It’s the Monopoly, Stupid | Washington Monthly
On the evening of October 24, 1978, President Jimmy Carter sat up straight behind the Resolute desk in the Oval Office, interlocked his hands, and began reading from the prepared remarks laid out in front of him. “I want to have a frank talk with you tonight about our most serious domestic problem,” Carter told the camera. “That problem is inflation.”
Since the summer, the cost of living had been increasing at a rate not seen since the Ford administration. Worse, the new burst of inflation was accompanied by stubbornly high unemployment, creating a return of dreaded “stagflation.” According to one of his key advisers, Stuart Eizenstat, Carter worried that if they didn’t come up with something new and substantive to say that night, “we’ll be laughed at.”
The largest single cause of accelerating inflation during Carter’s term was monopolistic control over the flow of oil, but the president saw no palatable options for breaking up the OPEC cartel anytime soon. Nor, thanks to political opposition from both Big Business and Big Labor, could he put in the kind of mandatory wage and price controls Richard Nixon had once ordered up.
Also off the table was giving in to Republican demands for dramatic cuts in government spending and higher interest rates. Carter was not yet desperate enough to sign on to that agenda because it risked a wholesale revolt from Democrats to his left like U.S. Senator Ted Kennedy and would quite likely induce a recession.
So Carter played another card: Blame inflation on government bureaucrats.
Carter told the nation that his administration was “cutting away the regulatory thicket that has grown up around us and giving our competitive free enterprise system a chance to grow up in its place.” As evidence, he pointed to a bill he had just signed that stripped the Civil Aeronautics Board of its power to regulate airline fares and routes. “For the first time in decades, we have actually deregulated a major industry,” Carter bragged. “Of all our weapons against inflation, competition is the most powerful,” he explained. “Without real competition, prices and wages go up, even when demand is going down.”
Carter tapped a high-energy Cornell economist turned policy entrepreneur named Alfred Kahn to oversee the dismantling of the CAB, and was so pleased with the result that he elevated Kahn to the new position of “inflation czar.” Later, Carter would double down on the idea that the most powerful tool for fighting inflation was depriving the government of its ability to regulate prices, signing bills that deregulated railroads and trucks, and passing the Depository Institutions Deregulation and Monetary Control Act, which set in motion deregulation of the financial sector. The overarching theory was that if the government would just get out of the way, market competition would lead to greater efficiency and therefore to lower prices for consumers.
Most Republicans applauded these moves, for obvious reasons, but Carter also got support from important Democrats. Ted Kennedy was a key supporter of the airline deregulation bill Carter signed that day. Influenced heavily by Kahn and by Ralph Nader’s Center for Study of Responsive Law, many had come to believe that federal regulatory agencies like the Interstate Commerce Commission and the CAB had been captured by the industries they were supposed to regulate. Stephen Breyer, the future U.S. Supreme Court justice, successfully teamed up with another Kennedy staffer, Phil Bakes, in helping the senator to become a champion of the new liberal cause of getting better deals for consumers through deregulation. The “New Deal faith in the science of the regulatory art,” Kennedy said at one point, was “a delusion.”
Today, we are paying a big price for that false lesson. Democrats and Republicans cooperated over the next four decades in dismantling much of the regulatory apparatus and antitrust enforcement that since the New Deal (and even before) had governed America’s financial, transportation, and telecommunication markets, foreign trade, and corporate mergers. As they did so, the underlying assumption was always that less government intervention in markets meant more competition, and that more competition would in turn bless the world’s consumers with more and cheaper stuff. But over the long term, the primary effect of this radical change in the country’s political economy was to foster an enormous growth in corporate power that set us up for today’s inflation.
As merger frenzies concentrated markets in sector after sector, corporate giants used their increasing power at first mostly to suppress wages. Over time, they also maximized profits through downsizing plants and equipment, shrinking workforces and inventories, and relying on brittle, sole-source supply chains to reach outsourced production facilities in low-cost, mostly Asian countries. As a result, when shocks like the coronavirus pandemic and the war in Ukraine came along, the industrial system had no spare capacity and became riddled with choke points, setting off a prolonged frenzy of price gouging that doesn’t self-correct.
Call it “choke-flation.” With perverse irony, it now threatens Joe Biden with the same political fate as Jimmy Carter, only this time the stakes are much higher, given the authoritarian drift of the Republican Party since Ronald Reagan’s time. To avoid that fate, we must counter the false narratives peddled not only by Fox News but also by out-of-touch establishment economists who would have Americans believe that too much liberal government is to blame for inflation, and not the predations of unregulated monopolies.
