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President Biden obviously has his hands full trying to explain high inflation to voters and convince them things will get better. Now he’s got a fresh problem: Criticism from within his own party that Biden may actually be contributing to inflation, instead of fighting it.
Harvard economist Larry Summers, a high-level Democratic appointee in the Clinton and Obama administrations, is now arguing that Biden’s threat to break up big companies could in itself trigger a form of inflation. In a May 20 Bloomberg interview and then on Twitter, Summers bashed antitrust officials at the Justice Department and the Federal Trade Commission who are promising a crusade against big companies.
“I am very concerned that we may [be] headed into a new era of … populist antitrust policy that will make the US economy more inflationary and less resilient,” Summers tweeted on May 22.
This is something of an arcane debate, but it has kitchen-table implications for everybody struggling with inflation that’s now sitting at a near-40-year high of 8.3%. Inflation has several causes, not one. Supply-chain kinks caused by the COVID pandemic are a factor, along with tight energy supplies that got worse after Russia invaded Ukraine on Feb. 24.
Last year’s American Rescue Plan also pushed inflation up, by putting more money in Americans’ pockets and boosting demand for already scarce goods. Summers was one of a few economists who predicted that would happen, which irked the Biden White House at the time. Since Summers called that right, however, his predictions now get instant attention, inside and outside the White House.
Biden hasn’t acknowledged the role of the ARP, which passed Congress with only Democratic votes, in causing high inflation. Instead, he’s looked for other villains. One is Russian President Vladimir Putin, who has lent his name to the “Putin price hikes.” Biden and other Democrats have also argued that big companies are exploiting monopoly power to gouge consumers on products including gasoline, meat, financials services and other things. On May 19, Democrats who control the House passed an anti-price-gouging bill that would punish companies making excessive profits due to monopoly power.
Yahoo Finance has been closely tracking consumer sectors with the most and least inflation, so we looked for evidence of price-gouging that could be related to monopolies. If that were happening, it would be a longer-term trend that predated the Russian war and the pandemic supply-chain disruptions. So we measured inflation in key categories over five years. Here’s what the numbers show, in sectors Democrats have singled out.
Gasoline. Gas prices have risen 44% during the last 12 months, but the average annual increase has been 14% during the last five years. And that average is due almost entirely to the price increase from 2020 to 2022. During the three years leading up to the pandemic, the average annual increase in gas prices was just 3.6%. Given that U.S. gas prices are highly dependent on global oil prices, there’s little to no evidence of price-gouging by American firms. Oil markets are not completely capitalistic, given that governments, not private-sector companies, control production in most OPEC nations and in Russia. So you could argue that political decisions to limit production in Saudi Arabia or the United Arab Emirates are contributing to high prices. But there’s not much American officials can do about that. (And Biden has tried.)
Meat. Biden argues that four large meat producers in the United States are able to set prices high and keep them there. Meat prices are up 14% year-over-year, with the five-year change averaging 5.8% per year. That’s higher than the average for all inflation. As with gasoline, however, most of the five-year hike in meat prices came after the COVID pandemic hit in 2020. Market concentration could be a factor, but supply-chain disruptions and safety concerns at factories since 2020 seem to be a bigger deal.
Internet services. Biden also says there’s not enough competition for internet services, as justification for considering a breakup of big tech firms such as Facebook and Google parent Alphabet. But price certainly isn’t a problem there. Google searches and social-media networks are free, and the cost of internet services has been rising at less than 1% per year since 2017, far below average inflation.
It's also worth looking at categories where inflation is highest, to see if a small number of huge sellers seem to have near-monopoly power there. Soaring new and used car prices have been a big contributor to inflation jumps during the last 12 months, but that’s mainly because of semiconductor shortages plaguing the entire global industry. More than a dozen big car companies sell in the U.S. market, more than enough to ensure robust competition. Used cars are sold by some national retailers and thousands of small local businesses, which all told are not in a position to impose monopoly pricing.
Grocery costs are up by about 11% year-over-year. But retailers are not the likely cause. There seem to be plenty of grocery chains in the United States, with discounter Walmart being the largest. Furniture costs are up 15%, but that’s mostly because of a surge in lumber prices, not price-gouging by Big Furniture. (Who is Big Furniture, anyway?) Home prices have surged during the last two years, but that was triggered by super-low interest rates engineered by the Federal Reserve to bounce the economy out of the COVID downturn. The Fed has now reversed that easy-money policy and is raising rates.
Overall, there’s little evidence that price-gouging by giant corporations is causing undue inflation. Biden and many of his fellow Democrats have other reasons to bash huge companies, of course. Most Dems want to raise the tax rate on businesses, with some cheering unionization efforts at Amazon and other companies that have fought unionization.
Democratic Sen. Elizabeth Warren of Massachusetts is the leading proponent of breaking up big tech firms and other Goliaths mainly because they simply seem to be … too big. It’s this impulse that Larry Summers seems to find most objectionable. His point is that big firms often achieve highly efficient economies of scale that make goods and services cheaper, the way Walmart is able to force its own suppliers to lower costs and sustain market share by keeping prices low and attracting masses of shoppers.
There could be other reasons to break up big companies besides price. The Biden White House, for instance, cites research showing that a small number of big firms in a given industry can depress wages or harm workers by requiring career-limiting non-compete agreements. That could surface as a rationale for blocking future mergers or even pursuing the breakup of some firms. But Biden may need a break on inflation first, and attacking big companies is probably not the way to get it.