Deeply Confusing 'Greedflation' Debate
Leading economists like Larry Summers have argued that in order to stop inflation, the Federal Reserve must intentionally create substantially higher unemployment.
Among others, progressives disagree with this notion. Their specific justifications differ. However, the majority think that Summers and like-minded economists overestimate the risks that the labor market poses to price stability and underestimate the costs of regulating inflation through engineered recessions. They also contend that new methods of managing and avoiding inflation should be developed, ones that do not place the bulk of the adjustment costs on the backs of the most vulnerable employees in the American economy. To me, their situation is strong.
However, there is a different, less significant inflation discussion with basically comparable fronts. The subject of the second argument is what led to post-COVID inflation.
Mainstream economists think that a mismatch between supply and demand is to blame for the inflation we are currently seeing. The pandemic recession decreased the capacity of the global economy by closing industries, upsetting supply systems, and forcing a large number of elderly people into retirement. At the same time, the purchasing power of American consumers expanded as a result of several record sizable relief packages. Then, a large number of virus-averse consumers turned their abundant spare income away from in-person services and toward things. As a result, demand for a wide range of produced goods increased while supply decreased. Because of this, producers could demand greater prices for their goods.
According to some progressives, neither fiscal policy nor demand dynamics are the main causes of today's inflation. Instead, it is the result of a corporate sector profiteering frenzy. Their argument, in my opinion, is tenuous.
There are two distinct versions of the "greedflation" argument, one that is blatantly flawed and the other that is smart but unproven (and does not actually discount the importance of demand circumstances). In either scenario, the left's explanation for why inflation occurred is significantly less credible than its recommendations for controlling the rate of increase in prices.
Therefore, it seems foolish for progressives to link the two. It is not necessary to provide evidence that corporate greed produced inflation to make the case against engineered recessions or for other price-management strategies. Focusing on the latter assertion mainly makes the heterodox macro policy perspective more open to criticism.
By gaining from inflation, one does not contribute to it.
The Lever and former Labor Secretary Robert Reich presented a simplified version of the greedflation argument that goes something like this: "Inflation has little to do with the relationship between supply and demand for goods and services." Instead, price increases are the result of excessive corporate control. According to Reich, "Corporations have the power to raise prices without losing customers because they face so little competition." They also have minimal competition since "two-thirds of all American industries have become more concentrated since the 1980s," according to a study.Corporate concentration has been happening for years, which poses a clear issue. The concentration of U.S. industries was similar in 2019 to 2022.
However, inflation in the previous year was just around 2 percent, which is modest by historical standards. In comparison, prices increased by 6.5 percent in the subsequent year. Why then did corporate concentration result in historically low inflation during the 2010s, only for it to abruptly increase after the pandemic?
Reich admits that the epidemic did raise business expenses by forcing manufacturers to pay more for labor, energy, and metals. However, businesses afterwards utilized these legitimately increased expenses "as excuses to increase their prices even higher" than was necessary to cover those costs. Taking advantage of these justifications and being shielded from competition by market concentration, greedy businesses used price gouging to fuel inflation.
The principal support for this assertion comes from the association between increased corporate profits and rising inflation that followed the pandemic. Pretax profit margins increased significantly between the second quarter of 2021 and the fourth quarter of 2019, going from 15.6 to 17.9 percent. The greedflation hypothesis' proponents frequently use charts from the IMF, like the one seen below, to back up their claims.
There are several problems with this argument.
First off, it's puzzling why businesses feel forced to wait for a "excuse" before trying to increase their earnings. Ironically, according to Reich's version of the greedflation thesis, corporate America has long prioritized the common good over its own financial self-interest: Corporate prices for goods in the 2010s may have been substantially higher since they were protected from competition by concentration. However, they choose not to increase their profits for years on end because they lacked a convincing "excuse" for setting a price that would be profitable.
