Inflation, Market Failures, and Algorithms

Abstract

Inflation is a problem of tremendous scale. But inflation itself is unlikely to cause the greatest economic harm during inflationary periods. Instead, a more likely source of devastation will be policymakers’ response to inflation. Their main anti-inflation tools, most notably increasing interest rates, increase unemployment and the risk of recessions. This Article argues that there is a better approach. Rather than defaulting to interest rate hikes that harm markets, policy makers should prioritize laws that lower prices while improving markets. For decades, businesses have raised prices by manipulating consumers, exercising monopoly power, and lobbying for laws that block competition. Automated pricing algorithms have further enhanced businesses’ ability to charge higher prices. Although those past market failures did not cause the currently high levels of inflation, they create new challenges and opportunities. Most importantly, they now provide an inflation-fighting tool that would not otherwise exist—like a piggy bank of market improvements that the law can break open to offset some portion of inflation. Interest rate hikes would surely still be needed, but to a lesser extent. Many of these market improvement opportunities lie in existing administrative agency authority, while more could be done through new legislation, such as a universal price transparency statute. Moreover, these legal reforms are desirable independent of inflation because they would improve efficiency, expand total wealth, and reduce inequality. Thus, policymakers should resist the urge to rely too extensively on interest rate hikes that bring impoverishment and should instead pursue legal rules that promote prosperity. Doing so could transform a grave crisis into a tremendous economic opportunity.

Keywords: inflation, consumer law, antitrust