Antitrust can’t tame inequality, let alone inflation

The Biden administration’s plans to take antitrust action to head off inflation are splitting progressives, with some openly rejecting the notion that monopolies are to blame for surging prices and others arguing that even if the initiative fails to tame inflation, more antitrust enforcement can only be a good thing.

What both sides should be questioning is not whether applying antitrust to inflation is too much of a good thing, but whether antitrust is good for progressives at all. Because, as I explain in a recent paper, an inconvenient truth about competition is that it breeds inequality — something economists have known at least since the days of the original progressive movement a century ago.

We do not all have equal access to the resources that we need to succeed — talent, technology, and raw materials are scarce — so even in a competitive market, some of us will face lower costs to compete than others, and so some will get rich and some will not.

As the great progressive lawyer-economist Robert L. Hale put it in 1924: “The owners of the superior resources are subject to some competition, but to competition of others who lack the same opportunities.”

So antitrust, which has competition as its end, is not going to achieve progressives’ overarching agenda of minimizing inequality, whether it is capable of tamping down inflation or not. 

A desire to reduce economic inequality motivates all of the ways in which progressives have tried to reinvigorate antitrust in recent years, from suing monopsonistic employers to increase wages, to pushing legislation to protect small businesses against tech giants, to preventing firms from leveraging pandemic disruptions to fleece consumers.

But even if a reinvigorated antitrust makes markets perfectly competitive, some sellers are going to earn more than necessary to cover their production costs, including a reasonable return on investment. That’s because, as British investment banker turned economist David Ricardo pointed out in 1817, the competitive price must be high enough to cover the costs of the marginal seller, but the other sellers — the inframarginal sellers — can have much lower costs thanks to their unequal access to scarce resources.

In pocketing the difference between the competitive price and their costs, those inframarginal sellers generate more than necessary to compensate them for their trouble in bringing goods to market. Ricardo, who wanted to explain why the landed aristocracy could grow so rich in highly competitive agricultural markets, called that difference “rent.” Rent expands the wealth gap.

A similar problem exists in the labor markets in which antitrust seeks to drive wages up to competitive levels rather than down. The compititive wage is what the marginal employer is willing to pay, but inframarginal employers are willing to pay more. So workers lose out.

The surprising thing about progressive enthusiasm for antitrust today is that the original progressives of a century ago — from whom today’s progressives take their name — understood that competition is part of the problem, not the solution.

Indeed, the most famous progressive trustbuster of the era — Teddy Roosevelt — actually hated the antitrust laws and tried unsuccessfully to replace them with a federal Bureau of Corporations empowered to force inframarginal firms to charge at-cost prices, eliminating rents.

But it was Henry George, in the 1879 book that inspired the progressive movement, who captured the problem best. He wrote: “[f]ree trade has enormously increased the wealth of Great Britain, without lessening pauperism. It has simply increased rent.”

This is hardly stale learning. In his 2013 magnum opus on inequality, Thomas Piketty wrote “the fact that capital yields . . . rent . . . has absolutely nothing to do with the problem of imperfect competition or monopoly.”

If antitrust is not the answer to inequality, what is? The original progressives thought it was the corporate tax, among other things.

Thanks to the deduction for business costs, the corporate tax falls directly on any payments received by a firm above and beyond costs, which is to say, on rents. And the original progressives were right. Piketty and his collaborator, Emmanuel Saez, have shown that the corporate tax, along with the estate tax, was primarily responsible for limiting inequality in the mid-20th century.

But while the Biden administration has prioritized the promotion of competition, it has failed even to propose a return to the already-low corporate tax rate of 35 percent that the Trump administration cut in 2017.

If antitrust is a dead-end for today’s progressives, why have they broken with their forebears and pursued it anyway? One reason might be that taking the antitrust hammer to big corporations feels more drastic and effective than changing a few numbers in the tax code, even though it is not.

Another is that both journalists and media owners have two big reasons — in the form of Google and Facebook, which threaten newspaper advertising revenues — to welcome greater antitrust enforcement. As The New York Times’s erstwhile media critic, Ben Smith, has observed, “hostility to Google bleeds through the pages” of Rupert Murdoch’s newspapers. Smith could have said the same of any major American media company. This has created a welcoming media environment for anyone willing to push antitrust. And progressives have taken the bait.

But even if antitrust is of little use in the fight against inequality, can it at least tame inflation?

The answer is: not by much because everyone agrees that a major cause of the present inflation is supply chain disruption, and supply chain disruption means scarcity. So those surging corporate profits that the Biden administration is claiming are being driven by monopoly power are more likely to be something else: rents.

Competition cannot eliminate them.

Ramsi A. Woodcock is an antitrust scholar. He is an assistant professor at the University of Kentucky Rosenberg College of Law and holds a secondary appointment at the University of Kentucky Gatton College of Business and Economics. Twitter: @RamsiWoodcock

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