In recent weeks, senior Biden administration officials have been arguing that monopolization explains at least some of the inflation that is eroding the otherwise impressive wage gains average Americans are experiencing. The case they make is that firms in concentrated industries are using their excessive market power to raise prices and fatten their bottom lines at the expense of consumers. They point specifically to industries like oil and gas and meat processing, where corporate profits are skyrocketing.
On Monday, the Washington Post published a scathing editorial calling that argument “foolishness.” Citing the opinions of several highly influential center and left economists, such as Larry Summers, Jason Furman, and Dean Baker, the editorial scorns the idea that monopoly has anything to do with the problem:
Inflation, which was relatively low for years, did not suddenly rise in recent months because businesses decided now was the ideal time to squeeze their customers. What actually happened is that demand soared for many products as the economy recovered. Often, there were not enough products to meet it, thanks to supply chain hiccups and labor shortages, so prices went up.
I’m not sure why the Post editorial board, much less economists like Summers and Baker, are so dismissive of the idea that monopolistic corporations might choose to exploit their pricing power at this moment of maximum leverage. That’s pretty obviously what is happening in the meat industry. Thanks to lax antitrust enforcement, four companies now control 55 to 85 percent of the markets for beef, pork, and poultry. Since the fall of 2020, the price of beef has risen by more than 20 percent, far higher than the inflation rate. At the same time, the profits of the meat-packing industry are up more than 300 percent. Consolidation is hardly limited to the meat industry. It is rampant throughout the economy. So too are recent corporate profit rates, as anti-monopoly researcher Matt Stoller has calculated.
But for argument’s sake, let’s say that the Post and the economists are right—that predatory pricing by oligopolistic firms isn’t driving the current inflation, but rather, “supply chain hiccups” as the Post editors say, brought on by pandemic induced labor shortages and high demand. The question is, why were the supply chains so fragile in the first place?
The answer is monopoly—in particular, the hollowing out of capacity as a result of industry consolidation and Wall Street’s demand for short term profits. Consider the case of semiconductors—crucial components in most of the products we use. As recently as a decade ago, America was producing vast numbers of cutting-edge semiconductors right here on our shores. Since then, as Garphil Julien recently explained in the Washington Monthly, the federal government has allowed the biggest domestic manufacturer, Intel, to buy up or drive out most of its U.S. competitors. The firm then offshored or sold off its U.S. manufacturing capacity to reduce costs. That boosted Intel’s stock price and delighted investors. But it left the company with scant domestic capacity to increase supply when COVID-19 shut down Asian semiconductor factories. The falloff in semiconductor supply has led, in turn, to shortages of, and higher prices for, everything from cars to cell phones.
Or consider the cargo ships that haven’t been able to get products into and out of U.S. ports. That, too, is a problem exacerbated by monopoly. Ocean shipping was a highly regulated industry until a quarter century ago, when Washington loosened the rules, notes The American Prospect‘s David Dayen. That led to three vast carrier alliances, all foreign owned, gaining control of 80 percent of the ocean shipping market. These alliances then built super-sized cargo ships that can only dock in a few ports, like the ones in Los Angeles and Long Beach, which now service 40 percent of all U.S. traffic. This highly consolidated system kept shipping prices, and hence overall inflation, low for years. Now, its brittleness is contributing to inflation.
Once supplies do land in U.S. ports, there are not enough trucks and truck drivers to deliver products to our warehouses and stores. In the recent past, however, many of those goods were delivered by freight rail. Why aren’t those goods now moving on trains? Because, as Phil Longman has reported, the federal government allowed the railroad industry to monopolize. And the Wall Street hedge funds that control those monopolies have more recently demanded that they rip up tracks, mothball rail cars, and lay off seasoned union employees to get costs down and stock prices up. Now our freight rail system doesn’t have the capacity to take up the slack.
The failure of establishment voices like the Washington Post editorial board and the economists they rely on to grasp how monopolization and financialization have hollowed out our supply chains is no small thing. After all, if you misdiagnose the source of a problem, you’re likely to advocate the wrong solution. “The reality is that the best tool the nation has to fight inflation is the Federal Reserve raising interest rates,” the Post editors confidently assert. That might be true if monopoly has nothing to do with inflation. But if, as I’m arguing, it’s at the heart of the problem, and yet the Federal Reserve heeds the Post’s glib advice, it could plunge the country into a needless recession without having dealt with the underlying cause. Of course, it took decades, and countless bad decisions in Washington, for our supply chains to become as concentrated, uncompetitive, and breakable as they are now. It will take years of strong antitrust enforcement and other measures to set things right. But the sooner Washington acts—and the Biden administration is off to a good start—the less likely the current inflation will last.