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Frank Cappello: [00:00:00] Hello and welcome to this week's bonus episode of Lever Time Premium, exclusively for the Lever's supporting subscribers. I'm Lever Time producer Frank Capello.

Today we'll be sharing David Sirota's interview with economist Isabella Weber.

Isabella was one of the few economists who was raising the alarm about corporate profiteering being one of the main drivers of inflation. Almost two years ago,

in December of 2021, Isabella published an op-ed about inflation and suggested the use of strategic price controls to reign in corporate profiteering. A. K. A. Greedflation. After that op ed published, Isabella was figuratively ripped apart by almost the entire economics Cr...

For example, Nobel Prize winning economist and New York Times columnist Paul Krugman [00:01:00] called Isabella, quote, truly stupid. Now, it is almost two years later, and the so called greedflation theory has gained pretty wide consensus

by even mainstream economists. in fact, this past January, Paul Krugman was even arguing for strategic price controls himself.

In today's interview, David speaks with Isabella about the debate still surrounding inflation. What's driving it? Who's responsible? How strategic price controls could be used? And which economists you should never listen to again.

Thank you again for being a supporting subscriber and funding the work that we do here at The Lever. now here's David Sirota's interview with Isabella Weber.

David Sirota: Hi, Isabella. Thanks so much for joining us.

Isabella Weber: Thanks so much for having me.

David Sirota: let's start with, um, the headline. In a recent issue of the New Yorker, an article that was about you and the headline was what if we're thinking about inflation all wrong and that was posed as a question.

[00:02:00] Okay, so what if we are thinking about inflation all wrong? And I think the question that flows from that is. Well, how have we been thinking about inflation, and how, in your mind, how is that wrong?

Isabella Weber: Yeah. So in the great moderation, we kind of became accustomed to, first of all, not think about inflation too much because it wasn't really an issue. We were almost more concerned about deflation. And if we were thinking about inflation at all in rich countries like the United States, um, we would have been thinking about it in terms of standard models.

So for example, in terms of the relationship between aggregate demand and capacity utilization, Or, um, in very simplistic monetarist terms where you basically think of inflation as having a bucket of money and a bucket of goods and it's about the exchange rate between the amount of money that you have and the amount of goods that you have and if you have more money than that exchange rate.

Um, changes in ways that creates inflation in the sense that the general price level goes up. [00:03:00] So in both, um, these cases, you have inflation as the outcome of basically changes on the macroeconomic level. In one case, you would think of it as somehow aggregate demand, um, going up. In the other case, as somehow the quantity of money in circulation in the economy going up.

But, um, you didn't pay too much attention to specific sectors, to issues on the level of specific products, really specific supply chains. Now, with the pandemic, we have had a very major structural shift. States suddenly decided who could go to work, who could not go to work, which factories could operate, which factories could not operate, and so on.

And that happened in an asynchronous way, in different countries, in a deeply globalized, um, economy. So that what used to be... A global production network that used to work like a clockwork suddenly became pretty much [00:04:00] messed up and very much, um, out of sync. Um, which created a lot of supply chain issues, which created very major, um, price and profit spikes in the, um, commodity and energy sectors.

So we got these, like, massive, um, sectoral, um, disruptions that, had huge implications for prices. And that ended up generating a more general kind of inflationary dynamic, where in the beginning, most thought of this as just local problems that didn't have too much to do with inflation, in the sense of not having too much to do with where prices overall are moving.

David Sirota: So, some people have called this a profit led inflationary situation. Companies using, the pretense of supply chain problems and the like, uh, as a rationale to jack up prices, betting that consumers would simply, accept that. Inflation, and I should [00:05:00] add a lot of that has been borne out.

I mean, we've seen a lot of data that this is now, much more widely accepted as a driver of inflation. A lot of the data shows that even central bankers, the Fed and the like, uh, have added credence to this idea. I think one question that's come up in my mind about this, and I'm not challenging that that is the dynamic at play here.

