Summers stumbles

by John Quiggin on February 9, 2022

There’s been a lot of debate lately about whether tightening of anti-trust legislation might be a useful response to inflation. Underlying this question is that of the relationship between monopoly and inflation more generally. The dominant view among mainstream/neoclassical economists seems to be that there is no such relationship. That view is stated by one of the most prominent mainstream theorist, Larry Summers as follows

There is no basis in economics for expecting increases in demand to systematically [cause] larger price increases for monopolies or oligopolies than competitive industries.

Summers goes on to describe the opposite view as ‘anti-science’.

Readers of this blog will be devastated to learn that Summers is dead wrong. It’s quite straightforward to show, in a simple neoclassical model, that imperfect competition amplifies the inflationary effects of demand shocks. Here’s a paper I’ve just written with my colleague Flavio Menezes which makes this point using the concept of the strategic industry supply curve. The same result can be presented, less elegantly in our view, using the standard tools of comparative statics to be found in any intermediate microeconomics test.

We also show that, contrary to a suggestion by Elizabeth Warren, imperfect competition is likely to dampen the impact of cost shocks. There isn’t, however, any equivalence here. Warren’s background is in law, and she isn’t making a claim just observing that monopoly power might be a problem. The distinction between cost shocks and demand shocks is unlikely to have been relevant to her, whereas it should have occurred immediately to a leading theorist like Summers.

I’m not sure about the lessons from all this. For me, it’s to think carefully before making dogmatic statements from authority. If all experts agree on something, we should say so, but be careful to make sure we are right.

The end of hope

by John Quiggin on February 9, 2022

If you want to mark the end of hope for US democracy, last weekend was as good a date as any. Both Trump and the Republican National Committee made unequivocal commitments to supporting the insurrection.

The response, on the Republican side, was much the same as in every previous step along the road to dictatorship. The usual handful of serving politicians, like Romney and Hogan (MD governor) objected, as did sometimes-Trumper Mitch McConnell, but none (not even Cheney and Kinzinger, the targets of the censure) even hinted at changing parties. A rather larger group of retired Repubs signed a statement, again failing to urge rejection of their party. Most current Repubs dodged the issue, claiming not to have read the news for a while. And, a couple of days later, it’s just about forgotten.

The result is that the overthrow of democracy has become, as far as the political culture is concerned, a routine issue of disagreement between the parties. In these circumstances, the par outcome is that the opposition party will do well in the midterm elections, and all the evidence suggests that 2022 won’t be an exception. So, unless effective legislation to prevent election subversion is passed this year, it never will be. It seems highly unlikely that reforms to the Electoral Count Act, if they pass, will be enough.

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