The Neo-Brandeisians Are Wrong About Greedflation

By Barak Orbach. He is a Professor of Law & Business at the University of Arizona. Excerpts:

"The White House took advantage of inflation to pursue its Neo-Brandeisian antitrust agenda but quickly found that its arguments for stricter antitrust as an antidote to inflation were irreconcilable with economic realities. The White House Council of Economic Advisers reportedly objected to theories tying inflation to corporate power and then Director of the National Economic Council Brian Reese likewise tried to soften the White House’s position that antitrust could reduce inflation.  

The 2023 President’s annual economic report similarly distanced the White House from assertions that unchecked economic power was the culprit for soaring inflation. The report recognized that some argued that “increased market concentration in U.S. industries” had contributed to the spike in inflation, and that “[t]here is some evidence that these firms [raised] prices in response to cost increases more than firms without market power would have done in the past.” However, the report also stated that “the link between market power and pricing when subject to shocks like the pandemic is not clear. . . . Measuring market power is a difficult task, and measuring the prices firms charge above the cost of their inputs, their ‘markup,’ isolated from the effects of the increased demand and constrained supply of 2022, is even more fraught.”"

"The United States saw high inflation in the eras that contemporary antitrust crusaders describe as antitrust’s golden age. In contrast, for several decades until the onset of the COVID-19 pandemic, the U.S. experienced a period of relatively low inflation, although many industries became considerably more concentrated during that period."

"Compared to the high inflation periods of the 20th century, the post-pandemic inflation surge was modest. If we take seriously claims that the vigor of antitrust enforcement affects inflationary pressures, we should explore why inflation soared in periods of aggressive enforcement in the 20th century. For example, assuming that macroeconomic conditions are irrelevant, one may advance the following speculations:

1. The trust-busting campaigns of the early 20th century caused the inflation boom of 1916-1920.
2. The rise of antitrust enforcement in the 1930s enabled the inflation spikes of the 1940s. 
3. The anti-bigness movement of the 1960s caused the Great Inflation (a period of recessions and high inflation).
4. The reorientation of antitrust law that began in the late 1970s ended the Great Inflation era and decreased macroeconomic volatility.
5. “Techlash,” antitrust populism, and the stacking of the antitrust agencies with crusaders induced the current inflation surge.

The difference between the foregoing baseless hypotheses and antitrust greedflation theories is the attitude toward large corporations. For some, the key explanation for undesirable economic and social conditions is government actions, while, for others, corporate greed is the explanation. 

The word “greedflation” is a relatively new political meme, yet theories linking antitrust and inflation theories are far from novel. In his 1952 book, American Capitalism, economist John Kenneth Galbraith noted that, during the post-WWII inflation surge, many believed that rigorous antitrust enforcement could keep prices down and prevent inflation. Galbraith was skeptical of this belief, noting that “the American radical has an unfailing formula” for most economic problems: “demand that the antitrust laws be more rigorously enforced.” Using this unfailing formula, in 1966, Attorney General Nicholas Katzenbach contended that “strong antitrust policy against concentration helps to promote economic growth by making inflation easier to control.” Likewise, in the 1970s, facing an inflation spike stemming from the oil crisis, the Nixon administration blamed the anticompetitive practices of concentrated industries. Thomas Kauper, then the head of the Department of Justice’s Antitrust Division, maintained that strong antitrust enforcement was crucial to the fight against inflation. His counterpart at the FTC, Chair Lewis Engman, emphasized the Commission’s commitment to conduct “an extensive investigation” to ascertain whether the food and oil industries “were limiting competition in an attempt to drive up prices in violation of the antitrust laws.”"

"Greedflation theories beg the question of why greedy corporations did not inflate their profit margins before the pandemic. UBS Chief Economist Paul Donovan answered this question, arguing that developed economies experienced profit-margin-led inflation, which he defined as conditions in which “some companies spin a story that convinces customers that price increases are ‘fair,’ when in fact they disguise profit margin expansion.” Donovan observed that companies whose business models rely on customer loyalty ordinarily pass on cost increases, but do not expand profit margins. If consumers feel that prices are rising unfairly, they will abandon the company. However, such companies can use inflation, uncertainty, and external shocks to justify price increases without creating a consumer rebellion. This explanation rests on sound economic principles that address market friction and fairness perception. It has long been understood that companies—small and large ones—can and often do exploit market friction profitably by circumventing fairness perceptions. Be that as it may, antitrust greedflation theories conveniently ignore the global rise in inflation rates. The notion that permissive antitrust policies in the U.S. drove inflation rates around the world seems far-fetched.

There is a broad consensus among economists and antitrust experts that “competition policy should not be seen as a prominent short-term anti-inflation tool.” The recent flirtation with antitrust greedflation theories aligns with past instances of reckless political maneuvering. It also mirrors the propensity of antitrust populists to propagate misleading, sensational claims. The media’s extensive rejection of these theories suggests that the fervor fueling antitrust populism in recent years has started to wane. The most significant insight that antitrust greedflation theories offer is that political greed sometimes leads to inflated exaggerations, diverting resources toward political memes at the expense of the public."