That profiteering is at the heart of this. And, and I should add that some people have scoffed at that saying, Oh, you know, this is the theory of so called greedflation. And they've scoffed at it by saying, well, greed has always been, sort of baked in, uh, to the corporate economy, to CEOs, fiduciary responsibility to their shareholders.

In other words, companies have always been, in a sense, Greedy. So I want to ask you about that. , if, if it is the case that this is profit led inflation, I, what do you say to those who say, well, companies have always tried to maximize profits. , so that hasn't [00:06:00] changed, uh, and that thus can't be the driver of this new inflation.

What's your response to that?

Isabella Weber: Yeah, so of course, I'm also of the opinion that companies have always pursued profits and that they've always tried to maximize profits. The question is, what kind of circumstances provide what kind of opportunities to pursue profit maximization? And the core of the argument that I have developed together with co authors, , which we have been calling seller's inflation, is to say that there have been very massive cost shocks that came.

Predominantly from the energy sector, but also from other raw material sectors. And the question is, how are these costs being covered in the economy? Is it that firms... can pass on these costs to consumers and ultimately workers. And that means that at the end of the day, wages go down, and the wage owners, um, taken as a whole pay [00:07:00] for that cost shock.

Or is it a situation where the, the corporate sector as a whole cannot pass on that cost shock? And it ends up being a situation where wage earners actually don't have to pick up most of that bill and end up being the ones that come out on top. What we have seen by and large is that the corporate sector has been pretty successful in protecting its profit margins.

against these cost shocks. Now, if you have a very large increase in costs and you keep your profit margin constant, then this means that your profits actually go up because you are now making the same relative margin over a larger volume of expenses. Which means that at the end of the day, you are bringing home more dollars in terms of profits.

Um, so this means that if the corporate sector as a whole is simply able to [00:08:00] protect its profit margins, it already enjoys a profit increase. And, this is also reflected in the macroeconomic decompositions. Where we can look at what share of inflation is accounted for by profits and what share of inflation is accounted for by profits.

by wages. So for all of this argument, I do not need an increase in greed. I do not need any kind of sudden change in the mindset of corporate leaders. I do not need a sudden pandemic of immorality among the business leadership or something like this. All that I need is to say that these cost shocks Um, coordinated, the price behavior of firms in ways where, um, those who are in charge of price setting anticipated that their competitors would react to these cost shocks by also trying to protect their profit margins and thus felt safe to increase prices in ways that kept these profit [00:09:00] margins where they were.

Now, in some instances, corporations were able to not only protect their margins, but to actually increase their margins and in some instances also increase them quite dramatically. And I think there are specific constellations that have allowed for such margin increases. That has happened, for example, when there were very severe bottlenecks.

, so for example, in the automobile sector, we have had a situation where there were chip shortages that of course have been very widely reported. So everybody, not only in the automobile sector, but pretty much everybody knows that there have been, , chip shortages and that for any kind of car, , at our time and age, you need...

Um, uh, computer chips. So if there was only a given amount of computer chips available, the, that translated in basically a fixed amount of cars that could be produced. So you had a proper supply constraint, which I think rendered some of the car producers, [00:10:00] um, to be some, in a, in some sort of a temporary monopoly position.

And what they have done is that they have not only produced less cars, which is... Inherent in the physical constraints that they have faced, but they have also tended to move into, um, more high end cars, more luxury types of, um, makes, which, are the kinds of, kind of cars that generally have higher margins, so, in addition, they could drive up prices a bit, um, overall, that would have increased their margins.

Now, you could ask, why is it the case that on the side of the consumers, they will be willing to pay these higher prices?

David Sirota: Yeah. I was just going to ask that. Right. Exactly. Like, like why. Are consumers willing to accept that? And I ask that, of course, with the understanding that some of this stuff that we're talking about is true necessity, that the consumer has no choice. But that is on my mind. So why? Why are consumers accepting this?