Just as Carter and Kennedy had hoped, a first-order effect of deregulating airlines was to spawn a round of price cutting. Scores of discount start-up airlines surged into the market (remember People Express, ValuJet, and Air Florida?), and incumbent carriers responded by extracting steep cuts in wages and benefits from their workers, which they initially shared with their customers. But as airlines began engaging in price wars, most of the new starts went broke within a few years, and the surviving incumbents began combining into increasingly dominant mega-carriers that no longer had any legal requirement to serve the public interest.
By the mid-1980s, many Democrats who had voted for deregulation were already regretting it. One reason was that because the CAB no longer existed, hundreds of medium-sized cities lost air service or found themselves forced to pay much higher fares. In 1986, Senator Robert Byrd of West Virginia was unequivocal:
This is one Senator who regrets that he voted for airline deregulation. It has penalized States like West Virginia, where many of the airlines pulled out quickly following deregulation and the prices zoomed into the stratosphere—doubled, tripled and, in some instances, quadrupled. So we have poorer air service and much more costly air service than we in West Virginia had prior to deregulation. I admit my error; I confess my unwisdom, and I am truly sorry for having voted for deregulation.
Ted Kennedy also came to deeply regret his vote, because of the way deregulation injured another key constituency once firmly in the Democratic coalition: organized labor. At a 1988 event in Washington, D.C., Kennedy buttonholed Phil Bakes, the former Carter staffer who, along with Stephen Breyer, had been his point person on airlines 10 years before. “This goddamn dereg … you know, Phil, you double-crossed me. You lied to me. You said the unions were going to support deregulation.” According to one account, people at the event gawked as Kennedy continued to shout at Bakes about deregulation. Bakes was then the president of Eastern Airlines, where the financier Frank Lorenzo had put him charge of driving down labor costs through union busting.
By this time, the Reagan administration, while furthering Carter’s moves to deregulate the financial sector, was also embarking on a wholesale retreat from antitrust enforcement. Under the influence of the conservative jurist Robert Bork and market fundamentalists concentrated at the University of Chicago, the Department of Justice in 1982 adopted new prosecutorial guidelines—subsequently followed by every administration until Biden—that ignored the clear statutory language of the Sherman Antitrust Act and the Clayton Act and thereby set off a frenzy of anticompetitive mergers. Meanwhile, a new generation of federal judges, many of them products of the Federalist Society and a vast, lavishly financed, conservative “law and economics” movement ensconced in the nation’s law schools, began further eroding traditional anti-monopoly policies by striking down cases against dominant firms engaged in predatory behavior, such as price gouging, loss leading, and price discrimination.
This meant that the flying public just had to take it when consolidating airlines increasingly under the control of financiers like Lorenzo and Carl Icahn began using their unregulated market power to push through more and more reductions in the quality of the product. These include smaller and smaller seats, nonrefundable tickets, overbooked planes, fewer direct flights, and more changing planes at “fortress hubs” controlled by a single airline. The nominal cost of flying declined on high-volume routes where some competition remained, but after adjusting for the changes in the cost of energy, overall fares declined at a lower rate in the 10 years after deregulation than they had during the 20 years before when the government set prices and routes. (See “Terminal Sickness,” in the March/April 2012 issue of this magazine.)
By 1998, air service was so wracked by bankruptcies, layoffs, regional inequality in service, and increasing concentration of ownership that Alfred Kahn complained that the promise of deregulation had been undone by the failure to enforce antitrust laws. “I’ve been saying for these 20 years when you deregulate an industry, the antitrust laws become more important rather than less,” the disillusioned Kahn told a reporter for the Houston Chronicle. “That’s because now customers are dependent not on regulators to protect them but on competition.”
Yet it is not clear that Kahn should have blamed lack of antitrust enforcement alone for the debacle; other policy shifts were also at work in making his reforms even more destructive. Early in his first term, Bill Clinton signed legislation, for example, that removed any regulatory barriers to compensating CEOs largely through stock options, thus inadvertently accelerating the trend toward “shareholder” control over corporations and the financialization of the economy. Kahn would be doing barrel rolls in his grave if he learned that all four remaining major airline carriers share common ownership by the same three gigantic investment pools. This interlocking financial control means that the major airlines don’t compete with each other any longer except over who can maximize returns to their owners by cutting costs the most and raising fares the fastest. In the first three months of 2022, average domestic airfares rose by a staggering 40 percent, with only a small portion of this attributable to rising energy costs. And that was, as we’ll see, only the beginning.
