What Will We Do About Inflation? All The Wrong Things, Of Course

With the consumer price index up 7.5%, the inflation rate is at a 40-year high. Everything is going up but wages, at least not fast enough to keep up with rising prices. Corporations, taking advantage of inflationary panic and their monopoly power to raise prices, are raking in record profits-- the highest in 70 years.

The knee-jerk solution for conservative political elites-- raising interest rates-- is a failed policy that will hurt the working class and possibly bring on a recession. The sensible thing to do-- raise taxes on corporate profits and enforce anti-trust laws to prevent corporate price gouging, would take a degree of political will that has completely dissipated in the U.S.

Late last year, anti-trust expert, Matt Stoller, wrote that big business is benefitting from and helping to drive inflation. Stoller had predicted at the start of the pandemic that concentrated market power and thin supply chains would induce shortages and he advocated antitrust rules that prohibit price-fixing, price discrimination, and monopolization. He asked "How much of inflation is a result of market power, and how much is due to some other set of causes such as government spending or thin supply chains? Let’s do some rough numbers."

Just before the pandemic, in 2019, American non-financial corporations made about a trillion dollars a year in profit, give or take. This amount had remained constant since 2012. Today, these same firms are making about $1.73 trillion a year. That means that for every American man, woman and child in the U.S., corporate America used to make about $3,081, and today corporate America makes about $5,207. That’s an increase of $2,126 per person.

Still, in order to know just how significant that amount is relative to inflation, we have to figure out how much inflation is costing the average American. A rough way to get that would be to take the total amount America produces annually, which is the Gross Domestic Product, and multiply that by the inflation rate. That’s $23 trillion of GDP times the 6.8% inflation rate, which comes out to $1.577 trillion, or $4,752 per American.

Taking all of this together, it means that increased profits from corporate America comprise 44.7% of the inflationary increase in costs. That means corporate profits alone are absorbing a 3% inflation rate on all goods and services in America (44.7% of 6.8% annual inflation), with all other factors causing the remaining 3.8%, for a total inflation rate of 6.8%. In other words, had corporate America kept the same average annual level of profits in 2021 as it did from 2012-2019 and passed on today’s excess to consumers, the inflation rate would be 3.8%, not 6.8%. And that’s a big difference, indeed it is the difference between Americans getting a raise, and seeing real wages decline. (It also could explain why inflation is lower in Europe - corporate profits there were very good in 2021, but not as good as in the U.S. And in Japan both inflation and corporate profits were low.)

It gets worse, because this calculation assumes that all 6.8% of the inflationary increase in prices is new. But of course, inflation isn’t zero in normal years, the Fed has an inflation target of 2%. In 2019, inflation hit 1.8%. So if you take the pre-existing inflation rate in 2019 of 1.8% and back that out of the numbers, then it turns out that 60% of the increase in inflation is going to corporate profits.

3% to corporate profits + 1.8% preexisting inflation + 2% from government spending/supply shocks = 6.8% total inflation rate.

...[I]t’s interesting to note which firms are raising prices, and why. We don’t have that much information on a macro-level, because there’s no systemic investigation using proprietary pricing data from private firms. Anecdotally, it’s obvious that certain industries like beef are seeing a mix of market power and cost pressures. Peter Goodman, for instance, just wrote a fantastic article in the New York Times on how meatpackers-- a four firm oligopoly-- are prospering by raising prices to consumers (and being sued for colluding to do so), while the cattle ranchers who sell to them-- a decentralized group-- are not. There is very little entry of independent packers into this industry, despite high margins. How common is this dynamic across industries, where controlling distribution enables a firm to raise prices, using inflation as a story to tell their customers?

One interesting set of data comes from Digital.com, a survey research firm that went out and asked retail businesses about inflation. 56% of retailers told Digital.com that “inflation has given them the ability to raise prices beyond what’s required to offset higher costs.” And these price hikes are concentrated among big retailers, with 63% of large firms using inflation to more than offset costs vs 52% of small and medium size businesses. And of “those who have increased prices, 28% of large enterprises increased prices 50% or more, compared to 6% of small and medium size enterprises.” So size, and presumably market power, matters. And one person’s profits are another person’s costs, because firms buy and sell to each other. So when firms raise prices to increase profits, then this increases costs for those who buy from those firms, and accelerates the expectation of more inflation elsewhere. Profits, in other words, are also driving inflation.

It’s not just retail. Inflation is a story that larger firms are using to raise their prices and change pricing behavior. For example:

The global auto industry is an oligopoly, with 14 firms controlling nearly all of the major brands. And that opens the opportunity for exploiting pricing power. “We will consciously undersupply demand level[s],” said Harald Wilhelm, Daimler’s chief financial. Daimler is even noting that forcing customers to wait for their luxury cars “makes the customer experience even greater and better.”

The story can get more pernicious. Here’s economist Hal Singer, explaining how inflation can be a convenient cover for price-fixing, which of course raises prices.