Isabella Weber: yeah, so I think we have to look, of course, [00:11:00] at different product categories. And as you already mentioned, the word necessity, right? I think that's pretty important. I mean, there are things where people just don't have a choice and can't say, like, I'm going to go without food. I'm going to go without heating in the winter, in the US, unfortunately, in many places.

It's also not a choice to say I'm gonna go without car because then it's like Basically a choice between being able to get to your place of work, , or not. Um, which means that basically not having a car means you will be out of work, which, uh, means it's not really a choice in that sense that we like to think about it, right?

But, , there has also been, um, something going on that Tracy Allaway over at Bloomberg, um, has been labeling, um, excuseflation, where, a lot of corporate leaders have observed that in the context of these extreme emergencies that the world has faced, consumers might have been a bit less price sensitive.

I mean, during the pandemic, if you kind of rushed into a store, um, and rushed out and you were wearing a mask and were fearing for your life, you might have been less concerned with [00:12:00] whether you're spending 50 cents more or less on the bread or butter or whatever you're buying. Once that, , became a bit more relaxed.

And we were, all watching the headlines on supply chain issues, on major grain price shocks, on, major, uh, cost shocks in general. , and if you go to the store after having seen these kind of news, um, that might also render you a little bit less... price sensitive because you might be thinking, okay, it makes sense that these prices are going up.

I can see that there are good reasons for this happening. And that's something that we can also trace in some of the earnings calls where corporate leaders are talking about that and are saying that they find that some of their customers are less price sensitive because they basically have An understanding or find it legitimate that prices are going up in the context of the kind of emergencies.

, that we all have, have been living through.

David Sirota: Okay, so let me [00:13:00] see if I understand what you're saying. So, a company has a supply chain problem temporarily. It raises its prices, uh, on whatever it makes. Other companies, where the product that that company makes, that's a higher cost of the input for their products that they're making. So, they raise their prices, uh, to account for that, to protect their existing profit margins.

So, in other words, There's sort of a, uh, a ripple effect, uh, from, uh, one industry or set of industries raising their prices temporarily, , based on a supply chain that ripples through the economy because their products are also inputs for other products and the like. I mean, I, I get. But I want to get to the, to the question of competition. And I want to hear if, if what I'm understanding or what I, I've come to glean is correct. It seems to me that what would short circuit [00:14:00] that ripple effect is if one company raises its price. And one big, relatively large company raises its price. It opens up an exposure, in theory, in a working economy, an economy that's got competition, where another competitor can say, Hey, I can gain more market share right now by undercutting that price.

By not following my competitor in raising my prices, I can actually gain more consumers, more customers, if I keep my price constant, don't raise it, or even lower it to grab more market share. But that doesn't seem to have happened. And I guess what I'm getting at is, is part of what's driving this, the fact that so many industries are now much more consolidated where there are one, two, three, five bigger players, oligopolies that don't have to worry.

About that kind of competition in a way that perhaps in previous [00:15:00] eras, they had to worry because their industries were less consolidated and more competitive. And if that's the case, what does that say about, for instance, antitrust policy?

Isabella Weber: Yeah, that's a great question. Um, because there's also kind of allows me to clarify one common misunderstanding. So I think that there has neither been a sudden spike in grade, nor has there been a sudden spike in corporate concentration, right? I mean, we have seen tendencies of small businesses, , possibly being hit harder.

And by the pandemic, then larger businesses, but we have not seen like a spike in corporate concentration.

David Sirota: But, but I think you, but I think you would agree there's been a, there's been a slow but steady consolidation over 10, 15, 20, 30 years of many industries.

Isabella Weber: absolutely. And the big question is. How can it be that that kind of very concentrated corporate structure has for a pretty long time generated a surprising price stability, right? Before the pandemic. I mean, we, we didn't [00:16:00] talk about inflation and we had very high Corporate concentration and how that same kind of corporate structure then brought about the kind of price hikes that we have seen.

