Inflation is very much top of mind for many Americans. It is a salient issue that impacts everyone’s day to day lives.
Despite what some (cough* Larry Summers * cough) say, the American Rescue Plan stimulus is not the driving force behind inflation. While it did contribute modestly to inflationary pressure, there are at least three other factors that are more culpable for pushing prices up: supply chain bottlenecks, Russia’s genocidal assault on Ukraine, and corporate price gouging. Of course, none of these three happened in a vacuum; the first two created the plausible deniability corporations leveraged to introduce price hikes. And, of course, one mechanism for corporate price gouging is to generate bottlenecks in supply – in consolidated markets, sluggish response to supply issues affords an opportunity to increase prices across everything a corporation sells.
The serious bout of inflation we’re experiencing got started with an increase of demand for goods during the pandemic, which caused fragile supply chains to get knotted. Far from inevitable, this was the direct result of turning our vital infrastructure over to corporations: rather than building a resilient supply chain that could handle shifts in demand. They built a brittle system that prioritized short-term profits above all else. Not only did this lead to a massive backlog of goods, but also higher prices as we experienced unnecessary shortages. Those heightened costs of moving goods then got baked into commodity prices, spreading inflation throughout the economy.
Then, corporations realized that they could raise prices beyond what the additional costs they incurred were and price gouging began. In earnings call after earnings call, corporations have been clear about the fact that inflation has been very good for business. It’s important to note that there are legal consequences for CEOs lying to investors, whereas economic models and modelers face no sanction for being obstinate, so we know whom we’re inclined to believe.
Then, just when supply chain pressure was easing, Russia invaded Ukraine, setting off panic about potential disruptions in the supply of oil and grain. That caused food and energy prices to rise in anticipation of shortfalls. But, oil companies could increase domestic production any time they like; the industry has decided to avoid increasing supply as a deliberate pricing strategy. Then, with speculative price hikes out of concerns over the war in Ukraine, price gouging got an even stronger smokescreen. It became even harder to tell when prices fluctuated because of actual shifts in supply or demand or simply to make more money. Every consumer sees that prices are rising but, at ground level, it appears to be a result of the events and policies on the news. Corporations know this and use it to their advantage. From the point of view of a typical consumer, the causes of price increases are unintelligible.
And that is where we are now. From pandemic profiteering to war profiteering. And if the underlying structures abetting greed-fueled opportunism go unaddressed, then future crises may well also have accompanying profiteering.
The good news is, there’s a lot which Biden can do to address the factors causing these price spikes, all without needing to go through Congress. Since we know what’s causing inflation, we know what to prescribe to fix it. All we need is bold leadership from the White House accompanied by a forthright and unflinching messaging strategy to get the public on board. Some of the approaches can provide immediate relief, but many of them involve fixing broken incentive systems through increasing competition and corporate oversight. Inflation is not just a flash-in-the-pan issue, it is a consequence baked into our market structure and regulatory regime. As a result, inflation is unlikely to be as easily reduced by Fed hawkishness as Fed-centric economists posit – supply chain snarls that have proven profitable can be maintained (or enhanced!) by business leaders even if demand is reduced by the Fed. Given that interest rates have only an indirect effect on the actual causes of inflation, undercutting demand might hurt people already struggling to pay the bills more than it will actually lower any of those bills.
Biden should do what he can to help in the immediate term while also aiming to prevent similar inflationary conditions in the future.
1. Fight Market Concentration
Corporate price gouging drives a big part of our current inflation spike. In competitive markets, firms are price-takers, which means that they have to sell goods and services at rates determined by supply and demand and have little to no ability to directly influence price levels. However, in concentrated markets, large corporations control enough of the supply that they become price-setters and are able to dictate rates either just by directly changing prices or by influencing supply. Without strong competitors ready to undercut their price and bring things back down to a reasonable level, the leaders in concentrated markets get to do whatever they want. This type of concentration is part of how the inflation spiral started, with unchecked shipping cartels able to rake in historic profits.
There are a variety of federal agencies that are able to fight concentration, including the Federal Trade Commission and the Department of Justice Antitrust Division, who handle consolidation generally, as well as a host of agencies with specialized jurisdiction over consolidation in specific industries. These include the Department of Agriculture (agriculture/food), Federal Maritime Commission (ocean shipping), Surface Transportation Board (rail), and Federal Communications Commission (telecoms).
Remedies include breaking up oligopolies and monopolies as well as enforcing the laws against collusion likely being broken in many of these industries. That is why the Congressional Progressive Caucus has called for “an inter-agency task force” to regulate corporate crime “including anti-competitive and price-gouging” behavior.
