As I've commented a few times on these, what was missed about corporate concentration and markups is that constrained markets (e.g. demand increasing faster than supply) are exactly how large markups get exercised in practice.
*The* reason to have market power is to be able to have access to the ability to profit from huge markups in constrained markets, because that's how you get your money before regulators notice.
The idea that this wasn't an obvious source of inflation is laughable, much as it was in December.
This makes my head want to explode. The government not only enables monopolies it actively encourages them. Every single regulation placed on corporations in America over the last 60 years have been anti-competitive. It ensures only the largest survive and they survive by paying for the politicians to also survive. Largest business, more regulation, even larger businesses, and all the lobbying and donations going directly back into the pockets of politicians.
Here’s an actual look at the vicious cycle that is larger and larger government followed by larger and larger businesses. You want to eliminate monopolies actually enforce the monopoly laws on the books, and of equal importance remove regulation and allow actual competition in the market.
I recently wrote a stack on government growth eating the American dream and how simple our inflation is to understand - it’s an energy crisis, exactly as we saw in the 30’s (a coal crisis) and the 70’s (an oil crisis). These things aren’t hard to understand. If you raise the cost of the single largest input to ALL of commerce, prices are going to rise. It isn’t magic.
Blaming it on profits is ridiculous - companies, and only very large companies took fake profits on the basis of stimulus money they shouldn’t have gotten from a government that shouldn’t be large enough to give them in the first place, and now we’re blaming them for “profits?!” It’s oxymoronic. Also, explain to the shareholders of these companies all the amazing profits they’re making as their profits literally go down and their market caps crater.
Nowhere in this analysis do you mention the Fed bond buying spree, unless that is factored into the demand side graph by the SF Fed? According to Matt Taibbi, Fed asset purchases jumped from $4 to $8 trillion, which basically means $4 trillion was dumped on the economy during the pandemic. To what degree did this drive inflation? https://taibbi.substack.com/p/blue-and-red-do-have-something-in
We can politicize those things or expect corporations to act in some non capitalism oriented way. Matt's analysis misses the broad based, systemic inflation across every CPI basket.
I have a novel reason for inflation: the growth of household net worth since 2009. Household net worth has expanded rapidly since 2009, up from an inflation adjust $62 trillion to $149 trillion, expanding by 140% in 13 years. And it expanded most rapidly since 2020 Q1 to 2021 Q1, up 23% or $26 trillion. (I took the figures from the Fed's Flow of Funds report, Dec. 9, 2021)
I compare this with Table 2.1, Personal Income site at BEA.gov. Looking at the period of Covid, from 2020 Q2 to 2021 Q2, it shows a very high savings rate, 19.0%, and the total income amount was around $20 trillion, so $3.8 trillion was saved. Much of that went into stocks, some into residential real estate.
But, and it’s a big But, the Fed’s Flow of Funds report shows household net worth increased from 2020 Q1 at $110.5 tr. And 2021 Q1 it was at $136.2, up $25.7 trillion or 23%.
During this 12 months only $3.8 trillion was saved. This $3.8 tr. created an increase of $25.7 tr. --- I don’t know what to say, it seems impossible that the amount saved was dwarfed by the amount of the increase, the increase in wealth was 6.7 times greater than the amount saved.
The ratio of GDP to wealth is now at an all time high, about 6.8 times higher than GDP.
Some of this wealth is bleeding into inflation. My hypothesis.
I think 60% of the nation’s income, pre-tax, is captured by 20% of the nation. That’s where purchasing demand lies. After a bout of very high savings, 19.0% over 12 months, pent up demand emerged, and corporations responded by operating on the “whatever the market will bear” practice. Prices shot up.
I’m disappointed that very few, if any economist, have pointed out that higher costs in materials and labor result in lower profits, not astronomically higher profits. Profits should be lower, wages should be taking a big hit. I think economist Daniel Alpert makes a case we are in a disinflationary and a deflationary period. Corporate profits are much higher than the period before 2000, when they bounced much higher. I think it’s time to set a maximum corporate profits rate speed bump as a percentage of GDP, set a target percentage of profits per GDP, a high financial transactions tax, a wealth tax, the whole works including a 90% tax on personal incomes over $4 million, as in 1952 to 1962. We need to shift the ratio of income going to the lower 90% to the levels of 1975, when the RAND Corp., the Pew Research, the Texas Inequality Project, the Saez, Piketty and Zucman group, Josh Bivens at EPI, and the CBO, all find the 90% has seen its share of earnings drop between 10% to 19% of all income. The Pew research puts it at 19%. RAND is a little famous for projecting the possible average worker income not at today's $52,000 but at $90,000. It’s time these facts arrive into the national debate. “Average weekly earnings for production and nonsupervisory workers”, says the BLM, were higher in Feb. 1966 than in Feb. 2020, adjusting for inflation. Who is making this statement besides the BLM? See this graph: Bureau of Labor Statistics Data (bls.gov) -- https/data.bls.gov/timeseries/CES0500000031. – My blog is Economics Without Greed, Part Two.
