Counterfeit Capitalism: Why a Monopolized Economy Leads to Inflation and Shortages
From railroads to plastic bags to semiconductors to ice cream, Wall Street and monopolists are creating shortages and exploiting them.
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Today I’m starting a series on shortages and inflation in the economy. If you see a shortage either at work, at your business, or in your normal life, let me know so I can learn and write more about this topic, and tell interested policymakers about your experiences. I’ve set up a form where you can describe the situation. Alternatively, you can email me or just leave a comment.
How Uber Caused a Shortage
I’ve lived in Washington, D.C. for fifteen years, and one of the many unacknowledged changes has been the disappearance of taxis. While the city has good public transportation, you could jump into a taxi for a reasonably priced convenient ride around commercial areas. Around 2012, Uber and Lyft came into the market, and for the next seven years, it got even better, with cheaper Uber fares within minutes. At the time, everyone knew that Uber, and its tech economy cousins, were heavily subsidized by investors, with Uber losing up to $1 million a week. But the cheap rides were too good a deal to pass up.
It couldn’t last forever, and it didn’t. Slowly, cabs, under pressure from ride shares, disappeared. Taxis had been a reasonable business in D.C., and the drivers had middle class lifestyles, but there was a tipping point, and the industry collapsed. Similarly, driving for Uber, once a reasonable side job, became worse as the firm cut the amount paid to drivers. Now, cabs are mostly gone. And today, ride shares are often a ten to twenty minute wait, and more expensive. It’s not just a D.C. problem; nationally, Uber/Lyft prices up 92% over the last year and a half. And at least in Washington, cabs, though they could now go back to their previous pricing, have not returned. In other words, there is both inflation, and in some ways, a shortage of taxi services.
Professional class people not being able to cheaply zip around is not the biggest problem in the world, but the story I just told you about why that service shriveled isn’t an isolated incident. While once ride shares were plentiful, now they are not. A would-be monopolist both raised prices to consumers, cut wages to drivers, and reduced the amount of driving services available in general.
And this story brings us to the problem of shortages and inflation.
The Shortage Problem
Last February, before Covid hit in force, I predicted in Wired magazine that this pandemic would introduce us to the problem of shortages. And now, almost every week I get emails from readers complaining about not being able to buy things they need. Politicians I know are hearing about it on the campaign trail. If you talk to local economic development officials, they will note that both shortages of goods and labor are the top concern of most businesses at this point. Reddit has a subreddit dedicated to shortages. The most recent Federal Reserve Beige Book mentions “shortage” 80 times. Even CNN is covering the problem, noting that shipping boxes have doubled in price and the cost of moving goods from East Asian to the U.S. or Europe has gone up five-fold.
The problem is everywhere.
There are shortages in everything from ocean shipping containers to chlorine tablets to railroad capacity to black pipe (the piping that houses wires inside buildings) to spicy chicken breasts to specialized plastic bags necessary for making vaccines. Moreover, prices for all sorts of items, from housing to food, are changing in weird ways. Beef, for instance, is at near record highs for consumers, but cattle ranchers are getting paid much less than they used to for their cows.
The debate over shortages has become so important that it is now a key political problem for the Biden administration. And yet, policymakers have no institutional measurement system useful for tracking it. Economists in the policy realm are obsessed with inflation, aka pricing changes, but they don’t have a similar popular metric to focus on with regards to shortages. This institutional gap blinds them, in part, to what is happening, because if there’s no transaction because the good doesn’t exist or can’t get to the buyer, then there’s no price. Hundreds of drugs, for instance, have been in shortage for decades, but the substitute of an inferior medicine doesn’t reflect in the consumer price index.
Nevertheless, economists are taking notice that something is off in our economy, because supply chains are disrupting pricing, and causing inflation in many unusual segments, like used cars and hotels. At the Federal Reserve, there is a debate over whether this inflation is ‘transitory’ - a result of one-time shocks from the pandemic - or something else.
Among economists like Paul Krugman, the problem is temporary. Supply chains will eventually work themselves out. Inflation hawks by contrast see money printing from the Fed as inducing price hikes. Republican Jim Banks, for instance, chalked up inflation to “reckless spending bills Democrats have pushed for during the last year,” but it’s not just a partisan play; Obama advisor Larry Summers agrees with that formulation.
