying the quiet part out loud: they’re happy to help drive inflation.
American families pay higher prices and corporate executives get fatter bonuses. See for yourself what executives are saying:
February 15th 2022
3,513 Retweets9,538 Likes
I poked fun at this rhetoric by creating the following (sarcastic) chart:
Catherine Rampell has an excellent column in which she makes a lengthier, more detailed version of the same argument.
The reason it would be silly to blame inflation on greed is that companies are always greedy; if they could have raised prices this much back in 2019, they could have. Thus, corporate greed is a constant; inflation is not. There’s no chance of dealing with inflation by hectoring companies to want profits less.
As I said, progressives know this. Unfortunately, some appear to think that rhetoric implying this “greedflation” story will be good populist politics and get people riled up at corporations. Rampell writes:
I’ve been scolded before, including by White House senior aides, for making a fuss about Democrats’ demagoguery on this issue. So what if Biden and Democratic lawmakers want to grandstand about corporate greed? Who cares whether Biden asks for another gratuitous investigation into whether “illegal” conduct is driving up gas prices? This kind of populist anti-corporate rhetoric polls well, they say. It does no harm. It’s just cheap talk, so Democrats can show they’re Doing Something about inflation.
But such allegedly cheap talk has become very expensive…it is encouraging Democrats to pursue policies that could be actively harmful. These include a proposed tax on “windfall” oil profits, which would likely reduce oil production exactly when we want output to increase.
Rampell is right. Even if it rousing anti-corporate sentiment were good for Democrats’ electoral prospects (which I highly doubt), it pushes Democrats’ governance toward questionable policies. Lashing out at corporations by any means available will not bring down inflation, and voters in November are still going to be mad.
But underneath the layer of overheated and probably-unhelpful rhetoric, there is the core of an interesting economic argument. Though greed isn’t driving inflation, there is a chance that monopoly power is making it worse.
Price gouging is sort of real, but it’s not so simple
The non-ridiculous version of the “greedflation” story is the idea that monopoly power is exacerbating inflation. When politicians like Elizabeth Warren say “greed”, maybe they’re just using that word as a rhetorical stand-in for “monopoly power”, since the latter is a term that few people know and even fewer understand.
In a perfectly competitive economy, companies don’t make profits (except what’s needed to pay back their cost of capital). But in the real world, companies make quite a lot of profit. In fact, since the early 2000s, profits have risen as a share of the economy:
Economists argue back and forth over why this happened. I won’t go over that whole debate here, and it’s not yet resolved. But some economists believe that the reason profits have risen is that companies have more market power now than they did two decades ago. Suffice it to say that this explanation is fairly plausible.
When companies have monopoly power, they raise prices beyond what those prices would be in a competitive market. And they do this by holding back output in order to make goods artificially scarce, thus increasing the price. So with monopoly power, we get a less efficient economy than we would otherwise. Shareholders make out like bandits, but we the consumers pay too much and get too little.
Here’s a picture of a simple, Econ 101 model of a total monopoly. Of course in the real world, companies aren’t total monopolies, at least in America; the truth lies somewhere in between perfect competition and perfect monopoly. But this simple model shows the basic idea of why monopoly power raises prices and lowers output.
So if something like this is going on in the modern American economy, we can raise economic efficiency — meaning lower prices and higher GDP — with better antitrust. It can also provide a rationale for price controls (which I’ll talk about in the next section).
OK, so far so good. Now let’s think about inflation, and how monopoly power might affect that.
First of all, there could be an increase in monopoly power in the economy. That would increase prices, and also increase profits. In the graph of profits shown above, we see that there is a jump in the share of profits as a share of the economy after the pandemic. Did powerful companies get more powerful as a result of their competitors getting wiped out by the Covid shock?
Maybe. But we also see that this jump in profit’s share of the economy is only about the same size as the jump after the Great Recession, at which time inflation was low. The big increases in profit as a share of GDP happened in the early 2000s, when inflation was also low. So it doesn’t seem likely that an increase in monopoly power since early 2020 is likely to be a big part of the inflation story. Also, for this story to fit, we’d probably have to see continuing increases in monopoly power in 2021 and 2022, which doesn’t make sense with the pandemic story. And finally, economists who study monopoly power don’t see much of an increase since Covid.
So we can probably discard the “monopoly power went up” explanation for inflation.
But in fact, Elizabeth Warren and other advocates of the “greedflation” story probably don’t have that story in mind when they accuse companies of price gouging. Instead, they probably believe that companies are using their existing level of monopoly power to take advantage of the current economic situation in order to raise their prices (and profits) more than they would in a competitive market. For example, here’s a thread by Lindsay Owens of the Roosevelt Institute that basically makes this case:
Twitter avatar for @owenslindsay1
Lindsay Owens, PhD
@owenslindsay1
"Rationing" scarce goods by price gouging is still price gouging. It's ok to be fine with that, and to write snide op-ed's defending it. But know this: CEOs are not acting as efficient stewards of scarce resources. That's a fiction. A thread: 1/6
Opinion | An inflation conspiracy theory is infecting the Democratic Party
At best, this approach has done nothing to curb inflation. Worse, it has distracted Democrats from taking actions that could help.
washingtonpost.com
May 13th 2022
223 Retweets711 Likes
oh word?
