Putting Profits Over Customers

The Pitch: Economic Update for April 27, 2023

Friends,

As I wrote last week, it does seem as though we’ve turned a corner on rising prices in the economy. But if you’ve been paying attention to corporate earnings calls lately, you know that corporate greedflation is still in full swing. In many sectors, profit margins are up while sales volume is down. In other words, corporations are charging people more, simply because they can.

Take Chipotle, for example. Sam Ro pointed out on Twitter that the fast-casual restaurant chain’s operating margin — the profit that a company makes on each dollar of sales — leapt to 15.5% for the quarter, way above last quarter’s 9.4%. Avocado and other food prices fell hard over the last quarter, but rather than bringing prices back down, Chipotle kept prices high and pocketed the extra money. McDonald’s is doing the same. And Joe Weisenthal notes that PepsiCo saw 14% revenue growth last quarter, while sales stayed basically flat.

Contrarians might want to argue this is just capitalism at work, but that’s just not true. Capitalism should be about businesses competing to win consumer share by providing better products at lower prices. These companies are raising profits by charging existing customers more, not trying to attract new customers with competitive prices or better products.

These individual choices have effects that can be felt throughout the economy. A new US Bureau of Labor Statistics report finds that car dealers raised the sales price of new cars above manufacturers’ suggested retail prices over the past three years. The Wall Street Journal reports that two of the largest publicly traded auto sales companies were raking in profits throughout the pandemic: “AutoNation Inc. marked up vehicles by almost 15% in the fourth quarter of 2021, versus less than 5% two years earlier,” while.” Lithia Motors Inc. marked up cars by almost 16% in late 2021, up from about 6% two years earlier.” The BLS now estimates that this profiteering by car dealers alone contributed up to a half a percentage point to the 16% of total higher prices American consumers paid during the pandemic.

At Civic Ventures, we’re fond of reminding workers that you’re not paid what you’re worth — you’re paid what you can negotiate. Contrary to standard economic theory, the market isn’t a perfect arbiter of every item’s precise value. And this applies to the greedflation that we’ve all been paying for the past three years: Companies don’t charge what an item is worth; they charge as much as they can get away with charging.

It’s now abundantly clear that a lot of companies used the media’s inflationary panic to jack up their prices and pad their profits. They weren’t charging you more because they had to in order to stay in business, they were charging you more simply because they could — because consumers were primed by the news to expect to pay more. And that created an economic negative feedback loop, with corporate price-gouging pushing inflation numbers even higher for even longer.

Now that the headlines have largely switched from inflation fears to recession fears, these same corporations have started to notice a growing reluctance on customers’ part to absorb those higher prices. The question now is whether corporations will finally be able to shake off this addiction to ever-growing profit margins and finally lower prices to lure customers back to their products, or if we’ve entered a dangerous new period of corporatism that refuses to embrace the kind of competition that’s necessary for well-functioning markets.

The Latest Economic News and Updates

President Biden’s Economic Case for Re-Election

President Biden announced his reelection bid on Tuesday with a video largely focused on freedom — freedom to make reproductive choices like abortion and birth control, freedom to take out whatever book you choose from the library, and freedom to vote. But on April 19th, Biden delivered a speech about his economic vision that should really count as the first volley in his reelection campaign. Biden began with his familiar refrain that he wants to rebuild the economy from the middle out and the bottom up. And then, he immediately made a distinction with the opposing party and announced who his economic vision was intended to help:

For decades, they’ve said that the best way to grow the economy is from the top down — trickle-down economics. Well, growing up, I didn’t see a whole hell of a lot trickle down on our three-bedroom house with four kids at my dad’s kitchen table. You know what? Trickle-down didn’t work for us, and it didn’t work for a long time.

And, by the way, it’s not just what we’ve seen with MAGA Republicans. For the last three, four decades we’ve been losing ground. And it’s hollowed out the middle class, rewarding wealth, not work; rewarding companies moving overseas because they get cheaper labor.

Maybe you come from neighborhoods and small towns like Scranton, Pennsylvania or Claymont, Delaware, where I came from — where there used to be a lot of pride because we had business, we had factories that were working.

In Scranton and Claymont, there were 4,500 steelworkers. There’s none today. And not only do you lose the jobs, you lose a sense of pride, lose a sense of who you are. You begin to wonder: Does anybody see me?

It’s smart of Biden to continue to attack trickle-down economics in tandem with his comments about rebuilding the economy through middle-out economics. They really are two opposing economic visions, and it’s important to define your opponents before they have the opportunity to define themselves. If any Republican presidential candidates object to being called a trickle-downer, they’ll be forced to explain exactly how their economic theories will help the middle and working classes.

