Dec 29, 2021Liked by Matt Stoller

Even more than usual you hit the nail right on the head. I'd only add that the Foxlings are constantly raising the absurd spectre of hyperinflation such as in Venezuela, Germany circa 1930's, Brazil at various times, etc. Even ol' Larry would (I hope) agree that this is absurd. On right-wing media they are constantly saying stuff like "Biden will raise the cost of gas so high than only a billionaire can feed his family or get a fill up." TOTAL BS but is makes great fodder for the scare lobby that really does want to overthrow the government. Matt, nowdays I sound just like you 15 years ago and you were right then.

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Dec 29, 2021Liked by Matt Stoller

Matt, are you just going easy on Larry because he's a "President Emeritus" at your very favorite institution of higher learning? 😉

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Its more accurate that the monopolists have been able to push their advantage more than that they are actually responsible for the inflation... if the money isn't there, they can't get it. But they've certainly displayed and abused their power in the crisis, and while it may not have changed the absolute number on inflation, they've certainly worsened the effects for a great many people.

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I’m compelled by the idea but not so compelled by the mathematic concept used (and I understand it is admittedly back-of-the-envelope): just because profits are up YoY, to assume that all of that $1.0T —> $1.7T increase is inflation doesn’t seem like a fair assumption. If profits were yielded from the same, fixed set of goods/services YoY, then that would make sense, but the increase doesn’t take into account changing consumption patterns, how much buyer utility was gained from the additional profits, etc. Am I missing something?

Just became a paying subscriber after a year or so of freeloading. Thanks for your work!

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"Taking all of this together, it means that increased profits from corporate America comprise 44.7% of the inflationary increase in costs."

The assumption that you can make 1 to 1 comparisons here doesn't feel fully substantiated. Looking at the entire time series, there are plenty of movements in corporate profits that don't really seem to have much connection with what was going on in terms of inflation.

More broadly, I worry that trying to use antitrust as the hammer for every nail is a dangerous strategy. In the 70s we saw the same attempt to defeat inflation by attacking "price gouging." These were frankly an embarrassing failure that helped discredit the validity of antitrust, even among those on the left and persuadable types.

Concentrated economic power deepens inequality, stifles innovation, and damages democracy. But, on inflation, we've seen decades of continued economic concentration (which have already had markedly negative impact in those three areas accompanied, among otherw) accompanied by...low and stable inflation. Putting two numbers from 2020/21 next to each other and saying one caused the other doesn't change that basic reality.

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One area where excess profits tax won't really work very well is where companies are not publicly traded. I will give a streamlined example of monopoly at work in Northern Europe, there are many details omitted but the main idea is presented.

Where I live, government-owned companies divested their regional power supply grids to private investors a decade ago. After the new deal, in 5 years we have seen a 40% revenue hike (paid in full by the users, of course as rate increase) and similarly a decline of this previously profitable business into a break even status, at least on the balance sheet, so no taxes are paid anymore. Sure, some part of the loss of taxable profits is due to required infrastructure buildup which was one reason for the divestment. But there is more.

There are subtle indications that attempts to evade taxation are made. Such arrangements can be found, which consist of 15 or so overseas shell companies and feature massive loans given out via these at exorbitant interest rate to this 100% guaranteed risk free business venture if there ever was one. Anyone gets a much better percentage on their car loan than the intra-corporation loans to improve the power grid get, to give an idea of the margins.

The politicians responsible back then claimed that there is no risk in selling a natural monopoly, as the pricing power of private entities could be regulated. Perhaps they were right, because could does not necessarily imply would.

Finally, after several years the politicians have done something: The price hike cap is adjusted from 15% to 8% per year. There also is some kind of profit margin regulation, but to a consumer this seems ineffective in practice as the price hike caps have so far been the limiting ones. Probably it's due to the above described tax scheme. Let this be more of a warning than an example to you across the pond. Perhaps IRS is more effective in preventing this behavior.

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Says it all: "I’ve interviewed a few business people dealing with China tariffs; they told me they raised prices when the tariffs hit, but won’t lower them if the tariffs go away. ***That’s because prices aren’t based on cost, but market power.*** Lower tariffs on Chinese imports will simply flow to more profits for middlemen, not lower prices for consumers."

