While these conclusions may not come as a surprise to those who came of age during the Great Recession, the publication last year of this short, earnest, and plaintive but restrained book is worth considering not only for its argument but for the identity of its authors. Fraccaroli is an economist at the World Bank, one of the two international financial organizations, along with the International Monetary Fund, created after World War II to govern international finance and development. He is also a visiting professor at Brown, where Blyth is a professor of international economics.
The authors have their feet in the worlds of mainstream academic macro-finance, understand that economics is the “language of power” that “sets the field of play for everyone else,” and are therefore concerned that “the ideas of the 1970s and the institutions that they spawned in the ’80s that were supposed to safeguard us against inflation” — independent central banks with inflation targets — “nstead made us more vulnerable to its return.”
In making this argument, they have to cover a lot of ground, and the speed with which they do so may diminish the force of what they are saying. What should land with the impact of a meteorite is obscured by the orbit required to survey the landscape of “mainstream” consensus on inflation and inflation policy: what is measured and how; how economists theorize and conjecture about the relationship among measured variables; how central the unmeasurable variables have become to the consensus; and how governments and business typically interpret and react to those measurements.
About half the book is made up of this background material. To establish that there are “different kinds of inflation,” Blyth and Fraccaroli employ the spaghetti western terminology of Fabio Panetta, the governor of the Bank of Italy: “the good, the bad, and the ugly.”
“Good” inflation is where “wages, in theory at least, rise in line with workers’ productivity” — around 2 percent, though some have advocated for 3 — and “even if prices increase, wages are catching up, and people can afford the same amount of goods, if not more.”
“Bad” inflation is a onetime jump in prices, kicked off usually by some single-industry or country problem: Ukrainian wheat and Russian oil getting cut off in 2022, for example, before Brazilian and Persian Gulf supplies could meet the higher price level.
“Ugly” inflation is when “prices and wages push each other upward in a cycle,” and the “bad” inflation kicks into a self-sustaining race between companies, workers, households, and investors to stay ahead of the game.
Such distinctions are tolerated within the mainstream. Nobody disputed that there were different kinds of inflation in Washington in 2021: the debate within the mainstream was whether the bad inflation that began that year would turn ugly without austerity and interest rate hikes — whether it was “transitory.” What economists disagree about is how a bad inflation turns ugly.
Arguing the point requires what Blyth and Fraccaroli call “inflation storytelling,” the narratives constructed to explain causal relationships in the price system. For “team transitory,” during the pandemic inflation, the story was that the price level rise was a one-off event. “Let markets work” was a common refrain of progressive economists opposed to Federal Reserve interest rate increases in late 2021: having jumped from 1.3 to 6.2 percent in the first ten months of 2021, the inflation would slow and come down as supply caught up to demand on its own. In the terms of economic theory, inflation “expectations” remained “anchored.”
“Team permanent,” their intellectual opponents both within the White House and among its partisan enemies, told different stories: excessive government spending from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan was raising household spending or creating a disincentive to work, reducing supply; too-tight labor markets from lockdowns, or lazy or greedy workers, were pushing wages up too far, too fast. In economic theory terms, “expectations” were becoming “de-anchored.” The ease with which national broadcast media slipped into the “labor shortage” hysteria of late 2021 and 2022, as the inflation accelerated, demonstrated the stakes of these narratives. The failure of the 2021–22 Congress to pass a budget for the administration’s first full fiscal year until ten months after it began demonstrated their effectiveness.
Missing from this account of the Joe Biden years is what most people actually believed. Blyth and Fraccaroli cite a May 2022 survey from Deloitte that found 60 percent of Americans thought “companies are taking advantage” of the pandemic “by raising prices beyond their own rising operating costs in an attempt to increase profit.” While economists and journalists disagreed among themselves about whether or when the Federal Reserve should raise rates, they agreed almost unanimously that this was wrong.
Blyth and Fraccaroli rely heavily on the example of Isabella Weber, the professor of economics at the University of Massachusetts-Amherst, who argued in late 2021 that the reason the inflation had not subsided was the expansion of corporate profits, particularly in monopolistic industries. Controversy ensued. The existence of the Deloitte survey is itself an artifact of how profoundly challenging the perspective was to what those who control major corporations were willing to countenance: six months after the Guardian published Weber’s infamous opinion, the world’s largest accounting firm, itself a key multinational corporation organizing the informational lifeblood of capitalism, felt compelled to test the popularity of the idea. They found that what a majority of people believed squared with Weber’s contention.
Even though this is the story “that intuitively most people think is right,” Blyth and Fraccaroli note how “economists hate it with a strange passion.” The reason for that is not obvious from the perspective of economic theory. While orthodox price theory holds that in a competitive market, a ceiling on price will prevent the expansion of supply, resulting in shortages, nearly a century of research on “imperfect competition” and “oligopoly” has demonstrated what anyone in America knows about corporate competition: most industries have a few key players that drive what the industry as a whole is doing.
Whether like oil refining, in which “[o]ne firm leads the price increase, and the others follow,” or the much more common “market structure of oligopoly, in which a handful of firms can set prices above marginal cost, but only if they cooperate with each other,” pricing arrangements in which sellers have a degree of discretion over profit margins exist across the range of real-world market structures.
The relevance of this fact for theories of inflation is not that corporate pricing power can kick off inflation. Usually, the risk of losing market share prevents this. Rather, the existence of “imperfect” or “monopolistic” competition means that when a bad inflation does occur, owing to a natural disaster or war or other “supply shock,” it can become a pretext for the kinds of collective action among corporations that would not normally be possible. The resulting price rise in some parts of the economy becomes rising costs for others, and it is in that moment that businesses can act together to raise the general level of prices.
As Blyth and Fraccaroli explain the logic resuscitated in the work of Weber and her colleague Evan Wasner, “price gouging may not be the fundamental cause of inflation, but once inflation gets going it’s arguably a large part of what keeps it going.”
Demonstrating the relevance of the point to inflation theory, they cite one survey of retail corporation earnings calls from late 2021 as finding that 56 percent of companies admitted to shareholders “that inflation gave them the ability to raise prices far beyond what they would have needed to offset higher production costs.”
If you think profits play a role in inflation, Blyth and Fraccaroli write, then the reason “inflation is higher in the United States than in Europe [is] simply because the American economy is more concentrated, and a handful of firms in critical sectors can set prices because they don’t face significant competition and the government does not enforce antitrust laws.”
The reason this occurs is because “those firms are critical funders of those hugely expensive US elections that elect the folks who regulate these firms.” Diagnosing the nexus of government and business power as the cause of inflation is not likely to be popular among those who hold power, and those who speak on their behalf have adjusted accordingly.