The same pattern now recurs in sector after sector. Start with the evidence from surging profit margins.
In April, the Economic Policy Institute issued a report that broke down the three main factors contributing to the price hikes charged by nonfinancial corporations. Since the bottom of the COVID-19 recession through December 2021, inflation in this sector, which constitutes three-quarters of the private economy, ran at an annualized rate of 6.1 percent. The rising cost of labor accounted for a small part of this, and the cost of raw material contributed substantially more. The overwhelmingly largest factor, however, was surging corporate profits, which accounted for more than half (53.9 percent) of the rise in prices.
These statistics undermine the idea, championed by the economist Larry Summers and many others, that today’s inflation is primarily caused by excessive government spending and monetary policies that have given ordinary Americans too much money. Both factors helped millions of Americans to make up for the income they lost when their jobs disappeared during the pandemic. Meanwhile, even at a time of spreading labor shortages, nominal wage growth still lags or is barely keeping up with overall inflation, signaling, as the EPI report puts it, that “labor costs are still dampening, not amplifying, inflationary pressures.” By contrast, according to an analysis published by The Guardian, between the first quarter of 2020 and the first quarter of 2022 the median profits of the top 100 publicly traded companies surged by 49 percent.
Abundant examples illustrate the business practices behind these statistics. Last fall, the Groundwork Collaborative, a progressive think tank, listened in on the earnings calls of hundreds of publicly traded companies, in which CEOs provide investors with projections of future profits. A consistent theme: CEOs bragging that inflation was giving them cover to raise prices above costs. The CEO of Hostess told shareholders, “When all prices go up, it helps.” A survey by Digital.com of retail businesses found that 56 percent said inflation has given them the ability to raise prices beyond what’s required to offset higher costs.
Why are corporations able to get away with this profiteering? After all, every economics textbook teaches that in a competition economy, any company that jacks up prices far above costs will soon find other firms stealing away its customers with better deals. It’s why many economists oppose laws against profiteering; their models tell them that market forces will automatically correct any abuse. It may also be why even some economists who work for the Biden administration drastically underestimated how long inflation would endure. They failed to focus on the fact that we don’t have anything like a competitive economy anymore; in sector after sector, we have an economy increasingly dominated by just a few, often colluding firms that have stripped out almost all slack capacity and that don’t need to worry about competitors under selling them because they no longer really have any competitors.
This is particularly true in sectors where we have seen the steepest price rises. In the meat-packing industry, just four large conglomerates control 55 to 85 percent of the supply chains for beef, pork, and chicken while enjoying near-total local monopolies. During the worst of the pandemic, the Big Four posted record profits by hiking up their prices by far more than their costs. According to a White House report, fully half of the rise in food costs since December 2020 is attributable to monopoly pricing by the meat-packing industry. Meat-packers give the excuse that they are just passing along higher costs—but then what explains their soaring profits? Tyson’s earnings per share have increased by 71 percent over the past year.
Rental car companies provide another good example of how consolidation amplifies inflation. The falloff in travel following the outbreak of COVID initially hit the industry hard. Rental companies dropped their prices by more than a fifth and began selling off cars. Hertz, which also controls its former competitors Dollar and Thrifty, declared bankruptcy. But the industry was soon able to more than recoup its early losses and go on to post record profits through ongoing price gouging.
That’s because it operates as an effective oligopoly. The Hertz group, which emerged from bankruptcy after attracting $5.9 billion in new hedge fund money, shares the market with only two remaining major players: Avis (which controls Budget and Zipcar) and Enterprise (which controls Alamo and National Car Rental). Because there was so little competition left in the industry, it didn’t have to worry about the worldwide shortage of new cars that occurred during the pandemic. It learned instead that it could pull in record profits just by selling off one-third of its inventory into a red-hot used car market while jacking up the price of renting the remaining cars in its diminished fleet. According to the Bureau of Labor Statistics, the average price of renting a car or truck is now 47 percent higher than it was in 2019 before the pandemic struck.