The rest of the speech was made up of Biden explaining his economic record and making a case for expanding that economic record into a second term. He cited record job growth, investments in American-made products, tax increases on corporations that were earning record profits, and reining in Big Pharma’s ridiculous price-gouging. Economically speaking, it’s a record that is hard to argue with — especially if inflation continues to recede as it has.

The Wall Street Journal took Tuesday’s announcement as an opportunity to explore Biden’s economic record through six graphs. For me, the most striking graphic was the one comparing job openings during the Biden Administration in comparison to the previous three administrations:

That astonishing record of labor market strength, when combined with the average median wage growth, tells a powerful story about Biden’s economic record. You can even see in the chart below that the wages of workers in the bottom three quartiles of the economy are growing faster than wages of workers in the wealthiest quartile :

If in the fall of 2024, the job market still has open jobs for workers, and if paychecks are still on the rise while prices are declining, that’s a pretty tough economic record to beat.

And yesterday, Biden’s Commerce Department announced plans for its National Semiconductor Technology Center, which the New York Times explains will bring together “companies, universities and others to collaborate on next-generation chip technology” in a string of “research centers, the locations of which have yet to be chosen, and aim to be operational by the end of this year.”

It’s likely that Biden, in lieu of traditional campaign rallies, will instead travel the country on a series of ribbon-cutting events at facilities like these semiconductor research centers. Rather than going from stadium to stadium giving speeches, Biden will be celebrating the creation of good-paying jobs and major economic investments in states around the country.

Consumer Spending Dips, Housing Prices Drop

The growth of America’s Gross Domestic Product slowed in the first quarter of 2023 to a rate of 1.1 percent — a significant drop from the previous GDP report of 2.6 percent. Because so much of our economy depends on consumer spending, it’s fair to assume that this slowdown is inspired by the recent drop in retail sales. Tomorrow, the Bureau of Economic Analysis will release their official consumer spending numbers for March, but early indicators make it clear that consumer spending has almost certainly declined.

Axios’s Emily Peck writes that this data point is a sign that “The American consumer is running out of gas when it comes to shopping — across all categories, from food to travel.” The question is whether consumers are pulling back after months of price increases — in which case, spending may well rebound if prices continue to decline — or if some other economic factor is at play. It’s worth noting that inflationary price increases have lately transitioned from goods to services, and many experts consider this move to be a lagging indicator of last year’s inflation. The dip in consumer spending could also be the result of months of headlines wondering whether the next recession was just around the corner, inspiring Americans to save for a rainy day.

Also at Axios, Nathan Bomey warns that UPS reported this week that “its domestic package volume was down 5.4% in the first quarter, compared with a year earlier” — another sign that consumer spending has dipped in the beginning of 2023.

At the same time, home prices fell in March, marking the biggest decline in 11 years. “The housing market had a surprisingly strong February, when sales rose a revised 13.75% from the previous month,” notes Nicole Friedman at the Wall Street Journal. “But after mortgage rates ticked higher, March sales resumed the extended period of declines.” So while home prices might be decreasing, rising mortgage rates could very well add up to a higher monthly payment for new homebuyers.

Home prices depend hugely on location, of course. Since the pandemic, Americans have been moving in large numbers away from the Northeast and Midwest to Sunbelt states like Arizona and Florida. Part of the appeal of the Sunbelt used to be low prices, but now those popular destinations are seeing major price increases. “The Tampa area has one of the highest inflation rates in the nation, 7.7% in March, according to the Labor Department,” writes Gabriel T. Rubin. “But when shelter costs are removed from the index, the Florida metro’s rate was 3.8% — putting it in line with the Minneapolis area, where inflation excluding housing was 3.6%.”

This is a good reminder that the indicators we use in economics are averages culled from a very complex and diverse market. The housing market in Florida is very different from the housing market in Indiana, and it would be a terrible idea to fashion our solutions to the national average indicators because Tampa’s solutions would not solve Terre Haute’s problems and vice versa.

Banking on disaster?

First Republic Bank has been adrift since Silicon Valley Bank collapsed last month, and it’s becoming apparent that some sort of intervention is now necessary. The New York Times reports that the beleaguered mid-size bank’s “clients pulled $102 billion in deposits in the first quarter — well over half the $176 billion it held at the end of last year.”

First Republic has responded to this lack of client confidence with layoffs and slashed executive bonuses, but its stock price has continued to plummet. No other bank has stepped in to purchase First Republic because doing so would incur billions of dollars in debts.