And what we argue in the Serendipity Inflation paper is that basically these kind of very large firms that are price makers Um, make their pricing decisions based on, um, considerations of strategic interaction with their competitors. So in normal times, when everybody has these global production networks up and running, where literally, um, whatever, , the customers desire is, uh, one click away from their doorstep.

, in that kind of situation, if a firm was to suddenly start hiking up its prices, it would, as you just said, be at a very high risk to lose market share. And by the way, if demand is going [00:17:00] up and a firm would react to that in this kind of world of globalized, extremely efficient, , production chains would react by suddenly increasing its prices.

It would, , risk, , losing out to that other empire in charge of an equally powerful global production network that can then just say, okay, then, , I don't know, if I'm, I'm Honda and you are Toyota and Toyota suddenly , increases prices because there's more demand, then, , people will go and say like, okay, well, in that case, I'll, I'll, I'll go back to Honda, right?

So there is an immediate risk. So the question is. In what kind of situation can the corporate, , decision makers assume that their competitors are also increasing their prices? That's the key, right? So for that, um, in normal times, you would need, like, some sort of a cartel or at least, like, some sort of, , maybe non formal, um, uh, type of collusion.

Exactly. But if you have these [00:18:00] megashocks... If you have a mega input price shock, if you have a sector wide supply chain issue that everybody in the industry is fully aware of. And it's not just like a creeping up of costs slowly or like a temporary unavailability of one thing where you expect that tomorrow it will be back.

But if it's like that sector wide mega shock that everybody is aware of. then this by itself can become some sort of a coordinating, um, device. If all corporate decision makers accept that their competitors will react to these shocks by increasing prices, then increasing prices become safe. And they talk about this on earnings calls.

So, , they list, they can also in principle listen to each other's earnings calls, and by the way, if they decide to not hike prices in response to these shocks, they also risk, um, being penalized by the financial [00:19:00] sector, because of course the financial investors also expect for firms to protect their profit margins , so on the one hand, it's It's safe because they expect their competitors to hike prices, so they are not putting their market share at, at a risk.

On the other hand, , they have a discipline from the financial markets that they face themselves, where if they don't, , participate in the price hikes, , they, they risk being penalized, which for a glimpse of a moment, in fact, happened to Walmart.

David Sirota: right, so it's a, it's a mix of, uh, of sort of financial short termism. Right, a company can't say, it can't really communicate to the markets, Hey, listen, we're not going to raise our prices. We're going to take less profits in this quarter or these two quarters to gain more market share.

To undersell our competitors. There's no real way to communicate that. And also, the, uh, temporary supply chain shock is a way for companies in a sense, to more reliably know that if they raise their prices, their competitors are also [00:20:00] going to be raising their prices as opposed to kind of quote unquote, normal times, or if you just jack your prices, uh, then, then you are more at risk, or at least you, you can less rely on.

Your competitors also raising their prices. You're more at risk of losing market share. All of this makes total sense. And all of this, of course, for many, many months, , and really, really over the course of a year, year and a half was not part of the discussion, uh, about. Inflation. I mean, the discussion in our silly, annoyingly stupid political discourse was Joe Biden gave out some checks to help people survive COVID and that's what created inflation when in fact, now we know a lot more.

About, uh, what really has driven inflation. And again, I just want to reiterate, this is not, no, this is no longer, thankfully, any kind of quote unquote fringe theory. I mean, this has been validated by federal reserve studies and data, European central bankers, even the wall street journals reporting, , on [00:21:00] this has validated that this is really what's going on.

So then of course the question becomes, okay, now we've learned, uh, what's going on in my view, I think we've made a horrific. Uh, inhumane mistake of initially reacting to that false discourse by sort of a more austerity agenda of cutting people off things like the expanded child tax credit, Medicaid, et cetera, et cetera, all the things that were in, in my view, the best part of the entire Biden administration, uh, which was the American rescue plan.