If you ask about supply chains, however, the answers get a lot more vague. In response to a question about shortages, Adam Posen, a former Bank of England official turned D.C. think tank expert, told the New York Times that normalcy might be “another year or two” away, though there is “genuine uncertainty here.”
What If There Is No “Normalcy”?
For forty years, everyone but logistics professionals have had the luxury of ignoring the details of how we make, ship, and distribute things. Stuff just kind of showed up in stores for consumers. Economists who talk about the broad economy, meanwhile, were obsessed with money; they thought about the Fed printing more or less of it, or taxing and spending. They too assumed stuff just kind of shows up in stores.
Yet, using this macro-framework is oddly divorced from what people are experiencing. Much of the handwaving - the assumption that things will return to the way they were and it’s just a matter of waiting, or that everything is driven by money printing or government spending - reflects the intellectual habits borne from not having to think about the flow of stuff.
There is a third explanation for inflation and shortages, and it’s not simply that the Fed has printed too much money or that Covid introduced a supply shock (though both are likely factors.) It’s a political and policy story. The consolidation of power over supply chains in the hands of Wall Street, and the thinning out of how we make and produce things over forty years in the name of efficiency, has made our economy much less resilient to shocks. These shortages are the result.
Uber’s attempt to monopolize the taxi market with cheap prices, and the resulting shortage years later after the market was ruined, is a very simple way to understand the situation, if you imagine that taking place across multiple industry segments beyond taxis. Monopolistic business models often appear to be efficient or good for consumers - for a time - but end up destroying productive capacity on the backend, which then creates or worsens a shortage. In that case, cab drivers, who used to be able to make a reasonable living, haven’t really come back.
Two years ago, I coined the term “Counterfeit Capitalism” to describe this phenomenon. I focused on the fraudulent firm WeWork, which was destroying the office share market with an attempted monopoly play turned into a straight Ponzi scheme, enabled by Softbank and JP Morgan. Like counterfeiting, such loss-leading not only harms the firm doing the loss-leading, but destroys legitimate firms in that industry, ultimately ruining the entire market.
In the gig economy, the consequences are becoming clear, as Kevin Roose of the New York Times noted a few months ago in a story titled “Farewell, Millennial Lifestyle Subsidy.” But beyond Uber and the gig economy, or firms like Amazon that pursue loss-leading strategies, such destructive business practices are also routine.
Take lumber, whose pricing increased dramatically earlier this year. As Sandeep Vaheesan pointed out, there’s a very clear predatory pricing monopoly story here. In the early 2000s, Ross-Simmons Hardwood sued lumber giant Weyerhaeuser Co. A key cost for lumber mills is the price of logs, and Ross-Simmons accused Weyerhaeuser of artificially paying more for logs to drive competitors out of business. This practice was similar to Uber incurring losses to subsidize the cost of rides to underprice taxis and capture the market, only in this case it was Weyerhaeuser incurring losses to keep the price of logs higher than they should be.
As Vaheesan put it, this behavior changed the market. “Why invest in sawmills,” he asked, “if dominant players will buy up necessary inputs as a means of crushing the margins of competitors?” Though a jury agreed that Weyerhaeuser was engaged in predatory conduct, in 2007, the Supreme Court ruled in favor of Weyerhaeuser. And whaddya know, during the pandemic lumber prices spiked, even as tree growers didn’t see the benefit. More broadly, this ruling undermined small producers in capital heavy industries, who had less of a reason to invest in capacity.
This decision, like many others, was part of a forty year trend of facilitating monopolies. It wasn’t necessarily done in bad faith; policymakers followed the lead of economists, who believed dominant firms were dominant because they were efficient. This faith in efficiency over all else meant that the public structuring of markets to force resiliency - aka regulation - was illegitimate. So too were attempts to use public rules like tariffs to retain domestic production of key goods.
Alas, this philosophy has led to a series of bottlenecks in our supply chains, which are now global. After all, what else is a monopoly but a business model designed to secure or create a bottleneck? It is those bottlenecks that are worsening, or in some cases, creating the shortages we see all around us, on a worldwide scale.