In 2021, I recommended an excess profits tax, tighter price-fixing rules, re-regulation of certain areas”
That’s all well and good but how will it address the problem of Putinflation? /s Putin doesn’t pay taxes and doesn’t respect rules or regulations. The Biden administration blames Putin and they have loads of serious economists, bankers and CEOs advising them. They are serious but seriously corrupt or seriously stupid?
Where is the data by industry from? Health care inflation has been out of control for 40 years, retail stock trading costs have drastically been reduced and gasoline prices have increased well below inflation until very recently.
"cheap capital" benefits homeowners, start-ups and small/midsize business. Higher interest rates helps banks and insurance companies. Re-shore supply chains will increase inflation and reduce competition as it will require large amounts of capital by corporations. Oil refineries have been shut down because of government regulation and jaw-boning by politicians that oil assets will be stranded.
Ways to reduce monopoly power: create a graduated national sales based on the size of a company or percentage of the industry a company has. Proceeds from a significant carbon tax (rather than regulation) on hydrocarbons could be used to capture carbon.
Rather than duplicate the policies of the early 1970s that worsened inflation and the economy, the US should look at less regulation that made things like airplane tickets affordable. Anti-trust law should be applied aggressively and incentives should create competition, not destroy smaller companies by hard to follow regulations.
Hi Matt, Thanks for this! Three follow-up questions:
Pre-amble: Biden has pointed to the refiners/gas-retailers and alleged they are collusively raising their profit margins significantly higher than the already unusually elevated cost of crude, something I find eminently plausible. I think this also fits nicely with the excess corporate profit evidence you present in this post?
1. Obviously, in the 1970s "classic U.S stagflation", gas prices rose as well. At that time, the Middle East oil embargo was the obvious suspect. But I'm curious: was there any evidence that refiners/gas-retailers colluded back then to raise their profit-margin above the admittedly sky-high raw-good/crude-oil price then? Is there similar evidence now?
2. Were there efforts back then to rein in higher gas prices with price controls, and were they effective? If not, is that why you have called for an excess profit tax, rather than direct price controls?
3. What rate of excess profit tax do you think would be sufficient, and what is the estimated incremental effect on retail gas prices for a given rate of excess profits tax?
Within two years, Amazon may have used up all the available labor. Bezos, of course, is blaming unions, but they have the highest turnover rate in workers due to work environment, pay, injuries. In all their calculations, they obviously missed the fact that people can be worn down, demoralized. They could switch to robots, I suppose, but somehow I don't think their customers will see better service. I'm basing this on my few interactions with programmed non-beings. Although I will say that the nosy bot in my Stop and Shop does turn tail and go in the opposite direction when I tell it to "get the hell away from me".
Well over a year ago I was listening to the top economist at Deloitte and he threw out there the possibility that inflation can be more than transitory if companies are able to convince consumers that there are good reasons for the price increases. He used the example of Fast Food companies plastering cities with signs that they have increased wages to employees. These signs get consumers used to paying high prices. (same could be said for Ukraine = Higher Oil Prices, more expensive flights etc...)
The role of the media in justifying higher prices can't be ignored.
@Matt, also, do you think longer term there will be a difference in total “capturable” profits for discretionary goods/services versus non-discretionary? For example, if Netflix raises its price too high to capture more profit, people eventually start canceling Netflix and renting DVDs for free from their public library instead, thus giving Netflix increased per-user margin on a reduced pool of users, possibly even canceling out any total profit increase.
Whereas, when refiners/gas-retailers raise their prices, the truck drivers who transport our food to market have no choice but to raise their rates, thus making food more expensive for all of us.
I guess core inflation doesn’t capture the cost of discretionary goods/services like Netflix anyway though?
I like that the SF Fed is attempting to separate and measure the various effects on inflation, because most coverage I have seen on inflation is just the author projecting their own biases onto the issue. Liberals decry supply bottlenecks and corporate profiteering, conservatives blame gov. spending, and Matt Stoller says it's all about monopolies. So who is right? Well looking at the SF Fed numbers, looks pretty even, though I have some questions about their methodology.
Why did they measure from a pre-pandemic average rather than the bottom of the dip? Seems like if you wanted to measure the impact of the pandemic on inflation, you would start from the crash.
Why do the numbers on the right which appears to show overall inflation gain not match their scale on the left?
Why does the total inflation from supply and demand not add up to the current 8%?
Hmm - I thought that inflation is created by printing money...
Thanks Matt.
As I've commented a few times on these, what was missed about corporate concentration and markups is that constrained markets (e.g. demand increasing faster than supply) are exactly how large markups get exercised in practice.