We've been cut that off in response to the wrong headed front. view about inflation. So now the question is, okay, knowing what we know, knowing what you've just laid out, what should we do to deal with inflation? Like learning those lessons. Okay. We, we got it. What can and should be done with those? Lessons.

Isabella Weber: Yeah, so I think first of all, we have to recognize that we are living in an age of [00:22:00] overlapping emergencies where as much as we all want to return to normal, stable times of the great moderation that rich countries in the EU and the US have been enjoying, in recent years, um, I don't think that's how the immediate future looks like.

I think it's very likely that there will be more shocks, um, that come from, for example, climate change and extreme weather events that are already a reality. But we are also living in a time of an increasingly unstable global political order, which in itself, , can create very major shocks to, , our production systems.

Now, if that is the case, and if some sectoral shocks matter more than others, then I think we want to understand what are the shocks. That have the potential to unleash these kind of ripple effects that, , then kind of, , develop into some sort of an economy wide, um, storm of general price effects.[00:23:00]

And in another paper, um, together with co authors, we have actually tried to analyze that, , trying to understand what the systemically important prices are. So taking the same kind of language that was used after the financial crisis, where we were looking at what are the systemically important parts of the financial system, right, that are too connected,

Trying to look at, what are the sectors that if you have major price expulsions in these sectors. They, , unleash all these knock on effects. So, , the idea behind that, in terms of policy conclusion, is to say that we need monitoring capacity for these systemically important sectors, that we need, , where possible, , redundancies and buffer stocks, , of the type like the Strategic Petroleum Reserve, um, and that we might also need, More regulation for these kind of sectors and kind of a revamp of the way in which we think about these sectors by recognizing them [00:24:00] as having this systemic importance.

How exactly this then looks like, I think, has to always be Sector specific. So some of the sectors that we identify are, for example, the fossil fuel industry, which, of course, also interacts with all efforts to do climate change mitigation. So we have to think about how can we achieve a price greater price stability in the fossil fuel sector while also trying to transition out of.

Fossil fuels another sector that we identify is, , housing, of course, what we would do for housing is very different from what we will be doing, , for the fossil fuel industry. And yet another sector is, um, chemical, the chemical industry, which of course raises it again, a completely different set of policy options.

So I think the next step needs to be to really look into these sectors, talk to sector. experts and come up with policies that make these sectors more resilient in the sense that if shocks hit these [00:25:00] systemically important areas , by the way, another one is food and farming, which is also obviously very important

David Sirota: to, I want to add, I mean, that's the one that came to my mind. We're talking on, in a week where the headline, uh, just for one example, talk about shocks. This was a headline, uh, I think it was yesterday. India to ban sugar exports in addition to rice as corn, soybeans, and more crops falter in extreme heat and drought.

Now, what that does in terms of supply, the supply chain, the food system, I mean, these are the kinds of shocks that are going to be, uh, or, or the kinds of events that could create shocks that are going to become more normal, uh, or more frequent probably during the climate crisis. So I just want to reiterate, I mean, one of the first thing I think is, is food.

Right.

Isabella Weber: Absolutely, absolutely. And I mean, if we are worried about food price inflation in the US and Europe, then we are talking about risks of famine for large parts of the rest of the world where the majority of people live, right? So we [00:26:00] absolutely have to rethink how the price system for staple food works in times of extreme weather events, in times of very high risks of crop failures that can be very local.

That can be affecting whole regions, that can take all sorts of different forms. And I'm not saying I have the silver bullet of how to do that, but I think it's a question that we have to urgently address. And it may not necessarily mean, and I do not think it means like halting all markets for grain, for example.

That's of course absurd, right? But it might mean that we need to regulate these markets in a different way. It might mean that we need buffer stocks for grain that can be mobilized, , to have, a regulatory, , market participant that is not simply in pursuit of, of the greatest possible profit, but that is also in pursuit of more stable, prices and food security.