Tomorrow morning, the Federal Reserve will release the results of its investigation into First Republic, and it’s likely that this report will decide the bank’s fate — either customers will lose faith in First Republic entirely, and the government will have to step in as it did with SVB, or a prospective buyer will find enough value to make some sort of an offer. Felix Salmon at Axios walks through the potential paths forward for the bank — and none of them are great news for First Republic.

It’s possible that the credit problems facing mid-sized banks might also spill over into the “shadow bank” industry. Greg Ip at the Wall Street Journal explains that ”pension and mutual funds, private-credit funds, life insurers, business-development companies, hedge funds, and other nonbanks” hold a tremendous amount of debt, and these so-called “shadow banks” have lost a lot of value as the Federal Reserve has spiked interest rates. While shadow banks don’t carry the same risk of bank runs that more traditional banks do, Ip warns that they could still be more cautious when taking on future debts, adding to the potential “credit crunch” that makes it harder for people and businesses to get loans.

And to top it all off, crypto exchange Binance, one of the last big crypto financial institutions left after the recent spate of crypto collapses, is facing a complicated future. The Commodities Futures Trading Commission has sued Binance for allowing criminals to use the crypto exchange to launder money and skirt federal laws and regulations. Skittish investors have pulled a billion dollars from the crypto exchange, which still holds over $66 billion in funds.

At the same time, Goldman Sachs is helping Apple get into the high-interest-rate saving deposit business, and Apple’s robust credit card service is expanding into the small loan game with Apple Pay Later. Buy now, pay later (BNPL) services have exploded over the past few years and, as Vox’s Sara Morrison writes, “people aren’t just using BNPL for frivolous or unnecessary expenses, either. People can and are using it for things like groceries. When it comes time to pay up, some people can’t. That subjects them to late fees or interest.”

BNPL services are hugely underregulated. Lenders are not required to investigate whether the person taking out the loan has the ability to repay the loan. it’s worrying that Apple is jumping into the field because it means that the estimated 136 million Americans who own an iPhone now have an extremely low-friction portal into the world of BNPL sitting in their pockets.

Clearly, more regulation is necessary across the entire financial sector. Leaders are finally looking into putting limits on the huge stock bonuses that executives in the banking industry are giving themselves. One simple suggestion for a regulation would require executives to hold onto any stock bonuses for three years after they leave the company before they can cash them out, which would stop incentivizing risky big bets like the ones taken by SVB leadership.

And some regulators are considering increasing the FDIC account insurance cap, which currently protects all deposits up to $250,000. The argument is that by ensuring that funds over $250,000 are protected, the government would likely protect banks from SVB-like bank runs that put financial institutions — and perhaps the whole banking sector — at risk. But there are downsides to raising the limit, too — for example, if big depositors don’t have to worry about losses, that could push bank executives toward even more risky behavior on the government’s dime. And generally, we don’t want to make it easier for people to stash money in places where it can sit for years at a time — the economy is stronger when people are spending and investing money.

One firm called IntraFi has taken advantage of the FDIC protection by offering a service that automatically spreads clients’ funds into multiple accounts of $250,000 or less, thereby ensuring that their money is protected by the federal government. Unsurprisingly, IntraFi has been lobbying against raising the cap. David Dayen writes that the company and its backers have invested anywhere from $100,000 to several millions of dollars this year to fighting an increase of FDIC insurance, in order to protect its business model.

This Week in Regulations

• One of Republican presidential hopeful Senator Tim Scott’s signature policies is the passage of so-called “opportunity zones,” a Trump-era law which provides tax shelters to wealthy people and corporations in exchange for investments into low-income areas in need of development. As the American Prospect notes, just one percent of the 8000 areas designated as “opportunity zones” has actually seen any investments, and most of those investments have been in the form of luxury developments. It’s nothing but a trickle-down scam that encourages gentrification in exchange for huge tax cuts.
• Last night, House Republicans voted to approve the debt ceiling bill proposed by Speaker Kevin McCarthy. Though McCarthy has claimed the bill is intended to shrink the national debt, Jim Tankersly at the New York Times writes that it’s actually a plan to unspool the investments in green energy that the Biden Administration successfully passed last year and invest in the fossil fuel industry instead. “More than half the 320 pages of legislative text are a rehash of an energy bill that Republicans passed this year and that aimed to speed up leasing and permitting for oil and gas drilling,” Tankersly writes. “The Republican plan also gives priority to removing clean energy incentives that were included in Mr. Biden’s signature climate, health and tax law.”
• The Biden Administration is making strides toward reining in the power of predatory franchise corporations that squeeze profits out of the franchisees that license businesses from them. The New York Times reports that big franchisers like McDonald’s, Jiffy Lube, and Hilton Garden Inn are fighting back against federal and state regulations that give franchisees more power, or which make corporations more liable for damages caused by franchisees. Right now, regulations are tipped in favor of the mothership companies that vacuum up much of a franchise’s profits in exchange for very little risk. It would benefit both small business owners and workers if the franchise relationship was more thoroughly regulated.
• President Biden’s pick for Department of Labor head, Julie Su, is facing down a coordinated anti-labor push from Republican and center-left Senators. Louisiana Senator Bill Cassidy said Su’s nomination might be “motivated by activism to carry out an agenda for a favored political group,” by which he means unions. Mitt Romney tried to pull out a gotcha attack on Su for meeting with labor unions during her time as Deputy Labor Secretary. Both Cassidy and Romney insinuate that they believe the Labor Secretary should be on the side of business owners and not workers, which is ludicrous. I’ve always appreciated that our government has established two equal cabinet posts to address the American economy — one to advocate for business development and one to advocate for worker interests. This push against Su is another neoliberal attempt to ensure that hundreds of millions of American workers don’t have representation at the Cabinet level.

