By Paul Krugman © 2022 The New York Times
More than a decade ago, commentator Jonathan Chait wrote about the “hack gap,” a striking difference between the behavior of Republican and Democratic experts (or in some cases, “experts”) when their party controls the government. Republican experts slavishly praise their leaders, no matter what they do; Democratic experts strive for objectivity and, if anything, bend over backward to criticize their own side.
This happens in many areas; Chait was talking about legal analysis, but I see it all the time in my home field.
During the Trump years, Republican economists, even those you might have expected to be concerned about their professional reputations, rushed to embrace extravagant and implausible claims about what Donald Trump’s tax cuts would achieve. Some were even willing to abase themselves in ways reminiscent of Putin cronies. Remember when Tomas Philipson of the University of Chicago declared that Trump had economic instincts “on par with many Nobel economists I have worked with”?
Democratic economists, by contrast, often seem eager to display their independence by criticizing Biden administration policies. And while intellectual integrity is a good thing, I’d argue that sometimes the desire to <em>seem</em> independent leads Democratic economists to overdo it — to criticize arguments or policy proposals that actually make sense, perhaps especially if these proposals would be politically popular.
Let me give you two examples, one minor and one much bigger.
The minor example is proposals for a temporary cut in gasoline taxes to reduce inflationary pressures. There are some good arguments against doing this; in the long run we want to discourage people from burning fossil fuels, not make them cheaper. But I’ve been astonished to encounter Democratic-leaning economists and economics writers asserting that a gas-tax cut wouldn’t help consumers and that it would simply increase oil company profits.
What? The price of crude oil is set on world markets and can’t be much influenced by U.S. policy. But there’s no world market for retail gasoline; Europeans can’t fill their tanks at American gas stations. There are, in fact, large international differences in gasoline prices, precisely because tax rates are so different. The data for the Group of 7 economies suggests a roughly one-to-one effect — that is, higher or lower fuel taxes are fully passed on to consumers.
Why assert anything different? I can only guess that it’s an instinctive reaction against anything that sounds crowd-pleasing.
The same thing is, I suspect, going on when Democratic-leaning economists summarily reject suggestions — most notably by Sen. Elizabeth Warren — that corporate abuse of market power may be one factor in inflation, or (not quite the same point) that stepped-up antitrust efforts might be a useful part of anti-inflation strategy. These views have wide public support, but the Biden administration has been diffident about advancing them, reportedly because its economists are reluctant to challenge the professional orthodoxy that such things can’t happen.
I understand where that orthodoxy is coming from. It’s not a naive denial that corporations are greedy or have price-setting market power. It comes, instead, from the assertion that corporations have always been greedy and had market power, and there’s no reason to believe that these problems have suddenly gotten worse.
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 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 <em>a</em> 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 reelection, 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 increases.
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.
So here’s a plea to my fellow wonks: Evaluate economic ideas on their merits. You don’t want to endorse bad policies because they’re popular; but you don’t want to reject policy ideas simply because they <em>are</em> popular, either.