So these kind of issues, I think we have to think about very seriously, and we have to think [00:27:00] about, , By bringing together the question of climate change, the question of overlapping emergencies and the question of inflation, so that inflation suddenly becomes an issue that is immediately intertwined with these very concrete, , Very, um, in a sense, like, physical almost, , kind of issues, right, that is pretty far removed from, , just the central bank, , doing, , one monetary policy or another, raising interest rates by 0.

25 or not, right? It becomes a very material kind of issue. That requires a different set of answers, but also, of course, we have to think about, , changing the conversation about inflation so that when inflation goes up, , the default answer is not, oh, clearly it's because people have too much money in their pockets, , but the default answer is, I mean, what is it that triggered that kind of inflation?

And it may be that in some situations it is indeed because, , there was a demand shock. But, it shouldn't be, , the case that whenever inflation goes up, we just say, oh, [00:28:00] of course it's a demand shock, especially if we are living in this world of supply shocks.

David Sirota: Well, so let's talk about that for a second. Um, uh, because I had said one of the things we did, uh, in response to the misunderstanding of inflation, uh, and I want to add one thing. It wasn't calling it a misunderstanding. I think is actually too generous. There were very powerful corporate the辩论. That misinformation campaign, right?

I mean, if you're, a CEO of a giant company, uh, you don't want the narrative to be that, uh, corporate, profiteering, corporate oligopolies using their market power to jack up prices. You don't want that to be the narrative. You want the narrative to be that, uh, the American rescue plan put too much money in poor people's pockets and now they're spending money.

Right? You want the narrative to be that wages are, are, are creating inflation. And of course, corporate media amplified that, uh, because that's what corporate media tends to do. So I don't think it [00:29:00] was a misunderstanding, I think it was actually, in many cases, deliberate misinformation to berate the idea that Corporate profiteering and corporate abuse of market share was helping drive inflation.

But, but I guess I want to ask the other part of this because one response was, okay, cut off the American rescue plan. Another response, as you alluded to, was the Fed jacking up interest rates. Uh, it seems to me that If we accept what actually happened with inflation, the Fed jacking up inflation is the wrong medicine, right?

It's like if somebody has one disease or one, one health ailment, and the doctor prescribes the wrong pill, right? So I guess I would ask you, what do you make of the Fed's response? What does the Fed's response, if it is misguided, how does it... [00:30:00] affect or not affect, uh, the inflation situation if it's treating the wrong problem.

Isabella Weber: Yeah, if I may just quickly on the question of media coverage, I think it's actually quite interesting that if you have watched, CNBC or these kind of channels that have a lot of, talking time for CEOs. They have been very explicit and blunt about, raising prices, right? There's so many segments where they are saying it on live TV that, um, what they are doing is to increase price in response to the shocks that they have experienced.

And on the earnings calls, by the way. And in fact, I've been quite struck by. How the business press has, in some sense, been ahead in the recognition of that kind of, inflationary dynamic compared to a lot of the economics establishment and, uh, some, some quarters where you might not, , immediately , think of vested interest.

So I think we also really have a situation of. Power of ideas. I mean, I'm not saying it's just power of ideas, but I think power [00:31:00] of ideas also really matters, , in that, in that kind of context. Now, to the fat and the question of interest rates. , so, I mean, let me preface this by saying that I personally don't think we should have near zero or negative interest rates, so I think we, like in some sense, um, these extremely low interest rates that we have had for a long while are an expression of a similar kind of way of thinking about economic policy as the one that then led to the checking up of interest rates.

Let me explain that. While we were, , in this, a kind of Simmering lack of dynamism in the economy, the main response to try to get out of it and generate a new growth dynamic was to try to lower interest rates, right? Basically, quantitative easing. Now, what could have been done in that situation too would have been something like an IRA or a Green New Deal, right, or like massive, , investment in the [00:32:00] kind of stuff that we really need to get a green transition, to, increase, uh, climate change mitigation, , and so on, right?

