Untangling the debate.
Is anyone left in Washington who wants to fight inflation by reducing deficits and deregulating the economy?
Two ways to allocate a limited resource, by price or by rationing. (And rationing usually ends up with black or gray market and become price anyway). Whether corporations were greedy (which they are) or altruistic, if you don’t have enough good to provide everyone, you have to keep increasing prices until you do.
Also, what do you think of Krugman's thread on this? In particular, that it's plausible that companies feel more free to raise prices because everybody else is doing it too? https://twitter.com/paulkrugman/status/1525838267916091395?t=CLlZww1O18oN6arfR2LP2w&s=19
I remember joking about what happens when you bring SF style housing political debates to food. "Stop allowing only market rate food to be sold, only *affordable* food allowed". Of course, followed by debates about who is allowed to access the "affordable" food.
Didn't think it would become real... but we're most of the way to "baby formula, but for whomst"
What do you think of the windfall tax idea? Do you agree with Rampell that it would reduce output?
Thanks a bunch for clarifying the issue. So my non-expert takeaway would be that
* there is real scarcity now in some entrants of the supply chain, AND
* market power matters also matters:
- those in the supply chain that are in position to reflect cost of inputs into their sales, and a bit more, actually benefit from the instability ; and
- those that don't have market power can't reflect their higher costs into higher pay/profit.
So increase in entrants costs just gives market power/weakness a chance to express itself. Sort of accelerating existing trends.
Hope I got this right.
Warren is a good example of "you either die the hero or live to become the villain." She went from "proud capitalist" with some great ideas on combating rentiers and corruption to someone who proposes economically illiterate plans and spouts the latest idiotic leftist rhetoric.
Good explanation of price controls and their likely effects. One item that I think deserves comment: the FRED chart on corporate profits would seem to indicate that evil corporations have found ways to manipulate the economy to extract greater profits over the last 20 years, at the expense of workers and consumers. This may be true, but this statistic is driven mainly by something entirely different: the increase in the number of S Corporations.
Brief explanation: "S Corporations" are allowed by Subchapter S of the Internal Revenue Code. The requirements to qualify as an S Corporation mean that nearly all S Corporations are small businesses, with fewer than 100 employees, and small numbers of shareholders (often only one). The advantage of S Corporations is that they are exempt from federal corporate income taxes, and from state income taxes in most states. Instead, their profits are passed directly to owners' income, and the owners pay personal income tax on the business profits - this eliminates the "double taxation" of corporate profits.
From 2000 to 2017, the number of S Corporations increased from 2.9 million to 4.7 million, an increase of 62%. During the same time, the profits of the S Corporations increased from $199B to $578B, an increase of 191%. Profits of non-S Corporations (nearly all conventional "C" Corporations) increased from $788B to $1,078B an increase of 37%. All figures are nominal dollars, and pre-tax. See https://www.bea.gov/system/files/2021-05/prototype-nipa-estimates-of-profits-for-s-corporations.pdf, table 1 on page 12. During the same period, US nominal GDP increased from $10,252B to $19,543B, an increase of 91%.
So, "corporate profits" before tax actually decreased as a percent of GDP from 9.6% to 8.5% of GDP, but non-S Corporation profits decreased from 7.7% of GDP to 5.5% of GDP. These figures don't match the FRED chart Noah showed, which also claims to be based on BEA data - I don't know enough about this data to know whether the difference is all due to "IVA and CCAdj" as indicated on the FRED chart, or whether there's a more fundamental difference. (It's also odd that FRED's chart shows after-tax profits higher than the BEA paper's pre-tax profits.) My point is that growth in "corporate profits" is mostly due to increase in "S Corp" profits, which is mostly due to the increase in the number of "S" corporations. It is not possible to know for sure, but this probably reflects mostly a change from sole proprietorships and partnerships to "S" corporation structure, not a redistribution of profits within the economy.
Noah, firms' percentage profit margins aren't even mentioned here until the third to last paragraph! A key piece of evidence for opportunistic price-gouging, really surprised you don't include it in your explanations. Corp profits/GDP seems much less pertinent.
Hi Noah. What do you think of price controls on healthcare services and pharmaceuticals? It seems to me this is part of how Western Europe keeps healthcare costs lower than in the U.S.
Why not raise the personal income tax? It’s at historically low levels and likely contributing to inflation by inducing demand.
Realize it’s not popular, but if there was ever the time, this would be it.
'If you think inflation is being caused by a negative supply shock, then the “greedflation” story just doesn’t make sense at all. ' You're assuming that we have homogenous markets (e.g. "all goods come from China"), no expectations, and no such thing as price elasticity - basically your explanation is all the things in first-year econ that are proven wrong by grad school. In fact you can still have "greedflation" when people hear of isolated pockets of inflation (trucking costs, oil, Chinese-made house construction materials) and extrapolate that into an expectation that peaches grown 1 state away will cost 50% more. Retailers have been exploiting this to jack up prices on things that have seen no supply shock. It'd be nice to look at the details of retail inventories to see if they're screwing themselves right now.
Corporate profit margins are doubling? There's no way to call this anything but Greedflation. How can you say raising prices does not increase inflation?
Raising prices IS Inflation.
Noah, terrific report, thank you! I had a thought, does the answer really rely on the bargaining power of capital/retirees versus the bargaining power of consumers/labor? Why does capital seem to me to be able to preserve their returns and consumers/labor do not? Does their stock of wealth (relative to income) give them an advantage in bargaining over consumers/labour's presumably smaller stock of wealth relative to income. Briefly, why does the latter group take the hit (Inflation) rather than reduced returns to capital?
Would love comments from you and the group! Thanks!
Just great. What I get out of your post is that there’s nothing the Democrats can do except hand the government over to the Republicans in the fall.
Great post! Always love it when graphs are included. I just want to disagree on the “nobody really believes it”:
I don’t think he could have said it more clearly.