Industrial Supply Crashes
I first noticed the problem of concentration and supply in 2011, when I wrote a piece on shortages of specialized video tapes, a result of the earthquake in Fukushima and the consolidation of productive capacity in that region. Before digitization, such video tapes were necessary, not to watch shows, but to film them. Because of the shortage, the NBA scrambled to get enough tape to broadcast the NBA finals, with one executive saying, “It’s like a bank run.” Why was this shortage so acute? The earthquake halfway around the world had knocked offline a Sony factory that made them. That was known an industrial supply chain crash, like a bank run, only with actual inputs and outputs of real world stuff.
This wasn’t the first such industrial supply chain crash in the era of globalization. There was one in 1999, when an earthquake in Taiwan hit semiconductor production, causing factories all over the U.S. to shut down and firms like Dell and Hewlett-Packard to stop selling computers. The key to these supply crashes was the consolidation of production in one area, often under the guise of trading off resiliency for efficiency. This was also the logic behind mass outsourcing of production.
Similar to the lead-up to the financial crisis, policymakers only saw in these trends the efficiency of large firms and beautiful global supply chains, not the pooling of hidden risk. The intermingling of banks and shadow banks into a complex and unknowable system caused a huge crash in 2008. Who knew AIG, Goldman Sachs, and fly-by-night California mortgage lenders connected to German land banks? Certainly regulators didn’t. The same is happening in slow motion with our supply chains. As one trucker noted, his Freightliner is in the shop due to a broken air line, and he was told that shop had seven other trucks sitting there with a similar issue, and so they can’t truck anything. That specialized part to repair his vehicle is no longer made domestically, but must be… trucked in from Mexico or Canada. See the problem?
The lack of resilient supply chains in the United States (and around the world) was masked, until a global shock came among. That Covid would cause such a shock was obvious; as I noted above, before the pandemic hit in force, I predicted it. And now, the pandemic is introducing shortages into our politics for the first time in living memory, largely because our highly thinned out supply chains are no longer resilient.
Forty years of consolidation suddenly met with a pandemic that required a social flexibility that our monopolistic commercial systems can no longer provide.
The Basics of Shortages: Bank Runs and Economic Shocks
So what is actually happening? I’m not sure, but below I’m going to lay out some of the dynamics I’m seeing.
First, there are two things at work that have nothing to do with monopolization. The first is Covid, a massive shock to our economic system that changed consumption habits. We switched from restaurants to grocery store food, from movie theaters and concerts to home electronics and hunting gear, from vacations to home improvement, from public transportation to driving, etc, along with parallel shifts in various commercial sectors.
Under any circumstances, such changes would necessarily cause chaotic price movements. Hotels and airline prices collapsed, lumber prices skyrocketed, and gun owners are still experiencing the “Great Ammunition Shortage.” But some significant shifts were inevitable.
Then there is the dynamic of bank run-like panics, which induce shortages by drawing down inventories. One home builder wrote me about shortages in his industry, noting that a lack of supplies “are, predictably creating further shortages, reminiscent of the toilet paper shortages in 2020: once someone finds black pipe or whatever, they buy way more than needed since they might not find it again. I'm as guilty as anyone; I have 50 stoves sitting in a storage unit since I'll need them at some point. Meanwhile, a 54 unit project is in suspended animation while I wait for the Packaged Terminal Air Conditioners that won't be in until next year.”
Another example is the gas lines resulting from panic around the shutdown of the Colonial Pipeline earlier this year. People topped up their tanks en masse, which caused shortages at gas stations even when there wasn’t an actual lack of adequate gasoline supplies.
Supply shocks, and some panic buying, was inevitable. In an economy with lots of flexibility and multiple buyers and suppliers at every level, these problems are manageable. But a monopolized economy makes the problem much worse.
The Different Types of Bottleneck Problems
Here are the five ways I’m seeing it play out.
1) Monopolies manipulate prices and lower supply. Unregulated firms with market power raise prices, cut wages, and reduce supply. That’s just what they do. A very simply example of this problem is in the beef, poultry, and pork industry, the three types of meat that are responsible for roughly half of the inflation in food. The White House came out with a very good blog post on the problem, noting that “just four firms control approximately 55-85% of the market for these three products.” The result is price spikes to consumers, lower amounts paid to farmers and ranchers, and record profits for the packers. Half of our food inflation, in other words, is a meatpacking monopoly story.