This notion of business conduct is peculiar. In general, businesses don't feel required to offer a justification for pursuing their mercenary objectives. U.S. businesses have been perfectly content to outsource work to low-wage nations, as Reich is keen to note in other situations, even in the absence of an economic crisis that would help to legitimize such profit-maximizing activities. While this was going on, pharmaceutical companies consistently hiked the prices of life-saving medications, even when inflation was at or below historic lows.
The fact that the correlation between rising profits and rising prices does not actually tell us anything about the cause of the latter is a second issue with the crude version of the greedflation theory.
Suppose the traditional idea of post-COVID inflation is accurate: As the economy struggled to increase its production capacity after the pandemic recession, fiscal policy allowed demand for products to exceed supply. In that case, since there would be a shortage of certain commodities and a high level of customer demand, manufacturers would witness an increase in the market value of their products. As a result, businesses would be able to negotiate a higher price for their products, increasing their profits.Depending on the relationship between labor and capital inside the company, these increased revenues would then either flow to employees in the form of higher wages or to owners in the form of higher profits. However, in either scenario, rising salaries or profits would be a result of the inflationary climate rather than its cause.
This point is helpfully illustrated by Matt Bruenig using the example of used-car market inflation. After the COVID recession, there was a shortage of personal vehicles compared to demand. This was mostly brought on by a lack of semiconductors, a crucial component of contemporary cars. Consumers unexpectedly raised their expenditure on a variety of semiconductor-using electronics during the pandemic. At the same time, the ability of the world economy to make chips was constrained by COVID lockdowns in China, among other things. As a result, automakers lacked the resources necessary to produce vehicles at a regular rate.
Consumers went to the used-car market when they were unable to purchase new vehicles. As a result, used automobile prices surged. In the United States, the cost of a used car increased by nearly 60 percent, after previously holding steady or declining for 25 years.
between June 2020 and January 2022.
Used automobile dealers did not observe an increase in their costs; since they are selling an already finished good, they essentially have no costs. Because of this, the price rise in the used-car market was nearly totally offset by increased earnings. Profits would "account for" roughly 100% of used-car inflation in the IMF chart's language.
But that wouldn't imply in any real sense that automobile owners' greedily pursuing profits "caused" that inflation. The pandemic recession did not result in a dramatic increase in market concentration for used cars, nor did it cause car owners to become more materialistic. Overall, they have always tried to sell their cars for the highest price possible. Due to a mismatch between the demand for, that "best price" only increased.
Notably, profit margins have decreased as supply has become less limited and the economy's productive potential has recovered. Pretax profit margins fell back to pre-COVID levels in the first quarter of 2023 despite continued inflation (although at a slower rate).
The crude greedflation argument's last flaw is that it just rejects the substantial evidence supporting the widely accepted explanation for the post-COVID inflation. Congress actually launched a historically robust reaction to the pandemic recession, giving households such a large amount of financial relief that Americans' disposable income grew during the economic slowdown and has been above 2019 levels ever since.
We would anticipate inflation regardless of corporate greed or market strength if we added this to weakened supply networks and a declining working force (as many older Americans choose to retire all at once).
This logic might hold true in the Machiavellian world of political advertising. Democratic politicians do not have the luxury of defending progressive macroeconomic policies in-depth to swing voters. Therefore, progressives' jeremiads against corporate greed may be used as a convenient acronym.
But coupling the left's recommendations for managing inflation to an unclear and unsupported interpretation of the phenomenon's causes seems foolish in the world of elite policy discussions, where influential individuals occasionally read and carefully consider rival ideas. Most often, doing so serves to both obscure and unfairly disparage unorthodox proposals for slowing price growth.
After all, whether corporate profiteering contributed to inflation is not actually what determines the viability of (almost all) such plans. In order to make the economy less susceptible to supply shocks, Weber and Wasner contend that policymakers should encourage the development of buffer stock systems for essential inputs and industrial commodities. Their "seller's inflation" argument supports the rationale for this idea. But that hypothesis is not actually necessary to make the case for buffer stockpiles. Even in the case of the standard explanation of the origins of the post-COVID inflation, building excess capacity of essential inputs to boost resilience would be a good idea. Additionally, a lot of analysts who disagree with Weber's thesis support the development of buffer stocks.
