Soaring Profits, Grounded Planes

The Pitch: Economic Update for January 25, 2024

Friends,

Six months ago, Greg Petro correctly defined greedflation for Forbes as “price-gouging or monopolistic profiteering. Prices are so high; the theory goes, because retailers found they could jack them up with little consumer pushback by pointing to the headlines.” While Petro got the definition right, he unfortunately dismissed greedflation as a “conspiracy” and a “myth.” He’s not alone: Over the last year, mainstream economists and pundits alike rose up to mock the idea of corporate greedflation.

I could fill the rest of this newsletter with links to pieces tut-tutting the idea that corporations would use headlines about inflation as an excuse to raise prices solely in order to jack up their profit margins when their costs hadn’t increased nearly as much, but here are a few more to give you a sense of how widespread the greedflation pushback was: The Economist called greedflation “a nonsense idea.” Matthew Yglesias claimed on multiple occasions that it was “fake.” The Washington Post’s Catherine Rampell warned that the “conspiracy theory” of greedflation was “infecting” the Democratic Party. Obama Administration economist Larry Summers refused to entertain the idea of greedflation at all, announcing that “I don’t think it’s a tenable view that all of a sudden corporations became greedy.”

Economists used complex language to try to explain why Americans shouldn’t believe the evidence in front of their own eyes — that somehow the record-high profit margins corporations were reporting bore no relationship to the skyrocketing prices Americans were paying. Pundits arguing against greedflation claimed that this was simply capitalism at work — corporations were simply raising prices to match inflation, they’d argue, and the free market would in its eternal wisdom naturally reject any excess profit-taking. (Those pieces conveniently ignored the fact that human beings need to eat in order to survive, and so they’ll continue to pay ballooning prices for groceries even when those prices rise beyond their means.)

Last week, though,Tom Perkins at the Guardian reported on a new study showing “‘resounding evidence’…that high corporate profits are a main driver of ongoing inflation, and companies continue to keep prices high even as their inflationary costs drop.”

The report, Perkins explained, even put a percentage on how much of the higher prices you paid went directly to corporate profits: “corporate profits accounted for about 53% of inflation during last year’s second and third quarters. Profits drove just 11% of price growth in the 40 years prior to the pandemic.”

I urge you to read and share the report, which was researched and published by the Groundwork Collaborative. It explains that while supply-chain snarls during the pandemic did in fact cause those early bursts of inflationary price increases in 2021, those snarls have dissipated and corporations are no longer paying higher prices for the raw materials that go into their products: “While prices for consumers have risen by 3.4 percent over the past year, input costs for producers have risen by just 1 percent. For many commodities and services, producers’ prices have actually decreased.”

This graph shows that while the costs producers have paid to make their products (the dark blue bars) have declined steeply over the last year, they still kept prices unnaturally high for consumers (the turquoise bars):

And while we talk a lot about groceries and gas prices because that’s where Americans most frequently spend their money, this greedflation touches every part of the economy and every part of our lives — even the very end. For the American Prospect, Luke Goldstein writes that “The multibillion-dollar funeral industry — a universal service that everyone has to deal with at some point — has costs that have risen 4.7 percent, a rate well above last year’s overall inflation rate of 3.4 percent. Death care is one corner of the economy that, despite promising indicators overall, is still afflicted by high markups driving inflation.” Thanks to concentration in the funeral industry, Goldstein argues, we’re even falling prey to price-gouging from beyond the grave.

Regular readers of The Pitch have known about greedflation for years, of course, but the data in this report will be a useful tool to counter the claims of pundits and economists who are arguing for the right of big business to continue to raise prices in order to plump up their bottom lines.

Groundwork says the Biden Administration is working to combat corporate price-gouging: “The Consumer Financial Protection Bureau, the Federal Trade Commission, and the Department of Justice continue to dust off authorities not touched in decades to rein in corporate profiteering and concentration.” But they also make a recommendation for addressing runaway corporate profits: “As Congress turns to expiring provisions from the 2017 Trump tax cuts over the next year, they must take a hard look at the corporate tax rate. Our tax code should support a robust and equitable economy, not incentivize profiteering.”