Conservatives, led by Larry Summers, think that Austerity is the way to get at inflation, which is why they push restarting student loan payments, as taking money from young people means they won’t spend it on goods and services. Conservative economists like Summers also want to eliminate tariffs and Buy America provisions so that there are more cheap imports from China. Stoller notes that "Austerity will reduce inflation, as will a recession, though at a very high cost. Inducing more imports, I suspect, won’t work. I’ve interviewed a few business people dealing with China tariffs; they told me they raised prices when the tariffs hit, but won’t lower them if the tariffs go away. That’s because prices aren’t based on cost, but market power. Lower tariffs on Chinese imports will simply flow to more profits for middlemen, not lower prices for consumers. If it’s true that a concentrated economy is allowing firms to exploit the current pricing environment to raise margins, then a different set of policy solutions should flow from that."

The first is to strengthen laws against price-fixing. The courts have radically cut back on the ability of plaintiffs to bring such cases in concentrated markets. As antitrust lawyer Eric Cramer noted, in the Valspar decision in the 3rd circuit in 2017, judges actually said that firms in a concentrated industry are allowed to raise prices in a coordinated manner, as long as there’s no public proof they are working together overtly to do so. A plaintiff who attempts to bring such a case and investigate whether there is a formal agreement will now have his or her case dismissed before it even gets to trial. The 7th circuit found a similar result over container board price hikes in a heavily concentrated market. That’s crazy.

If Congress strengthened the Sherman Act to overturn these decisions, that would help lower prices. Similarly, in the 1970s, the FTC tried to bar coordinated price hikes that occur in concentrated markets, even if there’s no explicit agreement in place. Barring this kind of price fixing would be quite powerful. Another variant of this would be, as Hal Singer suggests, to trigger an automatic price-fixing investigation for any concentrated industry that raises prices above 15% over December 2020 levels. Basically, it should be very easy to bring a price-fixing suit, but only in concentrated industries.

The second is to impose an excess profits tax. Excess profit taxes are a common approach to emergencies like war, and they reduce the incentive to price gouge. You could define an excess profit by the amount the firm is making above what that firm used to make on the same line of business. Not only would such a tax reduce the incentive for price gouging, but it would encourage highly profitable firms to put cash back into new factories and production, for fear their newfound profits would otherwise be taxed away.

The third is to strengthen the antitrust laws against monopolistic conduct and concentration in general, which is likely driving some part of inflation. Even very cautious economists buy this story (though Larry Summers doesn’t). Obama-era antitrust economist Fiona Scott Morton, for instance, gently corrected Summers on his assertion that no economist could connect concentration and inflation, suggesting that less concentration can actually induce more investment when there’s an economic shock. Her view makes sense, since the more firms in an industry, the more likely one of them is to use a period of high margins to grab market share by expanding production. The New York state abuse of dominance bill would accomplish this by prohibiting unfair methods of competition that often lead to higher prices.

Finally, since large firms raise prices more than small firms, then a revival of provisions against price discrimination would likely reduce consumer prices. Summers doesn’t believe this, praising Amazon and Walmart as price deflators even as Amazon is being sued by the D.C. Attorney General for systemically inflating prices across the economy. So this would be a good place to get data, which is what the Federal Trade Commission is doing, looking at how suppliers and distributors allocate goods between large firms like Walmart and small retail stores.

How much will these changes help? It’s hard to say. The potential is quite real. In 1939, Franklin Delano Roosevelt’s Antitrust Division was so feared that merely announcing an antitrust investigation would cause prices in a market to fall by 18-33%. Since profit margins are massive today, there’s no reason we couldn’t see similar results if we shifted our legal framework to outlaw the kind of behavior likely occurring throughout the economy. Of course, doing so would require making different political choices. Since we live in a democracy, that’s always possible.

A month later, Robert Reich backed up Stoller's ideas and remedies. "While most of the price increases now affecting the US and global economy have been the result of global supply chain problems limiting the availability of parts needed to make consumer goods," he wrote in late January, "this doesn’t explain why big and hugely-profitable corporations are passing these cost increases on to their customers in the form of higher prices. If corporations were competing vigorously against each other, they’d swallow these cost increases in order to keep their prices as low as possible-- especially when they’re making huge profits. Yet corporations have been raising prices even as they rake in record profits. That’s because they face so little competition that they can easily coordinate price increases with the handful of other big companies in their industry. That way, all of them come out ahead-- while consumers and workers lose."

Reich's prediction is that the establishment will fight inflation-- the old fashioned way-- by raising interest rates, in effect "drafting millions of workers into the inflation fight by slowing the economy and causing them to lose their jobs or wages, or both. This is the wrong medicine for the wrong disease. It will hurt millions of people who are among the most vulnerable in the economy." Just as Stoller had argued, Reich wrote that "The correct medicine is to reduce corporate market power."

Fast forward to... this morning. Writing for the Wall Street Journal, Veronica Dagher is approaching the subject as though the battle is already lost and preparing her readers for how to best bite the pillow... like putting your car in neutral while driving downhill to save gas, keeping the thermostat below 65 overnight, shopping at thrift stores and negotiating before making purchases. "Always ask if that’s the best deal and be prepared to walk if necessary." That's cute... and it sure keeps Wall Street Journal subscribers chuckling instead of thinking about anti-Trust issues.