The argument for windfall profits taxes and anti-price-gouging laws can be made without supporting the greedflation theory, in a similar manner. I believe that huge profits earned by manufacturers of in-demand goods aren't necessarily a negative thing if those revenues are put back into further production. It would be advantageous for the producers of such products to have access to more finance if the demand for vaccinations or computer chips is significantly greater than the available supply. On the other hand, there is a rationale for public policy to adjust these producers' incentives or redistribute their earnings if they receive windfall gains and distribute them to investors rather than reinvesting them.
Most importantly, one need not support strict labor markets or substantial stimulus policies with the greedflation argument. The COVID epidemic caused significant economic harm that had to be made up for in some way. We would have paid for that harm by experiencing higher unemployment and a shorter recovery if Congress had appropriated significantly less relief money to the unemployed and households. Instead, it has cost us more money because of rising prices. The federal government could have theoretically adjusted fiscal policy a little bit better. However, it was forced to make choices in the face of uncertainty and chose to err on the side of an overly rapid rebound in consumer demand. Given the enormous costs associated with extended periods of widespread unemployment,
This development can be explained in part by the fact that there are more spare workers than the official unemployment rate would have one assume. As Adam Ozimek points out, the unemployment rate only includes unemployed people who are actively seeking for work, not people who aren't looking for work but would still work if the perfect opportunity came along. However, a lot of workers fit into the latter type. Many Americans have transitioned directly from the fringes of the market into paid jobs as employment prospects have improved. As a result, more people in the prime working age have entered the labor force.
Another possibility is that the sensitivity of the modern economy to wage-price spirals is significantly overestimated by mainstream economic theory. It's unclear whether employees can consistently require companies to raise salaries in response to price rises in America, where only 6% of U.S. workers are unionized and cost-of-living adjustments are an uncommon part of union contracts. Indeed, for the majority of the last two years, salaries have not kept up with inflation.
The expenses of faking a recession are hard to justify if we are not about to enter a wage-price spiral. Therefore, it is much preferable for policymakers to attempt and counteract inflation by promoting gains in capacity and productivity. By making the construction of apartment complexes permissible in regions where they are currently prohibited, we can stop the housing inflation. By allowing nurse practitioners to provide a wider range of services, facilitating the entry of foreign-trained physicians into the medical field, and increasing the number of spots available for medical school and residency programs, we can reduce the pressure on healthcare inflation.
Finally, you can make the case that corporate shareholders have it too nice without using the greedflation thesis. Regardless of what caused inflation, raising the capital gains tax rate is a sensible idea in order to fund public goods. The same holds true in the long run for raising labor's share of national income through expanded rights to collective bargaining.
Progressives may promote their fundamental economic objectives without resorting to questionable assertions. Thus, they shouldn't.
The crude greedflation argument's last flaw is that it just rejects the substantial evidence supporting the widely accepted explanation for the post-COVID inflation. Congress actually launched a historically robust reaction to the pandemic recession, giving households such a large amount of financial relief that Americans' disposable income grew during the economic slowdown and has been above 2019 levels ever since.
We would anticipate inflation regardless of corporate greed or market strength if we added this to weakened supply networks and a declining working force (as many older Americans choose to retire all at once).
In conclusion, the crude greedflation argument lacks a convincing justification for why prices rose at the times they did, heavily relies on correlation rather than causation, ignores plenty of evidence that a mismatch between supply and demand has been the primary driver of inflation, and is unable to explain why prices have continued to rise in 2023 despite shrinking corporate profit margins.
What’s greedflation got to do with it?