To keep this sweet deal going, the Big Three rental companies don’t have to engage in illegal price fixing. With so few players, it is easy to coordinate prices and output just by sending signals to one another in public. Hertz’s CFO announced on an earnings call this April, “We don’t view inflation as necessarily a bad thing for us, as this creates more discipline across the industry in terms of pricing and asset allocation, which you can see currently.” Just to make sure investors and other members of the oligopoly got the message, he let it be known that Hertz is committed to keeping its prices high by keeping fewer cars in its fleet than is necessary to meet demand. And what is the company doing with the money it saves with this strategy? It’s redeploying its assets to engage in a $2 billion stock buyback program.
It should come as no surprise that other members of the oligopoly are engaged in the same pricing and allocation “discipline.” Rather than build its fleet size back up to meet surging demand, the Avis Budget Group holding company, for example, bought back 20 percent of its outstanding stock in just four months late last year. According to its CFO, this represents “over $1 billion of value created for shareholders.” In May, Avis reported record first-quarter profits, further swelling its stock price by double digits. Meanwhile, anyone needing to rent a car paid more for it—if they could find one.
Variations on this pattern prevail in many other sectors, including central industries on which the whole economy depends. Coming into the pandemic, a highly consolidated freight rail industry, now largely controlled by private equity funds focused on maximizing short-term returns, learned that it could earn record profits by laying off tens of thousands of workers and stripping out physical assets like rail yards and locomotives. Service standards deteriorated, but with the industry dominated by just six remaining major carriers that enjoy near-total local monopolies, captive shippers had nowhere else to go. (See “Amtrak Joe vs. the Robber Barons,” November/December 2021.) The consequences for inflation became clear last year when an improving economy created an increase in demand for freight transportation that overwhelmed the railroads’ remaining capacity, causing supply chain bottlenecks that continue to drive up prices for everything from energy and food to consumer electronics.
Union Pacific, for example, having laid off thousands of workers before the pandemic and shut down a major terminal outside of Chicago as cost savings measures, had to turn away container traffic from West Coast ports for a week last year when undelivered containers started stacking up. Perversely, such bottlenecks give Union Pacific and the other five members of today’s railroad trust even more opportunities to profit through price gouging. On an earnings call in January, Union Pacific promised that due to “our disciplined pricing approach, we expect to yield pricing dollars in excess of inflation dollars”—in other words, we promise to deliver still-higher profits by further jacking up prices beyond what it costs to run the railroad. Currently, Union Pacific and other major railroads have such fat profit margins that they only spend 60 cents in operating expenses for every dollar of revenue they rake in.
Or consider ocean shipping. Once it was a source of falling prices in the U.S., as the use of containers and super-efficient mega-ships made it economical to outsource production to distant places like Japan, China, or wherever labor and other costs were lowest. But today, thanks to a huge increase in concentrated ownership over the past 10 years, roughly 80 percent of all global shipping capacity—and 95 percent of East-West trade—is controlled by just three cartels that allow freight carrier firms to coordinate rates. This they do with gusto, raising the rates for shipping between the United States and Asia by more than 1,000 percent since the beginning of the pandemic and taking home profit margins as high as 56 percent. Studies by the Kansas City Federal Reserve and the European Central Bank suggest that such profiteering could be responsible for as much as one-sixth of the ongoing rise in inflation.
Some observers insist that increasing corporate concentration cannot be a major cause of today’s inflation since the trend has been building since the 1980s while inflation has only surged more recently. But that is hardly a paradox. The combination of deregulation, financialization, and monopolization has been causing inflation in many sectors for decades; what’s different now is that in the aftermath of the disruptions caused by the pandemic and by the effects of decades of corporate outsourcing and downsizing, the same three forces are amplifying inflation throughout the whole economy.
For two generations we’ve endured rampant inflation in health care, for example. The reason is not that Americans consume more health care than people in other advanced nations; it is that we pay ever-higher prices for the same pills and procedures with no better results. And that’s largely because of a surge of hospital and insurance company mergers, cartelization of medical supply chains, patent monopolies on drugs and medical devices, and, most recently, moves by private equity firms to wrest more “shareholder value” out of nursing homes, dialysis centers, and other key parts of the health care delivery system.
Now, the same forces are causing inflation to spill out of sectors where competition is also disappearing, which had to happen eventually. Even in cases where monopolists might have at first lowered prices in the past, the effect over time has been the opposite, as per plan. As students of business history well know, John D. Rockefeller built the Standard Oil monopoly by colluding with railroads to sell kerosene for far less than any of his competitors could until he no longer had competitors and could charge whatever he liked. Later chain stores sold at below cost or forced their suppliers to do so in order to drive mom-and-pop stores out of business and gain monopoly pricing power. The abuse of such predatory pricing and price discrimination to build monopolies became so bad that Congress passed the Robinson-Patman Act in 1936 to make that business model explicitly illegal.