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U.S. companies are global companies. Their profits are derived from business in the U.S. and business outside the U.S. Comparing the increase in U.S. inflation to the increase in U.S.-based, global companies' profits is bad math.

And an excess profits tax discourages innovation. Excess profits should drive competition which should drive prices down. If the root of the problem is a lack of competition, then you need to increase competition. An excess profits tax encourages U.S. companies to be inefficient, a gap which foreign companies will gladly fill - e.g., the U.S. auto industry vs. Japan, Korea, etc.

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I suggest you write on non-profit organizations that , in effect, rob the public by avoiding taxes, choose for themselves what they spend money on, and pay their CEO's unusually large salaries.

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The point that I don't get is why the firms do not abuse their dominant market position before the pandemic but only to use them during the pandemic. I mean if they are in a strong price negotiation position they should have maximized them to draw in more profits and invest those profits to reinforce their pricing negotiation/fixing power.

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I believe the author makes interesting points but He doesn’t have sufficient data to draw the conclusions he makes. Public company information is available but it lags - small company information is generally not available and certainly not available in a timely manner to accurately compare against the inflation data he quotes. Labor shortages have been the major contributor increasing margins - companies are doing better with less labor by extracting as much as possible out of the people they employ. Wages for each working employee have been raised either by more hours or increased hourly wage. Higher per person productivity increases margins.

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Higher expenses lead to lower profits, right? Higher costs for materials and labor cut into profits, right? Profits are 70% higher, Q1 2020 to Q3 2021, your graph at the Fed's FRED page, Nonfinancial corporate profits -- https://fred.stlouisfed.org/series/NFCPATAX -- Profits jumped from $1.023 trillion to $1.729 trillion. The Forbes writer Nick Sargen, Sept,2, 2021, wrote, "In the second quarter of this year, corporate profits were up 69% from a year ago." This $700 billion new price tag is a $5,000 plus added expense to every household in the U.S. If inflation kicked up costs by 7% or 6.8%, how did profits jump by 70%?

It seems obvious we have opportunistic price hikes.

Inflation adjusted wages for 80% of full-time nonsupervisory workers, 104 million workers, were lower over the past year, see Jobs Quality Index.com.

Personal savings rate for Q2 2020 was 26.0% of disposable income (after taxes), and for the 4 quarters Q2, 3, 4, and Q1 2021, it averaged 19.0%. (BEA.gov, Table 2.1) After Covid restrictions eased, there was pent up demand. Since 60% of income goes to 20% of households, the demand was limited to households with higher income, the top 20% to 40%.

Strangely, nonfinancial corporate profits had plunged in Q1 2020, from $1,023 billion to $860 billion, pre-pandemic. Adjusting that for inflation it's about the same profit level as Q4 2009, when unemployment hit 10.0% in October, 2009. "The best economy ever," boasted Trump. Patriotic Millionaires linked to an article by Paul Constant this week, 2/18/22, that linked to Matt Stoller's article. Matt I heard you interviewed at the Century Foundation, good interview.

Explain the logic I can't understand, 7% increase in prices, 70% increase in profits.

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Let me offer a thought experiment here. What if the entire increase in prices that firms have made over the last 12 months were passed along to the employees at these firms in the form of higher wages? Would that not still be inflation? If Corporations raise prices and retain that extra revenue as profit or pass it along to employees through higher wages, it has the exact same impact on inflation. Inflation is the year over year rate of change in the prices of goods and services. It doesn’t matter who/what benefits from these changes, it’s still inflation.

This article is misconstruing increased corporate profits, an EFFECT of rising prices, with the CAUSE of rising prices. In my opinion the cause of rising prices is the unprecedented money creation by the Federal Reserve over the last 2 years combined with supply constraints (supplies chains, labor shortages, etc.). This money creation has shifted pricing power to the firms (supply) rather than the consumers (demand) by increase the MONEY demand for goods and services relative to supply. The output of this supply/demand imbalance are higher prices which are currently resulting in higher corporate profits.

As a testament to this, let’s take airline prices. Airline prices are barely higher than they were 2 years ago (based on Commerce Department data), despite the American Airline industry being far closer to an oligarchy with 4 dominant carriers in US Domestic air travel industry (Southwest, American, Delta, and United) than the global auto industry that Matt mentioned in his example. The reason for this inability to raise prices by the airlines (and corresponding weakness in profits) is that travel demand has not risen enough to create a demand/supply imbalance.