Instead, we kind of try to... Rely on making money ever cheaper, thereby also pumping up all sorts of asset bubbles, right, which, um, relied on the idea that the state should not take an active role by leading the way, and initiating major investment packages, but that it should, govern the economy through this indirect means of investment.

Monetary policy right now that that is just a kind of a preface because I think this is often lost in the debate around interest rates that we somehow I'm dealing with two sides of the same coin. That being said, if you increase interest rates very fast. If you did not also do the kind of big fiscal that the U.

S. has been doing, right, what you're basically, , after is, , to, , create [00:33:00] more unemployment, in the economy, thereby to, , bring down aggregate demand, thereby to, , cool down the whole economy, which always sounds like kind of a, Fresh breeze on a hot summer day or something, right? But it's really actually quite brutal, , kind of policy, right?

That basically aims to reduce the economic activity across the board. , but the things that go down first, are not homogeneous, right? So, I mean, it is, it is about, , lowering wages. It is also the case that, if you increase interest rates and, you are in a world where you actually need a lot of investments in renewable energy and renewable energy has a lot of upfront costs, right?

You first have to, , build, , wind plants. You have to build solar PV plants and so on. Sorry, wind parks and solar PV plants. , so you have a lot of upfront costs to install that stuff. But once that is up and running. The ongoing cost is relatively low. Now, if you have very high interest rates, you actually [00:34:00] make investments in these things that have these very high up front costs less attractive, which is a huge issue, of course.

So this is just an example to say that by increasing interest rates beyond relying on this very roundabout way that really touches upon the whole economy and kind of pushes down the whole economy, it also affects Some areas in particular, and I think it does affect some areas very rarely, , don't want activity, , to go down.

David Sirota: One final question here, uh, because it's something that you've written on. Um, it's the phrase that has become a taboo, uh, in American politics, price controls. There was the headline of your piece in the Guardian, uh, in 2021. Could strategic price controls help fight inflation? And I think, look, it, it wasn't that long ago that price controls were a thing that were.

part of American politics. I mean, Richard [00:35:00] Nixon in 1970, price and wage controls, during World War II, uh, price controls were, were on the table. My question for you is, if we talk about price controls, what specifically are we talking about when you say strategic price controls? What does that mean?

Like, what does that look like? In practice, uh, and, and how do you counter the, the argument that any time you put a price control into effect, um, you are, potentially, disincentivizing, uh, for instance, uh, production or there are other, uh, alternative or, or unintended consequences of a price control.

Isabella Weber: Yeah, um, so maybe. Let me motivate why I think there can be situations where strategic price controls can play a helpful role. So we talked earlier about some, , areas matter more than others, right? And certain prices shooting up can have very large [00:36:00] systemic implications. The prices of fossil fuels, , are shooting up in a fossil fuel powered economy has , very wide ranging implications, right?

Now, the argument that I made in this Guardian article is going back to the situation right after the Second World War, where basically you had a lot of bottlenecks, , because you were retooling your economy from production for war for post war consumption. which involved some of the similar supply chain issues as the ones that we have been facing.

And in that kind of situation, some of the most famous American economists, some very mainstream people like Paul Samuelson, one of the most famous textbook author of the 20th century, were arguing that , if supply cannot adjust quickly because You have physical bottlenecks, you have a real constraint to the speed at which you can retool a factory from producing tanks [00:37:00] to producing cars, then letting these prices shoot up when you know that this price explosion is not going to create it.

a fast supply, adjustment because prices shot up in the first place because you have all these bottlenecks, um, then in such a situation, it can be beneficial to have a strategic temporary price control that limits the amount by which the price can increase. Such as, to basically buy time for the adjustments, , in the supply chain that have to come about.

