Today in Economic Royalism
(Edited to fix goof over C. Rampell’s employer.) Dan Froomkin did a great take-down of The New York Times political coverage for The Nation. To add to the gloom, I need to point out that the rot extends to economics coverage at The Washington Post, in the person of Catherine Rampell (CR). I was going to ignore it, but I’m provoked by Noah Smith’s boost of her argument on Twitter. In a nutshell, CR lays an entirely fictionalized, disingenuous narrative on top of a perfectly ordinary Democratic argument about inflation.
The inflation is a tough row to hoe for Democrats politically, further dimming their prospects in this year’s midterm elections. They are responding by talking about price-gouging, monopoly, and corporate greed. CR critiques their political rhetoric for failing to reflect her economic argument, that demand has outrun supply. People’s spending power is elevated while supply-chain problems lead to price increases.
There is actually nothing inconsistent between these two positions. The difference is rhetorical, not substantive, with CR posing as the sophisticated economic thinker in contrast to the populist, barbaric yawp of Liz Warren. Truth be told, her alternative economics falls short of rocket science.
Insofar as markets are uncompetitive — tend towards monopoly, or at least oligopoly — firms have pricing power. It is exacerbated by supply disruptions, namely the pandemic and the Ukraine war. Insofar as there is a long-term secular trend towards market concentration, pricing power is increased. I would not explain the increase in pricing power by any abrupt shift in market concentration. Even a perfectly competitive market with the drop-out of an important supplier will result in higher prices. That’s just Econ 101, unless you believe the pedagogical fiction of an infinite number of suppliers with infinitely divisible output.
Gouging and corporate greed are just political terms for the exploitation of pricing power, for the sake of profit maximization. There is nothing untoward in a politics that tries to respond to inflation. Whether it will work politically or as policy are different matters. I am skeptical on the latter count, as I’ve said before.
An excess profits tax need not result in any attenuation of price increases. Trying to police individual firms is a difficult business. It was done after World War II (my dad worked in it for a time), but never since.
The disingenuous angle here is CR’s failure to state forthrightly her preferred policy: austerity. If we can’t fix supply, the only alternative is to claw back families’ spending power. Hence we have a back-handed endorsement of the Fed’s action to raise interest rates and reduce employment, notwithstanding the fact that there is no case that labor compensation or cash aid to households is behind the inflation spike.
Look at it this way. Employment has yet to return to its pre-pandemic level, when there was no inflation to speak of. Why should lesser employment now be the cause of the inflation spike? In the same vein, as Dean Baker has pointed out, consumption spending has not grown more rapidly than its usual pace.
The other avenue for austerity is reducing individual incomes. Opposing any extension of fiscal support — a.k.a. stimulus — is the implied imperative. So on top of all the purported sympathy for families’ difficulties in making ends meet, the objective is to make it more difficult. All the deficit hawks are having a field day with inflation. After blowing up Biden’s “Build Back Better” initiative, now they are mopping up after the Democrats’ retreat, ensuring there is no relief on student debt.
Of course the Republicans are all in on austerity, since they won’t be blamed for it, even though their Senate majority — 50 Republicans plus Sinemanchin — is largely behind the collapse of fiscal activism.
In this way, CR’s narrative dovetails precisely with the NYT stance detailed by Froomkin that facilitates the restoration of Trumpist neo-fascism in the U.S.