I'm reserving my comments to Matt's analysis of the causes of inflation. I don't necessarily disagree with him regarding the importance of competition in general or the need for BETTER regulation.

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At the weeds level...let me present a couple of personal observations.

I am in San Francisco for context. We also have a small place in a small town 80 miles away from San Francisco.

When things started to open up we went to our place out of town. In this town there is a Steak House. Been there for a couple of decades. There is also a diner. Both owned by the same person who also owns many other restaurants around the USA.

We went in and had dinner for the firs time in 18 months. The bill essentially doubled. From about $80 a head with tip to $160. My wife the ICU RN was beside herself. She did not get a 100% pay raise for risking her life.

What is interesting to note is that our acquaintances who own restaurants here in San Francisco with some of the highest least costs in the USA only raised their prices by about 15%. The steak house in the little town where the owner either owns the building or no doubt has lease costs a fraction of those here in SF doubled his prices. At the time there was no other full service dinner restaurant in this town. Small town Monopoly and prices went up 100%. Big City and Competition and it goes up 15%.

The second example is cars. We happen to drive a 1940's car. It is in need of a rebuild after 175K miles and 75 years. It is our only car. We can use the bus if need be in San Francisco. I want to take my time on the rebuild. So, we decide for the first time to buy a new car.

What we need is something to carry things like engine blocks and rear ends and the like. But, since we live in a 1922 building the garage doors are very narrow. Most trucks will not fit. Most of the auto companies had stopped making the little trucks years ago.

This fall GM started to make a small truck called the Maverick. We happen to test drive one over Christmas. Liked it. The fact it is on a car platform means it does not ride like a truck. It is narrow enough that with the mirrors folded in it will make it into the 1922 garage. Great.

We want the hybrid version for its 42 MPG around town. We go onto the Ford Company Website and it asked us if we want them to show us the "Inventory" at it dealers. Great. We punch in the colors and it shows us about 50 of them within 100 miles of the Golden Gate Bridge. We start calling. Turns out 99% of them are already sold. WTF? How is it that they show us "inventory" when nothing is actually for sale? This is morally bait and switch.

OK, Lets order one. Nope. Ford stopped taking orders for them. No more this model year. Come back in 2023. One can get the non-hybrid but it is not a good deal for a lot of reasons.

Ok, we call about 15 dealers and tell them if a deal falls through or one comes in that is not sold, contact us. A week later we get an email. They have one on the lot for sale now. Great. The MSRP is $22K. They want $30K. You do the math on the percent of the markup above MSRP. That does not include their mark up from invoice to MSRP. We tell them no thank you.

A week later another dealer 100 miles away from the first tells us they have one on the lot ready to sell. Great. They send us a note that this trucks MSRP is $23K. They want $32K for it.

So, how is it that two dealers 100 miles apart as asking the same markup over MSRP of about 22%?

These are but two very narrow data points in this discussion, but they are real world hard examples of what is going on in the market place.

It is interesting that Ford can barley manage 4000 units a month for its new "hot" truck. My 83 year old neighbor just shook his head. He purchased his new "Hot" 1965 Mustang Convertible as a special order and got it in 4 weeks. Ford was making 50,000 units a month of the Mustang in 1965-1966.

The New Economy is being built for suckers.

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The first politician to effectively get economists and economic policy people out of places with power with immediate effect and/or transfer major budget-making, and control of financial and economic matters back to Congress or the President himself/herself (and make them what they always were, openly political decisions) will see his party/her party govern for a generation (or get a chance to implement their generational agenda).

It takes a lot to do so because you have to basically sacrifice ever being in polite company again. And you need to have a certain level of ties to community and arrogance (and belief) to really be able to pull it off (because of how tempting it is to join 'polite company').

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"...the total amount America produces annually, which is the Gross Domestic Product." Does not the GDP include what governments spend? If so, GDP overstates "...the total amount America produces annually,..." throwing off your calculation of how much profits are contributing to inflation. I don't disagree that profits are contributing to inflation; I am just suggesting your calculation of the effect is invalid. Would not PPE be a better measure of "...the total amount America produces annually,..."?

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