Unemployment weakens governments. Inflation kills them. That’s what a government official from Brazil once told me. But in rich countries including the United States, the politically destructive power of inflation had been forgotten. Standard policy tools left us unprepared and the Biden administration was slow to fight back. The re-election of Donald Trump should serve as a warning to democratic governments.
In this age of overlapping emergencies — hurricanes, an Avian flu outbreak, two regional wars — threats to supply chains are becoming commonplace. Each threat brings the risk of inflation and its power to destabilize governments, including our own. With such emergencies being the new normal, if we learned anything from last week’s earthquake election result, it’s that we need new means of protecting our society and democracy.
Among the biggest problems that need fixing: Many business sectors today are dominated by large corporations that can profit from these one-time events.
Using A.I. and natural language processing in an upcoming paper, several co-authors and I analyzed more than 130,000 earnings calls of publicly listed U.S. companies and found that businesses can coordinate price hikes around cost shocks. This enabled companies, by and large, to pass on or amplify the impact of the initial cost increase in response to shocks in the wake of Covid-19 and the war in Ukraine.
In other words, the sudden news of cost shocks, like the onset of a pandemic and war, grants companies more freedom to coordinate price hikes across sectors because they realize that their rivals are very likely going to do the same.
Skeptics of this idea often counter that corporate concentration was already high before the pandemic, yet those same powerful businesses kept prices stable for many years, despite close-to-zero interest rates. That’s because under normal circumstances, a company that decides to increase prices without knowing that its competitors would follow suit risks losing business to rivals. This was the world we were living in before the pandemic. Globalization had created the most efficient, just-in-time production networks the world has seen and, for the most part, even giant companies kept prices stable under the pressure of competition.
