A Matter of Prices and Profits

The Pitch: Economic Update for November 3rd, 2022

Friends,

As I write this, the leading economic story is that the Federal Reserve followed through on their threats to raise interest rates by another three-quarters of a percent for a record-breaking fourth quarter in a row. I want to take a step back and look at the reason why Fed Chair Jerome Powell has been so adamant about raising rates: Specifically, he claims it’s to lower consumer demand and drive inflationary prices down by reducing job openings and increasing unemployment.

The problem, as we’ve said many times in this newsletter, is that the current global inflation crisis has less to do with consumer demand than the Fed or other hawks think, and that’s why they can’t beat inflation the way the Fed did last time. Our current crisis was caused by pandemic disruptions and global supply chain snags, and it has been exacerbated by corporations using the crisis as cover to raise prices and rake in profits. The Pitch was early on the “greedflation” train, at a time when many experts argued that it was wrong to blame corporations for the higher prices that people were paying.

But now it seems that conventional wisdom has finally come around to accept that corporate greed is playing a leading role in inflation. Yesterday, no less a mainstream publication than The Financial Times published a remarkable piece by Paul Donovan, the Chief Economist at UBS Global Wealth Management, which admits that the forces pushing the inflation crisis at the beginning of 2021 — the supply chain collapse caused by the pandemic — ”was transitory after all.” Instead, the higher prices we’re seeing in stores are “more profit margin expansion than wage cost pressures,” Donovan writes.

A story this week in The New York Times by Isabella Simonetti and Julie Creswell also connects the dots between corporate profiteering and inflationary price increases. “Amid growing concerns that the economy could be headed for a recession, some food companies and restaurants are continuing to raise prices even if their own inflation-driven costs have been covered,” they write.

The authors cite businesses ranging from Coca-Cola to Chipotle to banks to airlines to hotels that have cranked up their profits far above and beyond any inflationary price increases they have incurred, simply because consumers have proven willing to pay those higher prices.

“This unconventional inflation means higher unemployment and lower wages are not the only possible cure for it,” Donovan wrote in The Financial Times. “Policy has more routes to lower inflation if the cause is about profits.”

But which policies? On Halloween, President Biden called for a windfall profits tax on oil and gas companies, which have seen record profits while energy costs reached record highs this year. The New York Times didn’t poll ordinary Americans about Biden’s proposal for a tax on windfall gas and oil profits, but they did ask the president of an oil company for a quote and — shockingly — he was against the proposal, calling it “a horrible idea, small thinking,” and “Total politics.”

California Governor Gavin Newsom called for a windfall profits tax on oil and gas producers a month ago, citing the huge gap between the skyrocketing energy prices and the declining costs to produce gasoline and crude oil. Democrats in the Senate and the House have introduced bills that would introduce a national windfall tax on oil producers.

As even mainstream and center-right media outlets begin to recognize corporate greed’s role in skyrocketing prices, I’d expect public sentiment for windfall profit taxes to rise. Corporations have openly stated that they’re perfectly happy to sell to a smaller audience, as long as those audiences can afford to pay higher prices and boost their profits. But the commodities that they’re selling — food, energy, housing — are necessities for living. Because these higher prices are a matter of life and death for the average American, it’s up to the government to step in and combat inflation with policies that directly address corporate greed.

The Fed is currently trying to solve the “problem” of plentiful jobs at higher wages, which is in fact not a problem. In fact, you can argue consumer demand is the only thing holding the American economy aloft at this point.

The Latest Economic News and Updates

The Fed vs. American Workers

As I mentioned in the introduction, the Federal Reserve raised interest rates by three-quarters of a percent yesterday. That’s a record: at no other time in history has the Fed raised rates so high and so rapidly in succession.

Part of the Fed’s goal in raising rates is to make it harder for prospective employers to borrow money, thereby slowing down the job market. That’s why it’s incredibly confusing that Fed Chair Jerome Powell said in his press conference yesterday that “I don’t think wages are the principal story for why prices are going up.”

Powell explained that his main concern with the labor market is that there are too many jobs available. If that condition persists, he argues, wages might climb too high too fast, and prices would continue to rise to vacuum up those wages in a wage-price spiral. But if Powell’s main goal is to shrink the number of jobs available, he’s failing at his job: The economy added 10.7 million job openings in September, beating expectations.

Still, the job market can only defy this increased gravity for so long. The Fed has signaled that it may slow down its schedule of rate increases, but at some point those high interest rates will make money so expensive that unemployment will rise. When that happens, the Center for American Progress reminds us that the workers who suffer the most are those without a college degree. And nonwhite and disabled workers are much more likely to lose jobs with every percentage point that unemployment rises, too.