It’s not just meatpacking. The list of supply reductions seems endless. For instance, there is a shortage of various forms of generic pharmaceuticals. One would think we’d be investing in more production. Yet, as a result of a merger between Mylan and Viatris approved by the Trump administration, Viatris just shut down a giant pharmaceutical plant in West Virginia, costing 1500 jobs, but also reducing the capacity of the U.S. to make its own medicine. Similarly, in 2017, Linde and Praxair, two industrial gas giants, merged. Whaddya know, now there’s an oxygen supply shortage.
2) The Keurig Interoperability Problem: Then there are the artificial bottlenecks produced on purpose to exploit market power. For instance, why don’t we have enough specialized plastic bags to use in making vaccines? Over the past fifteen years, the producers of biopharmaceutical equipment consolidated the entire industry, such that there are really four producers each of whom sells, in business school speak, an “integrated set of products” to pharmaceutical firms who want to make stuff.
However, as I noted back in May, an ‘integrated suite of products” is really a euphemism for locking in your customers through product design, a classic sign of monopoly. If you use one kind of bioreactor bag, you can’t easily switch out to another, because the industry refuses to standardize. As this International Federation of Pharmaceutical Manufacturers Associations noted, “the high degree of specificity and the lack of standardisation of these items represent a hurdle to short-term supplier switches and thus flexibility.”
Basically, it’s as if these firms all make their own type of Keurig coffee machine, and don’t let the coffee pods work with each other’s machines to lock in their customers. There is no shortage of coffee, but the focus on market power has created an artificial bottleneck via product design. (To amplify the market power problem, these firms created intellectual property thickets, with thousands of patents on the plastic bags alone.)
Such interoperability issues are pervasive; railroad monopolies, for instance, don’t allow switching of freight loads to rival networks, which hinders shipping. Many of these shortages in the economy, in other words, are intentional.
3) Right to Repair, or the McDonald’s Ice Cream Problem: Another artificial bottleneck created to facilitate certain corrupt business models is to prevent firms from repairing their own equipment.
For instance, why is McDonald’s often out of ice cream? Their ice cream machines are always broken, leading to unhappy customers and frustrated franchise owners. There’s no shortage of vanilla, cream, sugar, or other inputs, but McDonald’s, and the food equipment conglomerate Middleby, do not allow franchise owners to repair their own equipment, because allowing that would jeopardize the fat maintenance equipment fees they get from servicing overly complex machines. And so there’s a shortage of ice cream.
If McDonald’s couldn’t force franchises to buy specific equipment, or if Middleby didn’t roll up the food services equipment space, or if it was illegal to block people from repairing their own equipment under reasonable terms, then there would be no shortage.
This problem, like the Keurig interoperability problem, is pervasive. John Deere tractors, weapon systems, wheelchairs, ventilators and many types of electronics have provisions preventing the ability of owners to repair their equipment. And market power creates an incentive for monopolists to produce over-engineered crap that breaks down, or to make it impossible to replace a part with a similar though not identical part from a rival firm.
When you need a flexible supply chain in a crisis, the ability to repair something comes in very handy. And the inability to repair stuff means shortages.
4) Infrastructure Monopolies: One of the most problematic monopolies is that of Taiwan Semiconductor (TSMC), which is the main fabricator of high-end chips used in everything from phones to computers to cars, whose customers include every major tech firm. Semiconductors, like oil, are infrastructure at this point, going into a large swath of products. Infrastructure monopolies are bottlenecks whose effects cascade down supply chains. I mean, PPG, which is a paint conglomerate, is pointing to chip shortages as a cause of its supply disruptions.
As Alex Williams and Hassan Khan note, sustained national investment by Taiwan, combined with disinvestment by the U.S. government, led to the consolidation of manufacturing capacity in TWSC. Additionally, TWSC engaged in dumping of products on the U.S. market in the 1990s, which is a form of predatory pricing. Intel, rather than focusing on competing, organized itself around monopolization, and thus loss the technological lead over semiconductor production in the early 2010s.
The net result is that we are now highly dependent for a key form of infrastructure on a monopoly that cannot expand as quickly as necessary, and that is halfway around the world in a drought-riven geopolitically sensitive area. Disruptions or supply shocks thus mean begging Taiwan for one’s ration of semiconductors.
