Greedflation

'Greedflation is, in a word, good'. Or so say many CEOs.

Photo by Henley Design Studio on Unsplash

Quote of the Moment

High profits tend much more to raise the price of work than high wages. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price. … They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.

| Adam Smith, The Wealth of Nations

Greedflation

The term ‘greedflation’ perfectly matches our present economics, described by many as being on the edge of a recession which is used as an excuse to raise prices (and profits). As Lindsay Owens reports [emphasis mine]:

Companies that historically might have kept prices low to pick up profit by gaining additional market share are instead using the cover of inflation to raise prices and increase profits. Consumers are now expecting higher prices at the checkout line, and companies are taking advantage. The poor and those on fixed incomes are hit the hardest.

As Hostess’s C.E.O. told shareholders last quarter, “When all prices go up, it helps.” The head of research for the bank Barclay’s echoed this. “The longer inflation lasts and the more widespread it is, the more air cover it gives companies to raise prices,” he told Bloomberg. More than half of retailers admitted as much when surveyed.

Executives on their earnings calls crowed to investors about their blockbuster quarterly profits. One credited his company’s “successful pricing strategies.” Another patted his team on the back for a “marvelous job in driving price.” These executives weren’t just passing along their rising costs; they were going for more. Or as one C.F.O. put it, they were “not leaving any pricing on the table.”

The Federal Reserve chair, Jerome Powell, said that sometimes businesses are raising prices just “because they can.” He’s right. Companies have pricing power when consumers don’t have choice. Sometimes this is because demand for consumer staples like toilet paper, toothpaste and hamburger meat is relatively inelastic. If you need a box of diapers, you need a box of diapers. Other times pricing power comes from concentrated market power. In industries like meatpacking and shipping — in which giants have over 80 percent of market share at times — it’s easier to take big markups when there aren’t major competitors to undercut you.

What we learned on these earnings calls was quickly reflected in data. Despite the rising costs of labor, energy and materials, profit margins reached 70-year highs in 2021. And according to an analysis from the Economic Policy Institute, fatter profit margins, not the rising costs of labor and materials, drove more than half of price increases in the nonfinancial corporate sector since the start of the Covid pandemic.

Meanwhile, back in Washington, moderate economists in ivy tower think tanks continue to drone on about the magic of self-correcting markets, politicians ignore what the corporates are saying on their earnings calls, and the Fed continues to raise interest rates, which would only slow businesses borrowing if businesses in fact intended to borrow to invest in the future. But they are not, because it’s so much better to pull in obscene profits than to actually plan for a future. And even if they did plan for the future, they have tons of cash, already.

So we aren’t in a recession: actually, what we are experiencing is more like a boomtown:

Tara Sinclair, an economist at George Washington University, said the United States wasn’t experiencing a true boom. That would imply a virtuous circle, in which prosperity begets investment, which begets more prosperity and makes the economy more productive in the long term — a rising tide that lifts all boats.

Instead, the lingering disruptions of the pandemic, uncertainty over what the post-Covid economy will look like and fears of a recession have made businesses reluctant to make bets on the future. Business investment fell in the most recent quarter. Employers are hiring, but they are leaning heavily on one-time bonuses rather than permanent pay increases.

“It’s not an economic boom in the sense of wanting to invest long term,” Ms. Sinclair said. “It’s a boomtown situation where everyone’s just waiting for it to get cut off.”

Basically, because the government policies are deeply skewed toward the benefit of the largest corporations, they are going to get while the getting is good. Which is the rationale behind this profiteering.

Raising interest rates is not the way out of this situation, since these companies are awash in cash, but to raise corporate taxes. Note that raising tax rates is not a lever in the Fed’s toolbox.

However, raising taxes is the business of Congress, and in the Inflation Reduction Act the plan is to set a minimum corporate tax rate of 15%, which is at least pointing at the true culprits, although is probably not enough of a disincentive to actually stop profiteering. So, just in time, the Department of Justice and the FBI will be investigating companies for ‘illicit profits’:

The Department of Justice announced Thursday that it will begin investigating companies for earning what it believes to be excessive profits amid surging inflation and ongoing supply chain issues.

In a press release, the department said its antitrust division would begin to "deter, detect and prosecute those who would exploit supply chain disruptions" to earn what the department calls "illicit profit." The goal of the initiative, according to the department, is to prevent companies from "overcharging customers under the guise of supply chain disruptions."

I hope they start with the CEO of Hostess.

Pushing the country into a recession to stop inflation would harm those least able to contend with losing their jobs. As Claire Sahm tweeted,

Workers did not cause inflation, and they should not pay for bringing it down.

Is Working From Home Unamerican? Peggy Noonan thinks so.

In an Op-Ed in the Wall Street Journal (paywalled), Peggy Noonan (who started as a speechwriter for Ronald Reagan, who left the Presidency in 1989) musters a combination of orthodox and fanciful arguments to try to hector everyone back into the office.

Here’s a close reading and rebuttals of her arguments, which culminates in a claim that a decline in what she calls ‘office life’ will lead to a decline in ‘national culture’.

She starts with this thumbnail sketch of the ‘office' wars’:

Where are we in the office wars? I think there’s an armistice between the return-to-the-office side and the work-from-home forces. Perhaps hostilities will resume in the fall. Bosses are hoping the old reality will snap back as the drama of 2020-22 recedes, that people will start to feel they need to come back, or can be made to. The work-from-home people are dug in, believing they’re on the winning side, that the transformation of work in America, which had been going remote for years, was simply sped up and finalized by the pandemic. In this tight job market they have the upper hand. Employers are fighting for talent: Fire me—I’ll get a better job tomorrow, and you’ll get 50 hours with HR onboarding my replacement. The balance of power will change if the slowing economy leads to layoffs and hiring freezes.

Except that the Fed’s Beige book released in mid-July said ‘Economic activity expanded at a modest pace, on balance, since mid-May’, and over 500,000 jobs were added in July. (See Greedflation, above.)

But Noonan wants to hint that power might shift back to the bosses, and they will end all this working-from-home malarky, stat!