Some thoughts on the inflation debate

Inflation is on the rise across the world. US and Europe are facing decadal highs in their inflation rates.

See also this below

While it's widely agreed that inflation will subside once the supply shocks - pandemic, Ukraine war, and Chinese lockdown - stabilise. However it's a matter of debate as to whether it'll lead to a regime shift where instead of struggling to create inflation (as has been the case fo the past two decades) we'll move to a normal world where central banks will have to struggle to keep inflation down. In simple terms, have the conditions which contributed to secular stagnation have changed due to recent events, as to shift the inflation regime? Olivier Blanchard and Dario Perkins are two sides of the debate.

Two very famous personalities recently added their voice (needless to say, both over Twitter) to the debate surrounding rising inflation. 

Larry Summers warned that antitrust efforts have gone too far and that "policies that attacked bigness can easily be inflationary". He said that such "populist anti-trust policy" can lead to an economy that is "more inflationary and less resilient". 

But attacks on “largeness on its own terms”, increases in the market share of industry leaders without regard to their efficiency, shrinkage of small business market shares, private equity ownership, or destruction of communities are presumptively problematic. There are real risks. Policies that attack bigness can easily be inflationary if they prevent the exploitation of economies of scale or limit superstar firms. Likewise, policy focused on protecting competitors or communities or limiting layoffs are likely to raise costs & prices. Policies that attack vertical integration or limit contracting between firms and their suppliers and distributors may reduce efficiency and, by lengthening supply chains, reduce resilience. We need more focus on tariffs and other trade restrictions which undermine competition raise prices and reduce resilience in products ranging from gas at the pump to baby formula and automobiles to new homes.

There are so many problems with these arguments. I don't want to dwell at length and get into details. Just two would suffice. One, the pendulum on anti-trust has swung so excessively in favour of big companies that a large calibration is required. However, even with the muscular presence of trust-busters at FTC, DoJ, and White House, the ideological hegemony and elite capture are too entrenched to make much of a dent on the prevailing paradigm. Summers' comments further entrenches the incumbents. 

Two, there is already enough evidence that being big by itself is bad for the economy. An even more compelling argument against bigness comes from the political economy. Bigness and attendant market concentration invariably generates lobbying and efforts to raise entry barriers, which ends up with regulatory capture and the rules of the market effectively being set by the incumbents. 

In response to a White House tweet urging the wealthiest corporations to pay their share of taxes so as to lower inflation, Jeff Bezos blamed the Biden administration's $3.5 trillion pandemic stimulus for the surging inflation. Amazon has long been Exhibit A of tax evasion dressed up as avoidance, having paid no federal taxes in 2017 and 2018 and more. This coming from Bezos, irrespective of its merits, is clearly hypocritical. Like devil quoting the scriptures.  

Technically speaking, unlike the self-serving petulance of Bezos, White House may have been on strong wicket when it linked inflation to the surging corporate profits. Sample this (here is the EPI report)

This is true of Europe too, where profits, and not wages, were the main contributors to inflation, as businesses managed to pass-on price increases to consumers. 

Incidentally, Summers intervened (again on Twitter) in support of the White House, calling for raise in taxes to reduce demand and thereby contain inflation.