Now the key term here is really buy time. So the idea is not that the price control itself can somehow fix the supply chain issues. The idea is that... By not letting prices explode in the interim, you're kind of, avoiding some of these, very large collateral damages that these price explosions, create where a supply adjustment is not, likely.[00:38:00]

To give you a more contemporary example, if you think of The, of the Port of LA where you had these huge, , traffic jams basically, right? And then in the meantime, you had freight rates multiplying, right? They didn't just go up by 40, 50 percent. They literally multiplied four, five, six times, right?

Now by freight rates multiplying, the traffic jam in the Port of LA It did not disappear, right? It was a physical bottleneck. I mean, quite literally a bottleneck, where the speed at which these ships could pass through the port was whatever it was and it might be able to increase it a little bit, but it was not possible, physically possible to multiply that speed, right?

So, now you have a huge price shock from shipping, which is also a systemically important area. , you have a huge profit explosion on the part of shipping companies. But your problem that you had really was that you had a traffic jam in the port because of all [00:39:00] the things that happened with the pandemic, right?

So that kind of situation, I think putting a limit to the amount by which Right. Rates can increase. I'm not saying like completely preventing them from going up. I'm just saying, I mean, maybe they can double but not increase three or four or five times, right? If they had doubled, you already have a lot of incentive, to, put capacity, , to that port, right?

, but you don't create quite as large, collateral damage as you would otherwise. And then there can also be situations where, where firms actually realize that with a lower volume of production, if prices go up enough, they are making more profit than if they were producing more. In that kind of situation, you can get perverse effects where letting prices explode can actually encourage keeping volumes relatively low, especially if you have very concentrated markets.

Because you kind of expect that others [00:40:00] might be doing the same and benefiting from these very high prices at relatively low volumes. In which situation, you get an outcome where the price increase actually does not increase the volume in the ways in which you would normally think it would.

Okay, all of that being said, I, I am not of the opinion that we can generally. , prevent inflation, with price controls. But I do think that if we have very local price explosions in very important areas, such as, for example, shipping or oil or gas, that temporary price policy can be an emergency measure that can buy time for the measures that actually unblock the port, , deal with the issues in energy supply and so on.

Now, how these price policies look like? Always has to start from the very specific conditions that you are facing. So if you are Germany and you are a gas importer and I worked on the German gas price civilization policy last year, then of course [00:41:00] you're not going to put a simple ceiling on the price.

You will have to use subsidies. You will have to use. fiscal firing power in, um, stabilizing your price. If on top of the price explosion, you are dealing with a situation of a potential nationwide shortage of gas, of course, you want to preserve the price incentive for consumers and firms as much as you can.

So what we came up with was like a dual Dual tier pricing scheme where households would get a basic amount of gas that they need for their basic heating and cooking and showering needs at a price capped level where this price cap is implemented with a subsidy, but if they consume more than that, they have to pay market prices.

So that, that part where consumers cannot save, , without like really giving up, , basic, um, human needs is protected. But at the same time, the price [00:42:00] incentive to not, I don't know, heat your pool at 100 degrees or something in December, is there.

David Sirota: And, and again, I think this all underscores that the old idea of what drives inflation fuels then the old, uh, policy prescriptions, uh, austerity, jack up interest rates, uh, and then we all look around and wonder, Wait, why didn't those things, uh, those policy prescriptions work? It's because different policy prescriptions are necessary when inflation is driven by something different.

And I, I really think that a lot of people couldn't, couldn't conceive Of any other way that inflation happens, uh, uh, and couldn't conceive of, of, of what you've been saying for a very long time. Isabella Weber is an associate professor of economics at the University of Massachusetts at Amherst. [00:43:00] Unlike Larry Summers and other economists who get tons of television time, she's the economist who's been right.

about corporate profiteering, fueling inflation. Isabella Weber, thank you so much for your time today.

Isabella Weber: Thanks so much for having me.

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Until next time, I'm Frank Capello. Rock the boat. The Lever Time Podcast is a production of The Lever and The Lever Podcast Network. It's hosted by David Sirota. Our producer is me, Frank Capello, [00:44:00] with help from Lever producer Jared Jacangmayor.