Lina Khan won’t solve inflation

With inflation at a 40-year high, the blame game is on. Sen. Elizabeth Warren (D-Mass.) has blamed rising prices on price-gouging or “plain-old corporate greed.” The Federal Trade Commission (FTC), led by progressive Lina Khan, is launching an investigation into whether high prices stem from unscrupulous business practices. 

If anti-competitive behavior, such as collusion, is to blame, then increased antitrust enforcement would be a promising solution. But that’s not the case, and antitrust enforcement won’t help inflation. In fact, it’ll only distract from the real cause: demand outpacing supply across the whole economy.

Blaming inflation on anti-competitive behavior (or greed) is like blaming plane crashes on gravity. Neither market power nor industry concentration rose in the pandemic. Used car dealerships didn’t suddenly all merge into some mega dealership. And it’s even sillier yet to think businesses suddenly became greedy. What were they before – altruistic?

Inflation is a general economic phenomenon. It affects all markets at once. To explain rising inflation, then, you need to find a change in the basic economic environment. Antitrust, in contrast, deals with business conduct in a particular market. 

To see the difference, suppose prices started out at $1 for an apple and $1 for a banana and that each consumer spends $10 to buy apples and bananas.

Suddenly, apple producers conspire to raise the price of an apple to $2. It’s tempting to believe this collusion will generate inflation; after all, the price rose. Sen. Warren pursued this line of argument in Federal Reserve Chair Jerome Powell’s re-confirmation hearing. But since the consumer only has $10 to spend, any price rise in the apple market will drive down prices in the banana market. Often prices rise and fall in proportion to each other. That’s not the same thing as inflation.

Always and everywhere, inflation results from too much purchasing power chasing too few goods. Right now, we’ve got both. Surging demand amid flagging supply is the best explanation for inflation. Contrary to the claims of antitrust enthusiasts, corporate greed doesn’t get us economy-wide price hikes. 

Collusion, when it happens, does drive up prices. When firms strike deals in restraint of trade, the quantity of goods falls while prices rise. This is why proponents of antitrust focus on collusion.

But that doesn’t explain the broad inflation of the entire market. For collusion to be the cause, it would require collusion in nearly every sector of the economy. Furthermore, the collusion theory predicts declines in the output of goods, which causes price hikes. But that’s not what has happened. Over the last year, inflation and output have increased together. That tells us that the inflation we’re seeing has a major demand-side component. Even at its most effective, antitrust regulates the supply side only. 

By design, antitrust policy targets frictions in specific markets. That makes it a poor tool for handling problems affecting all markets at once. Antitrust legislation and court rulings deal with sector-by-sector issues: Will the proposed Frontier/Spirit Airlines merger raise the price of flights? Did these companies collude? The choice by the FTC or Department of Justice to pursue antitrust cases may have some tiny impact on inflation. But they could never control inflation directly, no matter how many capable economists and lawyers were on the task. When confronting inflation, there are simply too many markets to deal with.

Since prices are rising across the board alongside increases in production, an increase in overall consumer demand seems to be a bigger driver. To control inflation, we should look to the Federal Reserve and Congress instead. 

The Fed’s loose money policy may well have been the appropriate response to the decrease in consumer demand during the COVID-19 recession. But the demand-side recovery is complete, and it’s time for central bankers to get monetary policy back to normal.

For fiscal policy, the best thing to do is rein in spending. Large deficits make the public think Congress lacks the political will to pay for frivolity today with prudence tomorrow. In anticipation of the central bank papering over the national debt, dollar-holders rush to swap them for goods and services, driving up prices everywhere. Without disciplining both politicians at the Capitol and bureaucrats in the Eccles Building, inflation will linger.

Antitrust won’t cause price pressures to ease. While it might be emotionally and politically satisfying to blame big business, corporations aren’t responsible for inflation. The push for antitrust is a distraction American households and businesses can’t afford.

Brian Albrecht is an assistant professor of economics at Kennesaw State University, a faculty affiliate at the International Center for Law and Economics and a Young Voices contributor. Alexander Salter is an associate professor of economics in the Rawls College of Business at Texas Tech University, a research fellow at TTU’s Free Market Institute and a senior fellow with the American Institute for Economic Research.