But Robinson-Patman and similar fair trade laws have not been enforced since the 1980s, while enforcement of antitrust statutes has also lapsed, allowing for the return of the same monopoly play. Using gobs of Wall Street capital, Jeff Bezos sold books, Kindles, and later almost everything else on Amazon at a loss for more than a decade until he built up a retail platform with such gigantic market share that merchants must now pay monopoly prices for access to it. Google and Facebook literally give away products to consumers for free in order to build up the monopoly power they now use to charge advertisers monopoly prices—a corner that destroys competition and drives up prices across the whole economy.
Even when predatory pricing fails to build an enduring monopoly, the effect is often ultimately inflationary. Classic examples include Uber, WeWork, DoorDash, and other so-called unicorns that built gigantic market shares over the past decade by using Wall Street money to sell their services at far below cost. Because this practice drives other producers, like traditional taxi drivers and small restaurants, out of business, consumers pay more in the long run.
A variation of this pattern occurs when deregulation brings an initial surge of competition but later an increase in corporate consolidation. In airlines, as we’ve seen, deregulation set off ruinous competition that, after a shakeout, has allowed today’s unregulated airline oligopoly to engage in fantastic price inflation combined with further cuts in quality. In April, airfares rose by another 18.6 percent, the largest one-month increase since the Bureau of Labor Statistics began tracking airline prices in 1963. Rising fuel costs account for some of this, but as Delta Air Lines President Glen Hauenstein recently told an investor conference, Delta only needs to collect an extra $30 or $40 per the average $400 roundtrip ticket to cover rising fuel costs, which it is more than getting through fare hikes. As a result, Delta is telling investors to expect a profit margin this year of 12 to 14 percent or more.
Meanwhile, Delta and the three other remaining major carriers have announced that they will be cutting the numbers of flights they offer this summer, blaming the fact that large numbers of employees are quitting. But rather than improve working conditions, airlines cut capacity. The effect on their bottom line will be to further boost their pricing power and profit margins as travelers compete for a dwindling number of airline seats.
The effect of this monopoly behavior is not only inflationary but also likely to end in recession. In a normal competitive market, these firms would be investing in new plants and capacity—buying more cars to rent, for instance, or ordering more airplanes—which might keep the economy humming along without inflation. Instead, by merely raising prices, they are driving up inflation and all but forcing the Federal Reserve to raise interest rates, which more and more market analysts fear will lead to a recession as early as this year.
Which brings us all the way back to Jimmy Carter and the false idea that the best way to fight inflation is by taking away the government’s ability to manage competition. It is true that excessive and poorly conceived regulation can itself become a source of monopoly by creating high barriers to entry for new businesses. One example is Carter’s deregulation of energy markets, which led to a boom in natural gas production that helped break the back of the energy crisis that was driving 1970s inflation in the first place.
Nor were Carter-era deregulators wrong that regulatory agencies can sometimes be “captured” by the powerful industries they are supposed to be regulating. Much of today’s health care cost inflation, for instance, is due to the iron control that the American Medical Association has over reimbursement rates for Medicare and Medicaid. (See Merrill Goozner, “The AMA’s Dark Secret“.) Indeed, the deregulation movement that Carter-era liberals began has itself been captured by corporations and laissez-faire conservatives, whose well-funded think tanks, lobbyists, and allies in Congress and the courts have bollixed up the federal rulemaking system considerably. With a new conservative super-majority on the Supreme Court, they may shut it down altogether. (See Marcia Brown, “Limitations of Statute“.)
Taken together, the competition policies we have been following for the past 40 years have gone so far in the wrong direction that what we have today is not a deregulated, market-driven economy, but one regulated by financiers who have cornered different markets large and small and who are now using their monopoly power to jack up prices and profits. The Biden administration, by its words and actions—including sweeping antitrust executive orders and the hiring of tough enforcers—clearly understands this. So does the public. A recent poll showed that a strong majority of Americans blames large corporations for today’s inflation and wants the federal government to crack down. About the only people who don’t get it are a handful of economists, like Larry Summers, who are nevertheless influential in elite media and Democratic circles. If Biden is to escape the same fate as Carter, he and his allies need to avoid being led astray by economists in thrall to their own models and do a better job of showing the American people that they have a plan that addresses inflation’s root cause: abusive corporate power.