*The* reason to have market power is to be able to have access to the ability to profit from huge markups in constrained markets, because that's how you get your money before regulators notice.
The idea that this wasn't an obvious source of inflation is laughable, much as it was in December.
This makes my head want to explode. The government not only enables monopolies it actively encourages them. Every single regulation placed on corporations in America over the last 60 years have been anti-competitive. It ensures only the largest survive and they survive by paying for the politicians to also survive. Largest business, more regulation, even larger businesses, and all the lobbying and donations going directly back into the pockets of politicians.
Here’s an actual look at the vicious cycle that is larger and larger government followed by larger and larger businesses. You want to eliminate monopolies actually enforce the monopoly laws on the books, and of equal importance remove regulation and allow actual competition in the market.
I recently wrote a stack on government growth eating the American dream and how simple our inflation is to understand - it’s an energy crisis, exactly as we saw in the 30’s (a coal crisis) and the 70’s (an oil crisis). These things aren’t hard to understand. If you raise the cost of the single largest input to ALL of commerce, prices are going to rise. It isn’t magic.
Blaming it on profits is ridiculous - companies, and only very large companies took fake profits on the basis of stimulus money they shouldn’t have gotten from a government that shouldn’t be large enough to give them in the first place, and now we’re blaming them for “profits?!” It’s oxymoronic. Also, explain to the shareholders of these companies all the amazing profits they’re making as their profits literally go down and their market caps crater.
Nowhere in this analysis do you mention the Fed bond buying spree, unless that is factored into the demand side graph by the SF Fed? According to Matt Taibbi, Fed asset purchases jumped from $4 to $8 trillion, which basically means $4 trillion was dumped on the economy during the pandemic. To what degree did this drive inflation? https://taibbi.substack.com/p/blue-and-red-do-have-something-in
Or... unprecedented M2 growth + unprecedented supply constraints + unprecedented tight labor markets.
We can politicize those things or expect corporations to act in some non capitalism oriented way. Matt's analysis misses the broad based, systemic inflation across every CPI basket.
I have a novel reason for inflation: the growth of household net worth since 2009. Household net worth has expanded rapidly since 2009, up from an inflation adjust $62 trillion to $149 trillion, expanding by 140% in 13 years. And it expanded most rapidly since 2020 Q1 to 2021 Q1, up 23% or $26 trillion. (I took the figures from the Fed's Flow of Funds report, Dec. 9, 2021)
I compare this with Table 2.1, Personal Income site at BEA.gov. Looking at the period of Covid, from 2020 Q2 to 2021 Q2, it shows a very high savings rate, 19.0%, and the total income amount was around $20 trillion, so $3.8 trillion was saved. Much of that went into stocks, some into residential real estate.
But, and it’s a big But, the Fed’s Flow of Funds report shows household net worth increased from 2020 Q1 at $110.5 tr. And 2021 Q1 it was at $136.2, up $25.7 trillion or 23%.
During this 12 months only $3.8 trillion was saved. This $3.8 tr. created an increase of $25.7 tr. --- I don’t know what to say, it seems impossible that the amount saved was dwarfed by the amount of the increase, the increase in wealth was 6.7 times greater than the amount saved.
The ratio of GDP to wealth is now at an all time high, about 6.8 times higher than GDP.
Some of this wealth is bleeding into inflation. My hypothesis.
I think 60% of the nation’s income, pre-tax, is captured by 20% of the nation. That’s where purchasing demand lies. After a bout of very high savings, 19.0% over 12 months, pent up demand emerged, and corporations responded by operating on the “whatever the market will bear” practice. Prices shot up.
I’m disappointed that very few, if any economist, have pointed out that higher costs in materials and labor result in lower profits, not astronomically higher profits. Profits should be lower, wages should be taking a big hit. I think economist Daniel Alpert makes a case we are in a disinflationary and a deflationary period. Corporate profits are much higher than the period before 2000, when they bounced much higher. I think it’s time to set a maximum corporate profits rate speed bump as a percentage of GDP, set a target percentage of profits per GDP, a high financial transactions tax, a wealth tax, the whole works including a 90% tax on personal incomes over $4 million, as in 1952 to 1962. We need to shift the ratio of income going to the lower 90% to the levels of 1975, when the RAND Corp., the Pew Research, the Texas Inequality Project, the Saez, Piketty and Zucman group, Josh Bivens at EPI, and the CBO, all find the 90% has seen its share of earnings drop between 10% to 19% of all income. The Pew research puts it at 19%. RAND is a little famous for projecting the possible average worker income not at today's $52,000 but at $90,000. It’s time these facts arrive into the national debate. “Average weekly earnings for production and nonsupervisory workers”, says the BLM, were higher in Feb. 1966 than in Feb. 2020, adjusting for inflation. Who is making this statement besides the BLM? See this graph: Bureau of Labor Statistics Data (bls.gov) -- https/data.bls.gov/timeseries/CES0500000031. – My blog is Economics Without Greed, Part Two.