In many ways, greedflation feels like an end result of 40 years of trickle-down economics. Many of the world’s biggest corporations — Coca-Cola, Nestle, Proctor & Gamble — decided to forego competition. They didn’t care about selling the most products, or even the best products. Instead, they jacked up their prices simply because they realized that a significant portion of their regular customers could pay it.

Middle-out economics understands that competition is a key driver of growth and prosperity. That’s why regulations are needed to encourage healthy, competitive markets — so unbridled arrogance and unchecked power doesn’t result in anti-capitalist outcomes like greedflation that shrinks the market and punishes consumers in the name of higher profit margins that only benefit an already-wealthy few.

The Latest Economic News and Updates

A “Bustling” GDP Report Caps Off 2023’s Economic Growth

“The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled and a widely predicted recession never materialized,” Ben Casselman wrote in the New York Times this morning. The Gross Domestic Product for the fourth quarter of 2023 came in above expectations, at 3.3%.

And for the whole year of 2023, GDP grew far past the expectations of most everyone in the economic mainstream. Abha Bhattarai writes at the Washington Post that “The U.S. economy grew by a bustling 3.1 percent in 2023, shaking off recession fears and offering an upbeat picture of consumers and businesses ahead of a pivotal election year.”

We don’t spend a whole lot of time talking about GDP in this newsletter because the measurements that GDP incorporates are more likely to reflect the economic health of the wealthy executives in the corner offices than of the workers on the manufacturing lines and in the cubicles. But this report is important because virtually every mainstream economist began the year with dire warnings of an impending recession. Instead, setting aside the 2021 post-pandemic GDP surge of 5.95%, the economy last year grew faster than any time since 2005, when the annual GDP was 3.5% .

Consumers Finally Believe the Economy Is Headed in the RIght Direction

You should read Sam Ro’s TKer newsletter on all the healthy economic signs we’ve seen in the past six months. The whole edition is packed with good news about industrial production, home sales, and much more, but I wanted to highlight two of the most important figures for middle-out economics. First, despite the fact that many economists were predicting a soft holiday season, retail sales increased by .6 percent in December, reaching an all-time high.

And Ro also notes that consumers are starting to feel better about the economy after two years of doldrums inspired by price increases. In fact, January’s edition of the University of Michigan survey reported that “Consumer sentiment soared 13% in January to reach its highest level since July 2021, showing that the sharp increase in December was no fluke. Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations. Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended.”

Because working Americans power the economy with their spending, this is excellent news for the economy heading into 2024. Not only are Americans spending more, but they’re starting to feel optimistic about their spending again: “Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” reported the University of Michigan. There are still high grocery prices and high housing costs to be dealt with, but many Americans are starting to see a light at the end of the tunnel when it comes to inflation.

The Biden Administration seems to agree that it’s time to take a more positive stance on the economy. Biden’s Chief Economic Adviser, Lael Brainerd, gave a speech explaining that the Biden Administration is overseeing an American economic comeback in rural areas and depressed urban areas that have languished for the last thirty years.

“President Biden’s top economic adviser argued on Monday that the administration is engineering a revival of economically disadvantaged communities across the nation, citing patterns of new federal spending and signs of economic progress in places like Eastern Pennsylvania and Milwaukee, Wis,” The New York Times’s Jim Tankersly explains, adding that Brainerd “used a speech to the Brookings Institution in Washington to lay out a detailed blueprint of the administration’s efforts to bring jobs, investment and innovation to areas hobbled by the loss of jobs and industries.”