All this is to explain why, as Ohio Senator Sherrod Brown warned Powell in a letter this week, “We must stay focused on addressing the root causes of inflation without putting workers’ livelihoods at risk.”

Rising interest rates have their most direct impact on mortgage rates, which already climbed above 7% this week. According to Rachel Siegel and Kathy Orton at the Washington Post, that high rate is driving down how much people can afford to spend on housing.

“This year, when rates were below 4 percent, a family earning the median household income of $71,000 could afford a $448,700 home with a 20 percent down payment,” they write. “This week, with rates around 7 percent, they could only afford a $339,200 home, according to Realtor.com.”

While it’s true that home prices are declining right now, they’re not declining nearly as fast as mortgage rates are rising. The median home price in Seattle, for instance, is now $800,000 — more than double what the median American family can afford.

And as mortgage rates climb, so do rental prices. Karl W. Smith notes that Americans are getting priced out of the rental market at unprecedented rates:

A UBS AG survey found that the percentage of adults living rent free with friends or family jumped from 11% a year ago to 18% this September, the highest on record. And according to rental data tracking firm RealPage, demand for apartments fell from more than 200,000 units in third quarter of 2021 to a negative 82,000 the same time this year. That marks the first ever negative reading for the third quarter — typically strongest leasing season — in over 30 years.

Smith actually frames this renter decline in positive terms as an “inflation fighter,” but that’s another case of the “good is bad, bad is good” derangement syndrome that has overtaken the economics profession in the last few months. The fact is, Americans are becoming unhoused at dramatic, possibly historic rates.

It’s almost impossible to drop out of the housing market without suffering downstream economic effects. Once someone becomes homeless the first time, they’re much more likely to become homeless again at some point in the future. Children who are unhoused are less likely to graduate and have poorer educational outcomes than their housed peers. We will all feel the economic repercussions of this housing crisis for years — maybe decades — to come.

Bosses vs. Workers

One of the most perplexing economic headlines I’ve read in the last month comes from a story by Taylor Telford in The Washington Post, ”U.S. workers have gotten way less productive. No one is sure why.”

“In the first half of 2022, productivity — the measure of how much output in goods and services an employee can produce in an hour — plunged by the sharpest rate on record going back to 1947,” Telford writes. But the piece frustratingly doesn’t come to any conclusions about why productivity declined, it broadly refers to CEO feelings that employees aren’t working as hard as they used to with no data to back up those claims, and it even fails to explain how the Department of Labor determines worker productivity in the first place.

If you look at the actual BLS report, though, it seems as though two factors are directly contributing to the drop in productivity in the first half of the year: Prices were skyrocketing as inflation reached its fever pitch, increasing the cost of materials, and wages were rising at a remarkable rate due to the hot labor market. Those two unusually high factors could be what threw the productivity data into a glitchy spiral. If that theory is correct, the report will veer back to something closer to normal in the second half of 2022. (And of course, we saw very little concern when productivity rose by nearly 63% between the years of 1979 and 2021 while wages only grew by 16%, but one six-month report in the other direction garners headlines and raised eyebrows across the media.)

Meanwhile, back in the real world, workers are still trying to claw back some of the pay and benefits that their forebears used to enjoy before income inequality ran amok four decades ago. Pilots at Delta are considering a strike during holiday travel season, and United Airlines pilots rejected an agreement and returned to the bargaining table with their employers.

Workers elsewhere are making gains through public policy. In New York City, a pay disclosure law went into effect, requiring companies with more than four employees to include salary ranges with job postings and transfer opportunities. Colorado, Connecticut, and Maryland already have pay transparency rules in place, and similar laws will go into effect on January 1st 2023 in California, Washington, and Rhode Island. Pay transparency laws are fairly new, but it’s hoped that the publication of wage ranges will help close gender and race pay gaps and increase the bargaining power of new and existing employees.

Big steps in the fight against corporate mergers

Some great news for authors and readers: This week, a federal judge blocked a merger of two huge publishing companies, Penguin Random House and Simon & Schuster. The Biden Administration bucked decades of federal inaction on publishing mergers by arguing that this merger would decrease pay for authors and reduce competition in the marketplace by shrinking the number of total books published.

Constance Grady at Vox reports that this win could mark a strategic shift in the way that the government argues against corporate mergers: “Most of us are familiar with the idea of a monopoly and how such a selling market can drive up consumer prices, but with this case, the DOJ was arguing that PRHS&S would form a monopsony — an unfair buying market that would drive down the money paid to authors.”

And in my home state of Washington, Attorney General Bob Ferguson is combating the proposed merger between grocery giants Albertsons and Kroger. Washington is suing to stop Albertsons from going through with a suicidal $4 billion stock buyback plan that would financially imperil the company and make the merger a necessity for its survival.

