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Did Corporate Greed Cause Inflation
Opinion | The Hidden Link Between Corporate Greed and Inflation | Robert Reich (commondreams.org)
WASHINGTON — Furious about surging prices at the gasoline station and the supermarket, many consumers feel they know just where to cast blame:
On greedy companies that relentlessly jack up prices and pocket the profits.
Responding to that sentiment, the Democratic-led House of Representatives
last month passed on a party-line vote — most Democrats for, all Republicans
against — a bill designed to crack down on alleged price gouging by energy producers.
Likewise, Britain last month announced plans to impose a temporary 25% windfall tax
on oil and gas company profits and to funnel the proceeds to financially struggling households. Yet for all the public’s resentment, most economists say corporate price gouging is, at most, one of many causes of runaway inflation — and not the primary one.
“There are much more plausible candidates for what’s going on,” said Jose Azar, an economist at Spain’s University of Navarra.
They include Supply disruptions at factories, ports and freight yards. Worker shortages. President Joe Biden’s enormous pandemic aid program. COVID 19-caused shutdowns in China. Russia’s invasion of Ukraine. And, not least, a Federal Reserve that kept interest rates ultra-low longer than experts say it should have.
Most of all, though, economists say resurgent spending by consumers and governments drove inflation up.
The blame game is, if anything, intensifying after the U.S. government reported that inflation hit 8.6% in May from a year earlier, the biggest price spike since 1981.
To fight inflation, the Fed is now belatedly tightening credit aggressively.
On June 15, it raised its benchmark short-term rate by three-quarters of a point —
its largest hike since 1994 — and signaled that more large rate hikes are coming.
The Fed hopes to achieve a notoriously difficult “soft landing” — slowing growth
enough to curb inflation without causing the economy to slide into recession.
For years, inflation had remained at or below the Fed’s 2% annual target, even while unemployment sank to a half-century low. But when the economy rebounded from the pandemic recession with startling speed and strength, the U.S. consumer price index rose steadily — from a 2.6% year-over-year increase in March 2021 to last month’s four-decade high. For a while at least — before profit margins at S&P 500 companies dipped early this year — the inflation surge coincided with swelling corporate earnings. It was easy for consumers to connect the dots: Companies, it seemed, were engaged in price-gouging. This wasn’t just inflation. It was greedflation.
Asked to name the culprits behind the spike in gasoline prices, 72% of the 1,055 Americans polled in late April and early May by the Washington Post and George Mason University’s Schar School of Policy and Government blamed profit-seeking corporations, more than the share who pointed to Russia’s war against Ukraine (69%) or Biden (58%) or pandemic disruptions (58%). And the verdict was bipartisan: 86% of Democrats and 52% of Republicans blamed corporations for inflated gas prices.
“It’s very natural for consumers to see prices rising and get angry about it and then look for someone to blame,” said Christopher Conlon, an economist at New York University’s Stern School of Business who studies corporate competition. “You and I don’t get to set prices at the supermarket, the gas station or the car dealership. So people naturally blame corporations, since those are the ones they see raising prices.’’
Yet Conlon and many other economists are reluctant to indict — or to favor punishing — Corporate America.
When the University of Chicago’s Booth School of Business asked economists this month whether they’d support a law to bar big companies from selling their goods or services at an “unconscionably excessive price” during a market shock, 65% said no.
Only 5% backed the idea.
Just what combination of factors is most responsible for causing prices to soar “is still an open question,” economist Azar acknowledges. COVID-19 and its aftermath have made it hard to assess the state of the economy. Today’s economists have no experience analyzing the financial aftermath of a pandemic.
Policymakers and analysts have been repeatedly blindsided by the path the economy has taken since COVID struck in March 2020: They didn’t expect the swift recovery from the downturn, fueled by vast government spending and record-low rates engineered by the Fed and other central banks. Then they were slow to recognize the gathering threat of high inflation pressures, dismissing them at first as merely a temporary consequence of supply disruptions.