I believe that political worries, rather than serious thought, are reflected in much of the language surrounding greedflation. Progressives want to support robust stimulus plans and competitive job markets. Recognizing that each of those factors might boost aggregate demand and cause inflation runs the danger of losing favor from the public. Theoretically, on the other hand, portraying inflation as a morality play in which greedy companies alone cause rising prices tends to channel the ire of the general populace in a more constructive direction.This logic might hold true in the Machiavellian world of political advertising. Democratic politicians do not have the luxury of defending progressive macroeconomic policies in-depth to swing voters. Therefore, progressives' jeremiads against corporate greed may be used as a convenient acronym.
But coupling the left's recommendations for managing inflation to an unclear and unsupported interpretation of the phenomenon's causes seems foolish in the world of elite policy discussions, where influential individuals occasionally read and carefully consider rival ideas. Most often, doing so serves to both obscure and unfairly disparage unorthodox proposals for slowing price growth.
After all, whether corporate profiteering contributed to inflation is not actually what determines the viability of (almost all) such plans. In order to make the economy less susceptible to supply shocks, Weber and Wasner contend that policymakers should encourage the development of buffer stock systems for essential inputs and industrial commodities. Their "seller's inflation" argument supports the rationale for this idea. But that hypothesis is not actually necessary to make the case for buffer stockpiles. Even in the case of the standard explanation of the origins of the post-COVID inflation, building excess capacity of essential inputs to boost resilience would be a good idea. Additionally, a lot of analysts who disagree with Weber's thesis support the development of buffer stocks.
The argument for windfall profits taxes and anti-price-gouging laws can be made without supporting the greedflation theory, in a similar manner. I believe that huge profits earned by manufacturers of in-demand goods aren't necessarily a negative thing if those revenues are put back into further production. It would be advantageous for the producers of such products to have access to more finance if the demand for vaccinations or computer chips is significantly greater than the available supply. On the other hand, there is a rationale for public policy to adjust these producers' incentives or redistribute their earnings if they receive windfall gains and distribute them to investors rather than reinvesting them.
Most importantly, one need not support strict labor markets or substantial stimulus policies with the greedflation argument. The COVID epidemic caused significant economic harm that had to be made up for in some way. We would have paid for that harm by experiencing higher unemployment and a shorter recovery if Congress had appropriated significantly less relief money to the unemployed and households. Instead, it has cost us more money because of rising prices. The federal government could have theoretically adjusted fiscal policy a little bit better. However, it was forced to make choices in the face of uncertainty and chose to err on the side of an overly rapid rebound in consumer demand. Given the enormous costs associated with extended periods of widespread unemployment,
This development can be explained in part by the fact that there are more spare workers than the official unemployment rate would have one assume. As Adam Ozimek points out, the unemployment rate only includes unemployed people who are actively seeking for work, not people who aren't looking for work but would still work if the perfect opportunity came along. However, a lot of workers fit into the latter type. Many Americans have transitioned directly from the fringes of the market into paid jobs as employment prospects have improved. As a result, more people in the prime working age have entered the labor force.
Another possibility is that the sensitivity of the modern economy to wage-price spirals is significantly overestimated by mainstream economic theory. It's unclear whether employees can consistently require companies to raise salaries in response to price rises in America, where only 6% of U.S. workers are unionized and cost-of-living adjustments are an uncommon part of union contracts. Indeed, for the majority of the last two years, salaries have not kept up with inflation.
The expenses of faking a recession are hard to justify if we are not about to enter a wage-price spiral. Therefore, it is much preferable for policymakers to attempt and counteract inflation by promoting gains in capacity and productivity. By making the construction of apartment complexes permissible in regions where they are currently prohibited, we can stop the housing inflation. By allowing nurse practitioners to provide a wider range of services, facilitating the entry of foreign-trained physicians into the medical field, and increasing the number of spots available for medical school and residency programs, we can reduce the pressure on healthcare inflation.
Finally, you can make the case that corporate shareholders have it too nice without using the greedflation thesis. Regardless of what caused inflation, raising the capital gains tax rate is a sensible idea in order to fund public goods. The same holds true in the long run for raising labor's share of national income through expanded rights to collective bargaining.
Progressives may promote their fundamental economic objectives without resorting to questionable assertions. Thus, they shouldn't.
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