This article was originally published in The Hill on July 2, 2021. You can see the original version here
Something essential is missing from the debate about the risks of inflation today and this is especially mind boggling because what is missing is the central insight of economics since Adam Smith — the role of competition. The last time inflation was a problem in the United States was in the 1960s, 70s and early 80s when large sectors of the economy were dominated by oligopolies and monopolies and competition was much weaker. Today, the near monopolies of that period are gone and the ability to raise prices in most sectors can last only until temporary bottlenecks are cleared.
To be specific, in the 1960s and 70s American steel companies raised prices in concert almost every year. When presidents Kennedy and Johnson spoke out against what they believed were inflationary increases, U.S. Steel (USS) and the powerful American Iron and Steel Institute (AISI) told the two presidents to mind their own business and the price increases usually stuck.
It was the same in the auto industry that dominated the post-World War II manufacturing sector. In the 1960s and early 70s the “Big Three,” GM, Ford, and Chrysler had roughly 90 percent of the U.S. car market. Their haughty CEOs and Republican congressional allies ridiculed legislators who had the temerity to criticize their pricing and design decisions. The Big Three competed over fins and taillights on the supersized land-boats they turned out, but competition on price, quality, economy, and durability was out of bounds.
The Big Three’s CEOs said that building small cars in the U.S. could not be profitable and joined forces to strangle American Motors whose CEO George Romney did want to make small cars here. They also attacked Walter Reuther, the progressive auto union leader, who wanted the U.S. companies to make small cars, foreseeing that his members would lose jobs to imports otherwise. The CEOs told Reuther in no uncertain terms that these decisions were theirs alone to make and that his suggestions crossed a line. It is enough to say that in 2021 there are perhaps twenty companies making cars all over the U.S. and that the inflexible, short-sighted oligopoly of the Big Three is no more.
In the 1970s the original AT&T, nick named “Ma Bell,” had 85 percent of the telephone market. Its army of lawyers dominated the Federal Communications Commission (FCC) and state regulatory bodies. The monopoly worked to prevent new competitors from offering competing service and felt itself so powerful that it could squeeze even large customers. Its stranglehold was broken, however when to its surprise companies like Westinghouse turned on it at the FCC and backed an upstart newcomer, MCI. MCI was a tiny Illinois company that had been selling CB radios to truckers but that decided to fight AT&T to get a license to operate across state lines. In a decade-long legal battle the little David broke the Goliath’s monopoly with help from the FCC staff and opened the gates to the many competitors that occupy Ma Bell’s old space today.
The Civil Aviation Board (CAB) from 1938 into the 1960s allowed no new interstate airlines to enter the U.S. market. The Board set fares and limited routes and the old airlines dominated CAB hearings, preventing newcomers from entering. In this closed system, the airline machinists’ leader in the 1960s, Roy Siemiller, was asked by President Johnson to limit wage increases to 5 percent. Siemiller blew off Johnson and demanded a 25 percent jump that opened a huge hole in the wage-price guidelines that the president was trying to put in place to limit inflation. The eventual comeuppance for the big airlines was the end of cozy regulation and the demise of the CAB that sheltered them from new competitors.
Price fixing by railroads and trucking companies was the rule until well into the 1970s. Every president since Franklin Roosevelt in the late 1930s had wanted to open up this inflation-prone system to competition, but they were afraid of the Truckers, Teamsters and Railroad Brotherhoods who did extremely well when competition was weak. Most interstate transportation modes were regulated by the Interstate Commerce Commission (ICC), a post-Civil War agency originally meant to curb the pricing power of railroads, but that had been taken over by the interests it was supposed to check. President Carter’s appointees at the ICC, however, did not play the game and ruled against price fixing by railroads and trucking companies in 1980, and the Congress ratified the changes. Transportation costs dropped far and fast.
In the 1970s when inflation was a problem, the retail sector was only beginning to be changed by fierce competition from Walmart. By the 1980s as inflation in this sector receded, one commentator said Walmart did more to fight inflation than the Federal Reserve, and he was probably right. Today however, even Walmart is facing competition from Amazon and others.
The above is to say that because of more intense competition there are downward pressures on prices in manufacturing, communications, transportation, retailing and other sectors that did not exist in the inflationary 1960s and 70s. Inflation hawks like the supremely confident former Treasury Secretary Larry Summers, a Democrat, and the supremely tiresome monetarists, mostly Republicans, never mention the price-dampening changes in the intensity of competition cited above. These kinds of changes in the way people behave in markets, however, were the central focus of Adam Smith whose overarching economic insight was that monopolies supported by government made things like grain for bread too expensive. As everyone should know, he also wanted competitive markets to replace state-backed monopolies in shipping and dozens of products like tea (remember the Boston Tea Party) that raised prices. He urged “legislators” to break up such monopolies, stressing repeatedly that monopolists and their workers would put up “furious” resistance to allowing new competitors. Furious resistance to domestic as well as foreign competition is what U.S. faces today, not inflation.
The oligopolies and monopolies of the period from the 1960s into the 1980s are gone and competition in these large sectors and others is still strong. This means that in a short time the bottlenecks raising prices of things like gasoline, lumber, semi-conductors, meat, and some types of labor will be opened up as companies and people compete and inflation will not be a problem.