In 2021, I recommended an excess profits tax, tighter price-fixing rules, re-regulation of certain areas”
That’s all well and good but how will it address the problem of Putinflation? /s Putin doesn’t pay taxes and doesn’t respect rules or regulations. The Biden administration blames Putin and they have loads of serious economists, bankers and CEOs advising them. They are serious but seriously corrupt or seriously stupid?
Where is the data by industry from? Health care inflation has been out of control for 40 years, retail stock trading costs have drastically been reduced and gasoline prices have increased well below inflation until very recently.
"cheap capital" benefits homeowners, start-ups and small/midsize business. Higher interest rates helps banks and insurance companies. Re-shore supply chains will increase inflation and reduce competition as it will require large amounts of capital by corporations. Oil refineries have been shut down because of government regulation and jaw-boning by politicians that oil assets will be stranded.
Ways to reduce monopoly power: create a graduated national sales based on the size of a company or percentage of the industry a company has. Proceeds from a significant carbon tax (rather than regulation) on hydrocarbons could be used to capture carbon.
Rather than duplicate the policies of the early 1970s that worsened inflation and the economy, the US should look at less regulation that made things like airplane tickets affordable. Anti-trust law should be applied aggressively and incentives should create competition, not destroy smaller companies by hard to follow regulations.
Hi Matt, Thanks for this! Three follow-up questions:
Pre-amble: Biden has pointed to the refiners/gas-retailers and alleged they are collusively raising their profit margins significantly higher than the already unusually elevated cost of crude, something I find eminently plausible. I think this also fits nicely with the excess corporate profit evidence you present in this post?
1. Obviously, in the 1970s "classic U.S stagflation", gas prices rose as well. At that time, the Middle East oil embargo was the obvious suspect. But I'm curious: was there any evidence that refiners/gas-retailers colluded back then to raise their profit-margin above the admittedly sky-high raw-good/crude-oil price then? Is there similar evidence now?
2. Were there efforts back then to rein in higher gas prices with price controls, and were they effective? If not, is that why you have called for an excess profit tax, rather than direct price controls?
3. What rate of excess profit tax do you think would be sufficient, and what is the estimated incremental effect on retail gas prices for a given rate of excess profits tax?
Add to the mix - using up available labor. According to this article in the Guardian, https://www.theguardian.com/technology/2022/jun/22/amazon-workers-shortage-leaked-memo-warehouse,
Within two years, Amazon may have used up all the available labor. Bezos, of course, is blaming unions, but they have the highest turnover rate in workers due to work environment, pay, injuries. In all their calculations, they obviously missed the fact that people can be worn down, demoralized. They could switch to robots, I suppose, but somehow I don't think their customers will see better service. I'm basing this on my few interactions with programmed non-beings. Although I will say that the nosy bot in my Stop and Shop does turn tail and go in the opposite direction when I tell it to "get the hell away from me".
Well over a year ago I was listening to the top economist at Deloitte and he threw out there the possibility that inflation can be more than transitory if companies are able to convince consumers that there are good reasons for the price increases. He used the example of Fast Food companies plastering cities with signs that they have increased wages to employees. These signs get consumers used to paying high prices. (same could be said for Ukraine = Higher Oil Prices, more expensive flights etc...)
The role of the media in justifying higher prices can't be ignored.
Fine piece, as always; sharing it everywhere
@Matt, also, do you think longer term there will be a difference in total “capturable” profits for discretionary goods/services versus non-discretionary? For example, if Netflix raises its price too high to capture more profit, people eventually start canceling Netflix and renting DVDs for free from their public library instead, thus giving Netflix increased per-user margin on a reduced pool of users, possibly even canceling out any total profit increase.
Whereas, when refiners/gas-retailers raise their prices, the truck drivers who transport our food to market have no choice but to raise their rates, thus making food more expensive for all of us.
I guess core inflation doesn’t capture the cost of discretionary goods/services like Netflix anyway though?
I like that the SF Fed is attempting to separate and measure the various effects on inflation, because most coverage I have seen on inflation is just the author projecting their own biases onto the issue. Liberals decry supply bottlenecks and corporate profiteering, conservatives blame gov. spending, and Matt Stoller says it's all about monopolies. So who is right? Well looking at the SF Fed numbers, looks pretty even, though I have some questions about their methodology.
Why did they measure from a pre-pandemic average rather than the bottom of the dip? Seems like if you wanted to measure the impact of the pandemic on inflation, you would start from the crash.
Why do the numbers on the right which appears to show overall inflation gain not match their scale on the left?
Why does the total inflation from supply and demand not add up to the current 8%?
Seems like their analysis needs some work.