Many of the Democrats who are scapegoating greedy businesses for inflation do not actually believe it. But they hope you will.
Many of the Democrats who are scapegoating greedy businesses for inflation do not actually believe it. But they hope you will.
P resident Biden and congressional Democrats spent a full year downplaying the inflation that buried families and swept across the economy. Now that the president’s approval rating has crashed into the 30s and voters seem eager to replace the Democrats’ congressional majority, the party has become desperate to “solve” the problem — by deflecting blame.
After all, truly addressing inflation would require admitting that the American Rescue Plan dramatically worsened inflation, and then abandoning the Build Back Better proposal. It would mean repealing new tariffs, as well as canceling new Buy America rules, ethanol mandates, and expensive regulations on economic development. An anti-inflation agenda would include expanding capacity at our ports, repealing the Jones Act, a vintage piece of protectionist legislation that increases shipping costs, and suspending the Davis-Bacon Act’s prevailing-wage rules. A commonsense approach to inflation would also promote domestic oil and gas production and end the student-loan-payment moratorium.
Unfortunately, the White House is not interested in those policies that — combined with a tighter Federal Reserve policy — would aggressively bring down inflation. Too many Democratic interest groups would be offended.
Instead, Democrats have decided to simply shift blame by scapegoating and demagoguing “greedy corporations” that somehow decided in early 2021 to begin gouging consumers with steep price increases. Senator Elizabeth Warren (D., Mass.) asserts that “giant corporations are making record profits by increasing prices, and CEOs are saying the quiet part out loud: they’re happy to help drive inflation.” Senator Bernie Sanders (I., Vt.), with characteristic subtlety, blames “Greed. Greed. Greed. . . . The problem is not inflation. The problem is corporate greed.” The White House chimed in, too, blaming “Big Meat” for greedy industry consolidations that are supposedly worsening inflation.
Even some of the White House’s own economists are privately embarrassed by this absurd populist pandering, but they are overruled by the political advisers who brag that such a strategy polls well. In short, the Biden administration sees inflation more as another messaging problem to solve with talking points than as an economic challenge to solve with smart policies.
So why do economists almost unanimously reject the “greedflation” argument? For the previous 30 years, inflation was low. Did corporations suddenly decide to become “greedy” in 2021? Of course not. They have always been greedy and profit-maximizing. What changed were the economic circumstances that led them to raise prices.
Some progressive analysts retort that major industries have consolidated, creating monopolies and oligopolies that can more easily gouge consumers. Yet there is no evidence that consolidation was suddenly accelerating in the past year as inflation leaped. And besides, some of the largest price increases have come from dispersed industries such as used cars, restaurants, and auto repair. Furthermore, if market power were concentrating, it would create a onetime price spike from competitive to monopoly levels — not persistent, rising inflation.
This is why a recent survey of top economists across the political spectrum revealed that just 5 percent consider market power a significant inflation factor, and why the same low percentage believe that antitrust crackdowns could reduce inflation within a year.
But don’t rising profits prove that businesses are raising prices at excessive rates? Corporate profits have risen from 9.2 percent of the economy before the pandemic to 11.2 percent today (even as workers collect a larger share of the pie, too). That increase, however, is a predictable function of supply and demand, not price-gouging.
First, consider that today’s inflation is not primarily driven by the supply side. If rising business costs were driving inflation, the leftward-shifting supply curve (due to rising marginal costs) would mean reduced output — yet durable-goods consumption is soaring. It would also mean lower business profits, because higher consumer prices could not absorb all 100 percent of rising business input costs unless consumer demand were perfectly fixed and price-inelastic.
Instead, current inflation is primarily driven by rising demand. This should be obvious after the Federal Reserve poured $4.8 trillion into the economy during the pandemic, and federal subsidies increased family savings by $2.7 trillion over the baseline projection in just two years.
When there is a sudden, unanticipated surge in demand, businesses cannot increase output fast enough to meet it (especially when supply is constrained by a pandemic). In order to avert shortages, then, businesses raise prices until they reach a new market equilibrium. The result is both higher prices and higher profits. Over time, either demand will recede back to the earlier equilibrium, or production will ramp up to meet the new demand at somewhat lower prices, returning profits and prices closer to the original level.
Marc Goldwein of the Committee for a Responsible Federal Budget has offered the useful example of a self-employed hairstylist whose daily number of interested clients rises from eight to eleven. The hairstylist can either work nights to meet the new demand, turn away three people each day, or raise prices until daily demand returns to eight. The profit-maximizing response would be to raise prices (and thus profits), and it would be wholly unfair to accuse the hairstylist of “price-gouging.”
Yet for a larger company that very response would be illegal under new price-fixing legislation from Senator Warren. During any vaguely defined period of “exceptional market shock,” Warren’s bill would make it illegal for any large company to impose an “unconscionably excessive” price hike. What size of a price increase would be considered “unconscionably excessive”? Whatever the Federal Trade Commission (FTC) decided at any given moment. Sanctioned companies would be allowed to justify their price increases only if they were based on costs outside their control — rising demand would not be accepted as a justification. Companies would even have to justify their pricing strategies in quarterly SEC filings. Sanctioned companies would be fined up to 5 percent of their total annual revenue, even if the infraction consists of one minor item’s price hike at one moment. Even large companies that do not raise prices could be fined for exercising “unfair leverage” with any creative pricing strategies. These pricing standards are so vague that companies would be left at the mercy of whatever the FTC decides is “excessive” pricing at any given moment, with billion-dollar fines handed out by random government bureaucrats based on their personal whims (a situation that would almost certainly invite lobbying and corruption).
As anyone who remembers the 1970s gas lines well knows, remedying rising demand with price controls is a recipe for shortages. In fact, price controls and rationing can exacerbate inflationary pressures by encouraging people to buy and hoard even more of the rationed goods. The economics profession had assumed that such ideas had been thoroughly discredited by history. Unfortunately now, voters too young to remember the 1970s and older lawmakers who pander to them are trying to return us to that failed era.
Even advocates of the “price-gouging” theory do not seem to truly take it seriously. As former Obama-administration economic adviser Jason Furman has noted, those who believe that new dollars and demand are overwhelmingly captured by price hikes and profits would need to also abandon any belief in Keynesian fiscal stimulus, including stimulus checks, since those policies would provide no real purchasing power. Greedflationists should also try to curtail economic booms, since they would lower real wages by predominantly raising prices. Instead, the “price-gouging” theory is abandoned by its advocates as soon as its logical implications become absurd or inconvenient to the rest of the narrative.
And that is when advocates move on to policies such as windfall-profits taxes (which would further reduce output), and corporate-tax increases (which are likely to raise costs and also reduce output, increasing inflation).
So, rather than make the difficult policy decisions to address inflation, expect to hear more Democratic rants about “greedflation,” “Big Meat,” and “Putin’s price hike.” Even many of the Democrats who are scapegoating greedy businesses for inflation do not actually believe it. But they hope you will.