“Ferguson argues that Albertsons would be putting itself at a competitive disadvantage to Kroger by paying out the dividend, and thus is seeking a temporary restraining order,” Axios explains. A press release from Ferguson’s office announcing the action argued that “Corporations proposing a merger cannot sabotage their ability to compete while that merger is under review.”

Shortly after Ferguson’s office announced their case against the buybacks, attorneys general in Washington DC, Illinois, and California launched suits of their own in federal court.

These two cases are the most high-profile instances of government rising up to combat monopoly and monopsony power, but the Biden Administration is doing more to bust corporate mergers than any presidency in at least 40 years.

The White House recently announced it was devoting over $200 million to fight monopolies and price-fixing in the meat industry. “Meat and poultry prices are soaring at the moment, but the White House efforts are long-term — the funds go toward loans and grants for smaller meat processing companies and farmers that can compete against ‘Big Meat,’” writes Axios’s Emily Peck.

And the U.S. Securities and Exchange Commission has pulled in a record $6.4 billion in fines and other sanctions against big Wall Street firms over the past fiscal year, including “penalties against major Wall Street banks including Barclays, Bank of America, Goldman Sachs, and JPMorgan after staff discussed deals and trades on their personal devices and apps,” a “$200 million settlement with Boeing Co to over charges it misled investors about its 737 MAX and a fine against BlockFi Lending LLC with failing to register a crypto lending product.”

But because we still have a lot of ground to recover in terms of monopoly reform, the Roosevelt Institute offers some novel proposals to how the Biden Administration could curb monopolies and huge corporate mergers through inventive tax policy. No matter how Tuesday’s midterm elections pan out, this is something President Biden could do to unilaterally continue his successful fight against out-of-control corporate power.

Real-Time Economic Analysis

Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.

• Join us at 10:30 am PT tomorrow for Civic Action Live, when we’ll talk about the Federal Reserve’s latest interest rate hike, an exciting new front in the fight to end the Kroger-Albertsons merger before it can happen, and what our leaders are doing to fight monopolies.
• On the Pitchfork Economics podcast, Nick and Goldy talk with science fiction novelist Cory Doctorow and intellectual property expert Rebecca Giblin about the unique pressures that corporate monopolies have put on workers in the creative economy. This one is a thoughtful and timely conversation including a personal explanation of why the Penguin Random House-Simon & Schuster merger would be so awful for writers.

Closing Thoughts

Art Laffer may not be a household name, but anyone acquainted with economics is probably familiar with the Laffer Curve — the long-since debunked idea at the center of trickle-down economic theory which posits that lowering tax rates on corporations and the wealthy will actually result in increased revenue. We’ve seen multiple times in the real world, most recently with the Trump tax cuts, that the Laffer Curve is fiction, a fable designed to convince people that concentrating wealth at the top of the income scale will result in prosperity trickling down to everyone else in the form of better wages. This idea is so obviously ridiculous that when new British Prime Minister Liz Truss recently proposed a trickle-down budget, she was tossed out of power in record time.

So it’s unclear why Paul Schwartzman thought that now was a good time to profile Art Laffer for the Washington Post — and it’s even more bizarre that the profile is in the Post’s Style section, and not the politics or business section. There’s absolutely no news in the profile, as Laffer repeats the exact same trickle-down dogma this week that he helped formulate in the 1970s, telling Schwartzman “Cutting tax rates on the rich and creating a prosperous economy is the best way to alleviate poverty and elevate the lowest echelons of the economic ladder.” (This is, factually, untrue.)

The profile paints Laffer as a clownish opportunist and a charming raconteur, but it doesn’t seriously debunk his economic claims. Sure, Schwartzman points out that Laffer’s push to severely cut taxes in Kansas ended in disaster, with Republican leaders eventually voting to raise taxes again. But he also lets Laffer literally laugh off the debacle: “What the hell is Kansas? There was no cataclysm. It was boring old Kansas before and after.”

That’s the problem with economists like Laffer, and with chummy media profiles like this — when you’re hanging out in the halls of power and tossing barbs back and forth, it’s easy to forget that Laffer’s policies have had real consequences. Those Kansas tax cuts resulted in jobs leaving the state, public schools losing resources that left the state’s children unprepared to join the workforce, and a tattered social safety net that left thousands of Kansans scrambling for food and housing. And it also kneecapped economic growth in Kansas, resulting in less money for workers and employers alike:

At least the Post piece doesn’t seem to have swayed any converts to Laffer’s side. At the time that I’m writing this, the two comments on the article are negative against Laffer, with one reading, in its entirety, “Dude’s probably still waiting for the Tooth Fairy.”

Perfect comment. No notes.

Be kind. Be brave. Remember to vote. Get vaccinated — and don’t forget your booster.

Zach