The Political Perils of Inflation and Unemployment

Unemployment weakens governments, while inflation can bring them to their knees. This stark observation was made by a government official from Brazil, and it rings true across various political landscapes. In wealthier nations, particularly the United States, the devastating impact of inflation had fallen from the public’s consciousness. Traditional policy responses left us ill-equipped to tackle this resurgence, and the Biden administration’s response to rising prices was notably sluggish.

The potential re-election of Donald Trump serves as a cautionary tale for democratic governments everywhere. In an era characterized by overlapping crises—such as hurricanes, an avian flu outbreak, and two regional conflicts—threats to our supply chains have become increasingly frequent. Each of these crises heightens the risk of inflation, which possesses a unique ability to destabilize governments, including our own.

As these emergencies become the new normal, a critical lesson emerges from the recent electoral outcomes: we must develop innovative strategies to safeguard our society and democracy.

Challenges in the Corporate Landscape

One of the most pressing issues we face today is the dominance of large corporations across many business sectors. These entities often exploit one-time events for profit. In an upcoming paper utilizing artificial intelligence and natural language processing, several co-authors and I conducted an analysis of over 130,000 earnings calls from publicly listed U.S. companies. Our findings revealed a concerning trend: businesses often coordinate price increases in response to cost shocks.

This ability to synchronize price hikes allows companies to effectively pass on or even magnify the impact of initial cost increases triggered by disruptive events such as the COVID-19 pandemic and the ongoing war in Ukraine.

To put it simply, the sudden emergence of cost shocks—whether from a pandemic or geopolitical unrest—grants companies greater leeway to implement price hikes across various sectors. They recognize that their competitors are likely to follow suit, leading to a collective rise in prices.

Critics of this perspective may argue that corporate concentration was already a significant issue prior to the pandemic. However, it is worth noting that these powerful corporations maintained stable prices for many years, even during periods of near-zero interest rates. The reason behind this stability was the competitive landscape; companies were hesitant to raise prices without assurance that their rivals would do the same, as this could result in a loss of market share.

This dynamic was characteristic of the pre-pandemic environment, wherein globalization had fostered highly efficient, just-in-time production networks. Despite their size, even the largest corporations felt the pressures of competition, which typically kept prices in check.