One aspect of the economy, though, is undisputed: A wave of mergers in recent decades has killed or shrunk competition among airlines, banks, meatpacking companies and many other industries. That consolidation has given the surviving companies the leverage to demand price cuts from suppliers, to hold down workers’ pay and to pass on higher costs to customers who don’t have much choice but to pay up.
Researchers at the Federal Reserve Bank of Boston have found that less competition made it easier for companies to pass along higher costs to customers, calling it an “amplifying factor” in the resurgence of inflation.
Josh Bivens, research director at the liberal Economic Policy Institute, has estimated that nearly 54% of the price increases in nonfinancial businesses since mid-2020 can be attributed to “fatter profit margins,” versus just 11% from 1979 through 2019.
Bivens conceded that neither corporate greed nor market clout has likely grown significantly in the past two years. But he suggested that during the COVID inflationary spike, companies have redirected how they use their market power: Many have shifted away from pressuring suppliers to cut costs and limiting workers’ pay and have instead boosted prices for customers.
In a study of nearly 3,700 companies released last week, the left-leaning Roosevelt Institute concluded that markups and profit margins last year reached their highest level since the 1950s. It also found that companies that had aggressively raised prices before the pandemic were more likely to do so after it struck, “suggesting a role for market power as an explanatory driver of inflation. ″
Yet many economists aren’t convinced that corporate greed is the main culprit. Jason Furman, a top economic adviser in the Obama White House, said that some evidence even suggests that monopolies are slower than companies that face stiff competition to raise prices when their own costs rise, “in part because their prices were high to begin with.”
Likewise, NYU’s Conlon cites examples where prices have soared in competitive markets. Used cars, for example, are sold in lots across the country and by numerous individuals. Yet average used-car prices have skyrocketed 16% over the past year. Similarly, the average price of major appliances, another market with plenty of competitors, jumped nearly 10% last month from a year earlier.
By contrast, the price of alcoholic beverages has risen just 4% from a year ago even
though the beer market is dominated by AB-Inbev and spirits by Bacardi and Diageo.
“It is hard to imagine that AB-Inbev isn’t as greedy as Maytag,” Conlon said.
So, what has most driven the inflationary spike?
“Demand,” said Furman, now at Harvard University. “Lots of government spending,
lots of monetary support — all combined together to support extraordinarily high levels of demand. Supply couldn’t keep up, so prices rose.’’
Researchers at the Federal Reserve Bank of San Francisco estimate that government aid to the economy during the pandemic, which put money in consumers’ pockets to help them endure the crisis and set off a spending spree, has raised inflation by about 3 percentage points since the first half of 2021.
In a report released in April, researchers at the Federal Reserve Bank of St. Louis blamed global supply chain bottlenecks for playing a “significant role” in inflating factory costs. They found that it added a staggering 20 percentage points to wholesale inflation in manufacturing last November, raising it to 30%.Still, even some economists who don’t blame greedflation for the price spike of the past year say they think governments should try to restrict the market power of monopolies, perhaps by blocking mergers that reduce competition. The idea is that more companies vying for the same customers would encourage innovation and makes the economy more productive.
Even so, tougher antitrust policies wouldn’t likely do much to slow inflation anytime soon.
“I find it helpful to think about competition like diet and exercise,” NYU’s Conlon said. “More competition is a good thing. But, like diet and exercise, the payoffs are long term.
“Right now, the patient is in the emergency room. Sure, diet and exercise are still a good thing. But we need to treat the acute problem of inflation.”
SomethingsPhishy
Oil giant BP reports highest profit in 8 years on soaring commodity prices.
This headline doesn’t really tell us anything. It could very well be that BP has had low profits or even losses in the seven years prior to this windfall. And what does the headline mean by “profit?” Is it referring to net income? Or operating income?
Or something else?
In fact, the oil sector struggled in 2020 when the price of oil tanked to $20 a barrel.
BP revenue was $298.8 billion in 2018. That plunged to $180.4 billion in 2020 and dropped again to $157 billion in 2021.
