Government Action, Monopolies, and Prices

Matt Stoller is convinced that the key to controlling inflation is government regulation—a lot of government regulation. In his crosshairs are shipping, oil and gas, railroads, trucking, and airlines.

For decades, there hasn’t been a big shift in markups between industries. But that changed during the pandemic, because the pandemic and the policy response itself shaped who could profit. Big pharma wasn’t in a position to profit, but oil refineries were. While not every firm with market power raised prices, market power could still elevate profits in other industries.

Ironically, while this analysis might lead some to think that the Fed shouldn’t be raising rates and drawing down its balance sheet, I draw the opposite conclusion. If you look at the most potent industry markup, you’ll see it is not what you’d expect from a pandemic, like transportation or health care. It’s finance/insurance. Number two is oil and gas, a heavily junk bond fueled industry that shut refineries and has less capacity than it did in 2019. Number three is real estate and rentals. In other words, the most financialized sectors of the economy are the ones most adept at exploiting pricing power during the pandemic. That is likely a result of cheap money from the Fed sloshing around Wall Street, or what I wrote up as the Cantillon effect. That needs to stop.

Regardless, supply side measures focused on individual markets, like antitrust, regulatory policy, industrial subsidies to re-shore supply chains, and ending cheap capital for Wall Street are the key ways to address inflation. But reducing government spending or further lowering wages for workers, while they could work, aren’t hitting the drivers of the problem.

I think he’s jumbling up and confusing a lot of things. Prices, inflation, government power, monopoly power, and so on.

First, almost all monopolies are created by government action. Patents, licenses including occupational licensing, exclusive contracts, and so on. Take waste management, for example. Maybe there are some but I don’t know of any jurisdictions in which there are multiple waste management companies competing to take away you garbage. It’s a very highly regulated sector. Nearly every waste management company has a local monopoly.

Insurance and finance are among the most heavily regulated sectors and, sure enough, they are dominated by a handful of very large companies. The financial crisis of 2008 exacerbated that. Small banks that were in trouble were liquidated (bought by bigger banks). Big banks on the other hand received bailouts and got bigger.

But, according to the charts Mr. Stoller produces, waste management had very small increases in profits during the pandemic but insurance and finance had very large increases. Both of those groups are very consolidated and highly regulated. How is that possible? Mr. Stollers is that they’re not regulated enough. Mine is that they have been misregulated. Addditional misregulation won’t help.

I’m also curious about how he plans to control foreign shipping companies. I don’t believe that the shipping companies are as much at fault as over-reliance on overseas producers, much of which in turn has been created by industry consolidation (in other industries) and bad regulations.

Consequently, although I agree with Mr. Stoller that monopoly power is a problem, my preferred solution is different. I think that governments should be creating fewer monopolies in the first place.