Friday 28 January 2022

Unlearning the magic money tree

My City AM column today is about people who believe in the magic money tree developing some desperate excuses for the rise in inflation.

When the inflationary chickens came home to roost last autumn, Robert Reich, a professor of public policy in California, insisted that it was not ultra-loose monetary policy that was to blame. Instead, it was the fault of greedy corporations which have “so much market power they can raise prices with impunity”.

Reich was not alone in this belief. When the US faced high petrol prices in November, the obvious explanation was that the price of oil had doubled in the space of a year. Not so, claimed Senator Elizabeth Warren, instead blaming “price gouging” by Chevron and ExxonMobil.

Cartels can exist but there is no reason to think they have suddenly taken over large parts of the American economy. If these markets are so uncompetitive and the companies so powerful, why did they not raise their prices earlier? Why are they not raising prices even more? The answer is that there is ample competition but companies cannot avoid passing on the higher cost of raw materials to their customers indefinitely.

(In addition to the copes mentioned above, the White House blamed the rising price of meat on 'dominant corporations in uncompetitive markets taking advantage of their market power to raise prices'.) 

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