BP’s operating income was $16.3 billion in 2018. In 2020, BP charted an operating loss of $573,000. It rebounded to $10.5 billion last year. In context, BP’s performance last year wasn’t particularly noteworthy.
Simply saying BP had the highest “profit” in 8 years doesn’t really give you any information about the company’s performance or trajectory. In fact, comparisons like this often give false impressions.
Let’s look at some other headlines. I’m not going to get into the weeds of every companies’ financials as I did for BP, but you get the idea.
Cereal maker Kellogg Co. forecast full-year profit growth above market expectations on Thursday, riding on higher product prices that helped overcome labor strike disruptions and soaring input costs in the fourth quarter.
All this tells us is that Kellogg is going to do better than expected and that the company was able to pass on at least some of its rising costs to its customers. (People like Nichols completely ignore rising costs. It seems like they might want to question why costs are rising as they analyze inflation. I suppose they just assume it’s other greedy corporations gouging these greedy corporations.) Based on this headline, it’s possible that analysts expected below-average growth or perhaps a loss. If the company now forecasts average growth, that would be “above market expectations.” I’m not sure how that is “greed.”
Procter & Gamble’s sales jump as consumers brush off rising prices.
You have to buy toothpaste and shampoo, even if the prices go up. When you see the
word sales, it either means the number of units sold, or more likely, revenue. Just because revenue goes up doesn’t mean the company is seeing a “profit.” In fact, P&G’s operating income was down 3% year-on-year in Q4 2021.
McDonald’s to raise prices despite record revenue
This is easy to misread if you don’t understand the accounting terms. If record expenses are higher than the record revenues, that’s not good news. A company will have to raise prices to cover the expenses. Or eventually, go out of business.
Amazon stock soars 15% after earnings, will hike Prime membership fee
Suffice to say, Amazon’s operating income was down 49.66% year-on-year in Q4. The company did fantastic in 2020 when everybody was locked in their houses spending stimulus money on Amazon. But the tide appears to be turning. Shipping costs are rising. Amazon’s future prospects are not particularly bright.
And this raises an important point about corporate finance. You have to be forward-looking. A company can report record “profits” today even as its business is on the verge
of tanking. The bottom line is that none of these headlines really proves greedy corporations are driving inflation.
That’s because they’re not.
In fact, producer prices have risen faster than consumer prices. That means businesses have only passed on some of their higher costs to consumers. If anything, these “greedy” corporations have allowed consumers to gouge them.
Progressives like Nichols and those who promote big government have a vested interest
in shifting the blame for inflation because the real culprit is government. As economist Daniel Lacalle explained, “Inflation is not a coincidence, it is a policy.” Much like who
pays for the illegals coming across the border to get started with just back packs?
And as economist Milton Friedman put it, “Inflation is always and everywhere
a monetary phenomenon.” It is ultimately caused by an increase in the money supply.
In fact, that is inflation, properly defined. If you have more dollars chasing the same amount of goods and services, you will see a general rise in prices.
The governments exacerbated the situation during the pandemic by shutting down the economy. That contracted supply. In the meantime, the Fed printed money and the federal government passed it out in the form of stimulus. You had more dollars chasing fewer goods and services. The inflation we’re experiencing today was entirely predictable.
The truth is the federal government needs inflation. It depends on Federal Reserve
money printing to support its borrow and spend budgeting strategy. Without the Fed’s inflationary activity, the government couldn’t finance its out-of-control spending habit. But politicians don’t want you to know that they are levying an inflation tax on you, so
they perpetuate all kinds of myths about inflation to try to make you feel better about it.
The average person is particularly susceptible to the greedy corporation myth.
People generally distrust big corporations, and they don’t understand financial accounting.
People like Nichols prey on this fact to promote their politics.
There may well be some corporations taking advantage of the current economic environment to pump up profits. But that does not explain the 7.5% consumer price
index (CPI). If you hear somebody blaming inflation on greedy corporations,
it indicates they don’t understand inflation.
Read more at: https://www.thenewstribune.com/news/business/article262901733.html#storylink=cpy
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