Biden’s latest inflation battle
Obviously, President Biden is busy trying to explain high inflation to voters and convince them that things will get better. Now he has a new problem: criticism from within his own party that Biden may actually be contributing to inflation, rather than fighting it.
Harvard economist Larry Summers, a high-ranking Democratic candidate in the Clinton and Obama administrations, now argues that Biden’s threat to break up big business could itself lead to a form of inflation. In an interview with Bloomberg on May 20, Then on TwitterSummers criticized antitrust officials at the Department of Justice and the Federal Trade Commission who promised a crusade against big business.
“I am so worried that we might do that [be] We’re headed into a new era of…populist antitrust policy that will make the US economy more inflated and less resilient,” Summers tweeted on May 22.
This is something of a vague controversy, but it has kitchen table implications for everyone with inflation which now stands at a 40-year high of 8.3%. Inflation has many causes, not one. Supply chain kinks caused by the COVID pandemic are a factor, along with tight energy supplies exacerbated after Russia’s invasion of Ukraine on February 24.
And last year’s US bailout also fueled inflation, by putting more money in Americans’ pockets and increasing demand for already scarce goods. Summers was one of the few economists to predict that this would happen, much to the chagrin of the Biden White House at the time. Since Summers called it true, his predictions now get immediate attention both inside and outside the White House.
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Biden did not acknowledge the role of the ARP party, which Congress passed with only Democratic votes, in causing inflation to rise. Instead, he looked for other villains. One is Russian President Vladimir Putin, who lent his name to “Putin’s High Prices”. Biden and other Democrats have also argued that big business is using monopoly power to convince consumers of products including gasoline, meat, financial services, and other things. On May 19, the Democrats who control the House of Representatives passed a bill to combat price gouging that would penalize companies that make excessive profits due to monopolistic power.
Yahoo Finance closely tracks consumer segments with greater and lower inflation, so we looked for evidence of price gouging that may be linked to monopolies. If this were to happen, it would be a long-term trend that predated the Russian War and pandemic supply chain disruptions. So we measured inflation in key categories over a five-year period. That’s what the numbers show, in the sectors that Democrats singled out.
gasoline. Gas prices are up 44% over the past 12 months, but the average annual increase has been 14% over the past five years. This average is almost entirely due 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 only 3.6%. Given that US gas prices are highly dependent on global oil prices, there is little evidence of price manipulation by US companies. Oil markets are not entirely capitalist, given that governments, not private companies, control production in most OPEC countries and in Russia. So you can say that political decisions to limit production in Saudi Arabia or the United Arab Emirates contribute to higher prices. But there’s not much US officials can do about it. (Biden has tried).
Meat. Biden argues that four major US meat producers can raise prices and keep them there. Meat prices are up 14% year over year, with the five-year change averaging 5.8% annually. This is above the average for all inflation rates. However, as with gasoline, most of the five-year rise in meat prices came after the COVID pandemic in 2020. Market focus could be one factor, but supply chain disruptions and safety concerns in factories since 2020 seem to be a bargain. Larger .
Internet services. Biden also says that there is no Sufficient competition for Internet services, as a justification to consider the dissolution of major technology companies such as Facebook and Google’s parent Alphabet. But the price is definitely not an issue there. Searches on Google and social networks are free, and the cost of internet services has been rising at less than 1% per year since 2017, well below average inflation.
It is also worth looking at the categories where inflation is higher, to see if a small number of big sellers have quasi-monopolistic power there. Rising prices for new and used cars have been a big contributor to the inflation spikes over the past 12 months, but this is mainly due to the semiconductor shortage that has plagued the entire global industry. More than a dozen large car companies sell in the US market, which is more than enough to ensure strong competition. Used cars are sold by some national retailers and thousands of small local businesses, which were said to be in no position to enforce monopoly pricing.
Grocery costs are up about 11% year over year. But retailers are not the likely cause. There seem to be a lot of grocery chains in the US, with Walmart being the largest. Furniture costs are up 15%, but that’s mostly due to higher lumber prices, not price gouging by Big Furniture. (Who’s the big furniture? The Fed has now reversed that easy money policy and is raising interest rates.
Overall, there is little evidence that price gouging by corporate giants causes undue inflation. Biden and many of his fellow Democrats have other reasons, of course, to crush big corporations. Most Democrats would like to raise the corporate tax rate, while encouraging some union efforts at Amazon and other companies that have fought unions.
Democratic Senator Elizabeth Warren of Massachusetts is the leading proponent of breaking up the big tech companies and other Goliath members simply because they seem…too big. This is a motive that Larry Summers seems to find highly objectionable. His view is that big companies often achieve highly efficient economies of scale that make goods and services cheaper, and the way Walmart can force its suppliers to cut costs and maintain market share by keeping prices low and attracting large numbers of shoppers.
There may be other reasons for the breakup of big companies besides price. The Biden White House, for example, cites research showing that a small number of large companies in a given industry can cut wages or harm workers by requiring noncompetitive agreements that restrict their careers. This may appear as a justification to prevent future mergers or even pursue the disintegration of some companies. But Biden may need to break inflation first, and attacking big business may not be the way to do that.
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