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Tuesday, January 18, 2022 Leer en Español

(Another) Top Obama Economist Offers Harsh Assessment of Elizabeth Warren’s Inflation Theory 

Harvard economist Jason Furman said the notion that "corporate greed" is driving inflation is not grounded in sound economics.

Image Credit: Flickr-Brookings Institution | CC BY-NC-ND 2.0

Over the weekend, Jason Furman, a former top economist for President Barack Obama, threw cold water on Sen. Elizabeth Warren’s claim that “corporate greed” is driving inflation.

“Corporate greed is a bad theory of inflation,” Furman bluntly told Business Insider in an article published Sunday.

Furman, currently a professor at Harvard University’s John F. Kennedy School of Government and a Senior Fellow at the Peterson Institute for International Economics, said the surging inflation in the US economy has a simple explanation.

“I think almost everything other than the Federal Reserve is a sideshow when it comes to the dynamics of inflation,” Furman said.

‘Corporate Greed’ Causing Inflation?

Warren, a populist progressive from Massachusetts, has hit the cable shows in recent weeks to argue that inflation—which in December saw a year-over-year increase of 7 percent, its biggest leap clip since 1982—is the fault of greedy corporations.

“Prices at the pump have gone up. Why? Because giant oil companies like @Chevron and @ExxonMobil enjoy doubling their profits,” Warren tweeted. “This isn’t about inflation. This is about price gouging for these guys & we need to call them out.”

Warren has used the “corporate greed” talking point to argue for antitrust legislation, saying businesses like Kroger should be broken up, which would lead to lower prices.

Furman isn’t the only Obama economist to point out that Warren’s arguments are not grounded in sound economics.

In December, Lawrence Summers, who served as the director of Obama’s National Economic Council from January 2009 until November 2010, had harsh words for those claiming antitrust legislation could be used to curb inflation.

“The emerging claim that antitrust can combat inflation reflects ‘science denial,’ Summers tweeted. “There are many areas like transitory inflation where serious economists differ. Antitrust as an anti-inflation strategy is not one of them.”

Could corporate greed really be behind inflation? Put aside for a moment the economic modeling. There’s an even more obvious reason Warren’s suggestion is silly, my colleague Brad Polumbo pointed out.

“Senator Warren’s attempt to pin the blame for rising gas prices on corporate greed makes little sense. Are companies ‘greedy’ in the sense that they’re focused on increasing profits? Yes, absolutely,” he writes.

He continues:

“But it does not in any way explain the current increase in gas prices that is hurting Americans. Chevron and Exxon are no more or less greedy or profit-focused than they were last year. Or the year before that. Or 20 years ago. There’s simply no reason to believe that they suddenly became extra greedy this year, or something. …

The true causes of high gas prices are complicated, and ultimately, prices are set by supply and demand—not by the whims of individual companies. (Otherwise, they’d always set them as high as they could. But other suppliers and customer demand keep companies’ prices in check).”

The True Inflation Culprit

Okay, so if “corporate greed” is not driving inflation, then what is? Well, Furman is mostly correct when he said “almost everything other than the Federal Reserve is a sideshow” when it comes to inflation.

After all, an authority no less than Nobel Prize-winning economist Milton Friedman noted that inflation is primarily a phenomenon stemming from monetary policy.

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output,” Friedman famously noted.

The reality is, the Federal Reserve has been printing money at an alarming rate. Fed Chairman Jerome Powell, by his own admission, said the central bank “flooded the system with money.” As a result, 35-40 percent of dollars in total circulation have been printed in the last 22 months.

Still, there’s another quote often attributed to Friedman that deserves attention.

“Inflation is caused by too much money chasing after too few goods,” the quote goes.

Money here is part of the equation; the other part is “too few goods.” While monetary policy is the elephant in the room when it comes to inflation, it’s also true that policies that discourage or frustrate the production of new goods or the ability to get them to market can also influence prices.

So while the Fed’s money printer is the primary culprit, lockdowns—which disrupt supply chains—and policies that discourage workers from working (such as ultra-generous unemployment benefits) also presumably played an inflationary role, though to what degree is unclear.

Whatever the case, many Americans unfortunately are experiencing significant inflation for the first time, a phenomenon that tragically falls hardest on the poor. If inflation continues to grow worse, claims that “corporate greed” are causing it will undoubtedly grow louder—which could spur calls for even more government action.

But if we want a solution that actually works, it’s imperative that the true culprit is identified. And in this case, the culprit is the usual one.

“I do not think it is an exaggeration to say history is largely a history of inflation,” the Nobel Prize-winning economist F.A. Hayek observed in The Denationalization of Money, “and usually inflations engineered by governments for the gain of governments.”

It’s just as they say: the more things change, the more they stay the same.

  • Jonathan Miltimore is the Senior Creative Strategist of at the Foundation for Economic Education.