San Francisco Fed Study Refutes Biden-Khan-Warren Line on “Greedflation”

June 4, 2024

In March, President Biden followed up on his State of the Union complaint about half-empty potato chip bags by launching an initiative to “fight corporate rip-offs” that drive inflation around the country.

The White House announced a joint “Strike Force on Unfair and Illegal Pricing,” co-chaired by the Department of Justice and the Federal Trade Commission, that “will strengthen work to root out and end illegal corporate behavior that raises prices for Americans through anti-competitive, unfair, deceptive, or fraudulent business practices.”

Feel safer? Or should we be more scared?

Allysia Finley wrote a mischievous piece in The Wall Street Journal predicting the likely effects of this campaign. She has the temerity to think through the implications of the call by Sen. Elizabeth Warren and other Democrats to have the FTC empowered to fight inflation by requiring that “small and large firms generally pay the same price for the same product.”

This is a goldfish proposal. Like so many such pronouncements, this one has great surface appeal – provided you don’t think about it for more than nine seconds. It is the precisely the big retailers – Walmart, Target, Kroger, HomeDepot, and Amazon – that are putting downward prices on consumer goods. The FTC price-leveling plan would, as Finley notes, increase “prices for everything from diapers to milk.” She adds: “Democrats want to ban food manufacturers from paying supermarkets for better shelf placement. Supermarkets would then raise prices to compensate for forgone revenue.” All to fight inflation!

Another brilliant progressive idea is the Price Gouging Prevention Act, that would allow the FTC to set price controls on food, gasoline, and other products. This would guarantee shortages, until the government gave up and prices exploded to restore supply. We know this would happen because we’ve tried price controls before under Presidents Nixon and Ford. All we got were collectable “Win” buttons.

But what about the underlying argument that business has taken advantage of the supply chain disruption to raise prices? Three economists – Sylvain Leduc, Huiyu Li, and Zheng Liu – have authored a white paper published by the Federal Reserve Bank of San Francisco that used macroeconomic analysis to determine that “markup fluctuations have not been a main driver of the ups and downs of inflation during the post-pandemic recovery.”

They did find markups in the petroleum and the automotive sectors since 2021. That is not surprising. Both sectors have marked boom-and-bust cycles. They use recoveries as a chance to replenish their immense capital investments. Overall, however, the economists write that the “aggregate markup across all sectors of the economy, which is more relevant for inflation, has stayed essentially flat during the post-pandemic recovery … our analysis suggests that fluctuations in markups were not a main driver of the post-pandemic surge in inflation …” Bottom line: Aggregate markups have stayed “essentially flat since the start of the recovery.”

So what caused the painful spike in inflation that has consumers smarting and voters seething? It certainly wasn’t workers, whose wages did not keep up with inflation. The economists write that “during the post-pandemic surge in inflation, nominal wages rose more slowly than prices, such that real labor costs were falling until early 2023. By contrast, disruptions to global supply chains pushed up intermediate goods costs, contributing to the surge in inflation.”

I’m no economist, but I have to think the exploding national debt is also a driver of inflation … the debt increases by $1 trillion every 100 days. In recent years Washington has driven debt to a level at which just the interest payment on that debt alone is a larger item in the federal budget than national defense. But don’t expect the president and his regulatory bullies to address inflation as a consequence of debt. Following that train of thought would implicate an entirely different set of culprits for inflation, namely, themselves.