2. Use the Defense Production Act And National Emergency Powers To Scale Up Renewable Energy
The President is empowered to utilize the Defense Production Act to reorganize industry to produce goods needed to address emergencies. It was used in World War II and, more recently, to produce PPE and vaccines during the Covid-19 pandemic. Given the existential risk posed by climate change, it would be a reasonable use of the power to massively ramp up production of renewable energy to put downward pressure on electricity prices. President Biden also already has experience with utilizing his power under the Defense Production Act, having recently used it to address a shortage of baby formula in a move described as “arguably the most expansive use of the Defense Production Act (at least in qualitative terms) since the Korean War.”
Similarly, a number of laws give the president the power to declare a state of emergency, which frees up funding and increases flexibility of government resources. Such a declaration could be used to mobilize an aggressive transition towards renewable energy, again helping to decrease reliance on highly-priced gasoline. For instance, a president might be able to prioritize ramping up domestic production of minerals necessary for clean energy production or create a national-scale electronics recycling scheme.
3. Fast-track Green Energy with Existing Powers
The Departments of Interior and Energy can be instructed to prioritize deploying green energy projects, leasing sites for wind and solar power, and shifting staff and resources towards increasing renewable energy capacity and away from other goals like carbon capture and oil lease sales.
4. Use the Bully Pulpit
This one is pretty simple. Tell corporations you know they’re messing with prices and if they don’t let up, you’ll ramp up investigations into them. Biden did this already with meat packers and it worked pretty well. The international shipping cartels looking at $300 Billion in 2022 profits seem like a great next target, although there are so many good options.
5. Increase Capacity at Agencies that Regulate Abusive Pricing
In order to ensure competitive markets and to make threats from Biden’s bully pulpit credible, agencies must be staffed and resourced sufficiently to actually implement strong investigations and enforcement measures. RDP has found that a variety of agencies, from the FTC to the DOJ Antitrust Division to the Federal Maritime Commission are all under-resourced for the scale of their missions, which are only more important in the shadow of historic inflation. Increasing capacity will require working with Congress, but because the President gets to propose a budget, Biden has the power to choose the initial starting point for funding negotiations.
6. Put Corporate Critics in Powerful Positions
Getting Alvaro Bedoya confirmed to the FTC was a good first step. In order for the antitrust strategy to bear fruit, the agencies also need bold leadership that will enforce the law, not just the pro-corporate norms of our dilapidated neoliberalism. While strong leadership needs to accompany increased capacity for revived enforcement, having corporate critics in power is good in its own right; appointing people who defend the public against corporate greed is also a way to give them platforms to shape the debate around governing markets, as well as help create a strong pro-consumer PR narrative.
7. Push Back on Big Pharma’s IP Abuse
Senator Warren recently wrote a letter to the Secretary of Health and Human Services, Xavier Beccera, outlining what these specific legal strategies could be. Through a combination of march-in rights, exercising powers to scale up generic drug production and access patented products royalty free if they were funded by government grants, Biden has the tools necessary to lower prices on many prescription drugs and medical devices. This won’t have as large of a deflationary impact as lowering energy or food prices, but it would help. And making medicine affordable is a good thing anyway — it’s what Democrats have run on for as long as most Americans have been alive.
8. Use FERC to Keep Utility Rates Low
The administration could ask the Federal Energy Regulatory Commission to protect consumers by investigating market manipulation among energy providers, as some lawmakers already have.
9. Investigate Transportation Price Gouging
There is evidence that both railroads and airlines are engaging in price gouging. Biden can and should direct the Surface Transportation Board and the Department of Transportation, respectively, to investigate this. Both industries are subject to common carrier obligations, which stipulate that they need to provide reasonable service at reasonable rates.
One thing that makes pricing in this sector especially critical is that higher costs in transportation can raise prices for all products reliant on that transportation; when retailers have to pay more to ship goods, they will pass on some of those costs on to consumers.
10. Make Enemies
The more that Biden can (appropriately) shift blame away from federal policy and onto things like corporations bleeding consumers dry and Republicans stalling confirmation of his Federal Reserve nominees, the more pressure there will be for those actors to stop abetting the tsunami of price hikes. There’s no shortage of fights to pick, from private equity driving up the costs of healthcare and housing to meatpackers to landlords who turned down pandemic aid just to kick out tenants and jack up rents.
At the Revolving Door Project, we’re always trying to understand the ins and outs of corporate power dynamics in markets more deeply. If you have thoughts on this or related issues or are interested in collaborating with RDP on inflation and industrial organization policy, please email firstname.lastname@example.org.