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.

• In this weeks’ episode of Pitchfork Economics, Goldy goes one-on-one with Pulitzer Prize-winning journalist Will Bunch to discuss Bunch’s new book, which argues that the increasingly high price of higher education has contributed greatly to America’s fast-growing political, cultural, and economic divisions.

Closing Thoughts

A pair of business failures that dominated newscasts over the past two weeks have reminded me that it’s always important to investigate what’s beneath the surface. Both of these failures have deeper stories than the headlines would lead you to believe.

First, news stories tried to whip shoppers up into a lather when they reported that those ubiquitous 20% off coupons would no longer be valid at Bed, Bath, and Beyond locations nationwide after Wednesday. The retail chain filed for bankruptcy on Sunday, USA Today reports, giving shoppers a three-day window to grab the stack of coupons in their mailboxes and spend them. “The beleaguered home goods retailer has experienced a decline in sales and struggled to attract shoppers in recent years,” the paper reports.

Except, the story isn’t really about the death of retail. A lack of shoppers didn’t kill Bed, Bath, and Beyond. Corporate greed did. Chris Isidore writes for CNN, “The $11.8 billion Bed Bath & Beyond spent on its own stock since 2004 comes to more than twice the $5.2 billion in debt it had on its books in its most recent SEC filing, a debt load that proved crushing for the company.” Isadore notes that that debt “left the company unable to buy the inventory required to create the sales it needed to reverse losses.”

Make no mistake: Bed, Bath, and Beyond was certainly a dated business model that needed some freshening up to meet the challenges that every 21st-century retailer faces. But rather than invest in the long-term health of the company, Bed, Bath, and Beyond leaders handed off nearly twelve billion dollars in corporate profits to shareholders with no strings attached. (And remember that corporate executives now take a majority of their bonuses in corporate stock, meaning that CEOs and boards often use buybacks in order to give themselves a huge, seven-or-eight-figure payday.) It’s not much of a stretch of the imagination to think that a $12 billion investment into the company and its workers might have done wonders for Bed, Bath, and Beyond’s health. Instead, the wealthy used that money to make themselves even wealthier.

And secondly, the media world reacted with sadness and ruminations when BuzzFeed CEO Jonah Peretti announced that he was folding up the Pulitzer Prize-winning BuzzFeed News division and laying off 180 employees. Peretti said that “while layoffs are occurring across nearly every division, we’ve determined that the company can no longer continue to fund BuzzFeed News as a standalone organization.”

The move inspired plenty of pieces ruminating on what this means for news in a time of social media, what the media landscape might look like now, and why this is all Facebook’s fault. Very few of those pieces bothered to mention that BuzzFeed News was the only unionized division of BuzzFeed. And the BuzzFeed News Union was a passionate defender of all BuzzFeed employees, calling out Peretti’s greed when the company laid off workers at this time last year.

When the union drive at BuzzFeed News got underway in 2015, Peretti was asked about unions at a company meeting. He argued that unions were great “like if you’re working on an assembly line,” but that he thought of BuzzFeed as a tech company. “A lot of the best new-economy companies are environments where there’s an alliance between managers and employees. People have shared goals. Benefits and perks and compensation are very competitive, and I feel like that’s the kind of market we’re in,” he told staff.

This year, after companies like Meta and Google announced layoffs while still reporting sky-high profits, it’s clearer than ever that no worker can expect their employer to act in their best interests. And it should be clear to everyone in the media that simply taking these companies at their word when they announce closures and layoffs isn’t good enough. You should always take the time to interrogate the motivations and the history of the executives making the decisions.

Be kind. Be brave. Take good care of yourself and your loved ones.

Zach