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Opinion | Democratic Economists Should Evaluate Ideas on Their Merits

This argument, however, misses two important points.

The first is that market power gives businesses some wiggle room on prices. Yes, there’s a profit-maximizing price, but the cost to a business of charging somewhat less than its profit-maximizing price is small, because lower margins would be offset by increased sales. (To be formal about it, the losses caused by deviating from the optimal price are second-order.) This wiggle room means that corporate pricing may be strongly influenced by intangible considerations, like fear of alienating buyers. A similar argument helps explain why social pressure and prevailing norms seem to have a strong effect on wage rates, and a related argument helps explain why minimum wages don’t seem to reduce employment.

Given this reality, it’s not foolish to suggest that some corporations have seen widespread inflation as an opportunity to jack up prices by more than their costs have increased without experiencing the usual backlash. And it’s not just liberal politicians saying this: Recently the market analyst Edward Yardeni, explaining why profits soared in 2021, declared that “it kind of became culturally acceptable to raise prices” because everyone knew that costs were going up. This phenomenon may, for example, explain recent huge price increases in the meatpacking industry.

Nobody sensible would argue that opportunistic exploitation of market power is the main factor behind recent inflation. But contrary to what some people might want you to believe, economic theory by no means rules out the possibility that it may be a factor.

And perhaps an even more important point, cracking down on excessive industrial concentration and market power would help reduce inflation, regardless of the role market power played in causing inflation in the first place. As an old line puts it, you don’t have to refill a flat tire through the hole.

Now, it would clearly be a mistake to make a campaign against price gouging the core of America’s economic strategy. But nobody is suggesting doing that. At this point, monetary policy is bearing the main burden of inflation-fighting, and the Biden administration — unlike its predecessor — has been careful about not placing pressure on the Federal Reserve to keep interest rates low. Republicans may portray Joe Biden as the second coming of Hugo Chavez, but he isn’t even the second coming of Richard Nixon, who tried to fight inflation with price controls while a complaisant Fed, probably trying to ensure his re-election, helped create an unsustainable boom.

In fact, Biden has been far less forthright about condemning corporate power than John F. Kennedy, who publicly berated the steel industry over what he considered excessive price hikes.

Why, then, are Democratic-leaning economists coming down so hard on the Biden administration’s modest, intellectually defensible attempts to highlight the role of abusive corporate pricing? As I said, I suspect that the desire of Democratic experts to avoid being seen as hacks is causing them to overcompensate, dismissing ideas that actually make sense.

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