But there are many other infrastructure monopolies we’ve facilitated over the last forty years. There are, for instance, railroads, an industry where there used to be 30+ competitors, and which now has seven monopolistic rail lines that are constantly reducing service and destroying freight cars. Railroads, like many network systems, require not only competition, but regulation, or else the incentive to disinvest by owners is too strong. For instance, in 2019, the Union Pacific shut down a Chicago area sorting facility to increase profit margins for its Wall Street owners. As a result, in July of this year, the rail line had so much backed up traffic in Chicago that it suspended traffic from West Coast ports. Such a suspension of service backed up port unloading, causing a cascading chain reaction, delays piled upon delays.
Regulators are noticing. A few days ago, the head of the Surface Transportation Board Martin Oberman, told his industry that US railroads are focusing too much on pleasing Wall Street at the expense of shippers and the general public. To reach Wall Street profit goals, he said, “railroads have cut their workforce by 25 percent…Operating the railroads with that many fewer employees makes it difficult to avoid cuts in service, provide more reliable service, and reduce poor on-time performance.” So we know the problem. Infrastructure monopolies, when unregulated, intentionally create shortages.
We saw something similar with ocean shipping lines that have consolidated into three global alliances that build larger and larger boats. When a big dumb boat crashed in the Suez canal, a significant amount of global shipping came to a halt, which again, caused a cascading chain reaction that is still being felt, months later. And trucking is also being disrupted by the private equity roll-up of third party logistics firms which, like Uber, pushes down wages and likely removes supply from the market.
5) Power Buyers and Economic Discrimination: Then there’s price discrimination to remove small players from the market. One BIG reader, an administrative assistant at a small college, noted she’s seeing “shortages in previously plentiful food items.” There are a host of foods they can’t get anymore. “We order from Sysco mainly, and we sometimes can't get basic things like spicy chicken breasts for sandwiches. We get the same spicy chicken that Wendy's serves, so we presume Wendy's is taking priority on this.” Sysco has tremendous market power in food distribution, it is what is known as a power buyer, using a system of rebates to coerce suppliers and buyers into using its services.
Power buying is why large firms like Walmart are out-competing small ones. Walmart, for instance, tells its suppliers they must deliver on time 98% of the time, or it will fine them 3% of the cost of goods. “Known in the industry as "power buyers," large retailers have had an advantage for years when buying goods because they order larger quantities than smaller wholesalers do,” wrote CNN’s Nathan Meyersohn on this problem. “Large retailers' scale and buying clout make them a top priority for manufacturers, he said, and they often get promotions, special packaging or new products early.”
Price discrimination means smaller firms, both producers, distributors, and retailers, can’t get access to what they need to do business, and small firms are often more flexible than big ones, and serve customers in rural or niche areas. In West Virginia, for instance, where small pharmacists were the key vaccine operators, the roll-out of the vaccine to nursing homes was initially far quicker than in states that used CVS and Walgreens. The collapse of niche specialties, or the disappearance of small dealers who can fix products or service customers, is one result.
There are many other ways power buyers operate, and I’m going to devote a BIG issue to breakdowns in the pharmaceutical supply chain as a result of what are known as Group Purchasing Organizations. But that’s the gist of the problem.
A lot of people look at the economy over the last year and a half, and see the shortages that we’re having as a result of the pandemic and the resulting supply shock. But while Covid provided the spark, it also leveraged pre-existing fragilities existing all over the economy, including some shortages that were longstanding before the disease emerged. What all of these examples I offered have in common is the basic idea that when a monopolist concentrates power, that monopolist also concentrates risk.
The story of my book Goliath is the story of how policymakers and Americans came to see monopolies as efficient, or useful, or perhaps simply inevitable. We relaxed antitrust policy, facilitated the rise of concentrated power, and enabled looting by financiers. And this created a political crisis which is simple to explain. American commerce, law, finance, and politics is organized around producing bottlenecks, not relieving them. And that means when there’s a supply shock, we increasingly can’t take care of ourselves.
The scariest part of this whole saga is not that a bunch of malevolent monopolists run our economy, inducing shortages for profit. Indeed, these shortages are not intentional, any more than the financial crash of 2008 was intentional. Most of what is happening is unintended. Bad actors aren’t steering the ship. They are just making sure that no one else can, even when it’s headed for the rocks.
Once again, if you’ve seen a shortage in your neck of the woods, let me know about it.
Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.