Not so long ago, politicians on both sides of the aisle explained that “those jobs aren’t coming back” to rural and industrial parts of the country that saw countless factories closed and wide swaths of workers laid off. Brainerd argues that the Biden Administration is bringing jobs back to these areas — and it’s improving the environment at the same time. “Ms. Brainard cited a Treasury Department analysis that finds low-emission energy investments spurred by Mr. Biden’s climate law have disproportionately boosted lower-income areas and communities that have been historically reliant on fossil fuels,” Tankersly writes.

Really, the biggest consistent drag on prices right now is housing. Nicole Friedman at the Wall Street Journal reports that existing-home sales in America last year hit a nearly three-decade low. This artificial scarcity keeps driving the prices of the few homes on the market even higher.

Probably the biggest reason why people aren’t selling their homes is the fact that the Federal Reserve drove up interest rates over the last few years, and those rate increases have driven up mortgage rates, which are still teetering near the recent high of 8%. It’s unclear why anyone who bought a home at the low mortgage rates of the past decade would choose to move to a new home with a mortgage rate that could be nearly double the rate that they previously locked in. So people are staying put, and prospective home buyers are facing the tightest home market they’ve ever seen.

(It’s worth noting that this is the exact opposite result that the Fed is seeking by raising interest rates. They raised rates with the stated intent of lowering demand, hoping that the decreased demand would lower prices. But instead, the Fed’s policy is increasing housing prices for ordinary Americans.)

Thankfully, the Fed has all but confirmed that they’re going to begin lowering rates this year, with Jeanna Smialek reporting on the most recent positive signals: “A prominent Federal Reserve official on Tuesday laid out a case for lowering interest rates methodically at some point this year as the economy comes into balance and inflation cools — although he acknowledged that the timing of those cuts remained uncertain.”

It’s not enough for our leaders to simply trust the Fed to take action, though. The central bank is so opaque (and cautious) that it could take a very long time to get mortgages back to an affordable level. I wrote at the end of last year about the policies that our leaders should enact in order to make housing more affordable for everyone, and to reprioritize the kind of housing that Americans need in the 21st century.

We Need to Talk About Boeing

It seems as though every day brings with it a terrifying new headline about a Boeing jet failure. The highest-profile event was the door plug that fell off the side of a plane in midair, but Boeing jets have also suffered cracked windshields and landing gear falling off planes as they prepared for takeoff, and now airlines are finding a number of bolts on Boeing jets that simply weren’t screwed in. And this all follows the catastrophic MAX crashes a few years back.

As a Seattleite, this story wounds my sense of civic pride. Seattle was known as “Jet City” for most of the 20th century because Boeing was the biggest local employer. An enormous portion of Seattle’s workforce was involved with Boeing, and Seattle took pride in the state-of-the-art engineering of the planes that we produced — the best planes in the world.

But “Jet City” was a long time ago. For the New York Times, Bill Saporito explains what went wrong with Boeing: “By 2020, Boeing itself had in a way been stretched, redesigned and repowered in a series of corporate restructurings that each yielded its own defects. Since the mid-1990s, the company has bought out McDonnell Douglas, a domestic rival, moved its headquarters twice, shifted some assembly to the East Coast (which allowed the company to sidestep the unions) and changed chief executives the way you would planes in Atlanta,” he writes.

“What got lost in all this shuffling is a corporate culture that once prized engineering and safety, replaced by one that seemed to be more focused on delivering profits over perfection,” Saporito continues. “The Boeing community in Seattle has been vocal about attributing this slide to the acquisition of McDonnell Douglas, whose leaders took over Boeing’s top jobs and reshaped the culture around cost control.”

This is what happens when a company buys back some $61 billion in shares over two decades, slashing quality control measures and forgoing investments into R&D to create better products while also turning corporate profits over to the elite shareholder class. This Wall Street Journal story from December of last year warns of Boeing’s culture of “self-inspection,” which saw the company eliminate 900 inspectors companywide in favor of engineers checking their own work. This was an entirely predictable catastrophe, and it’s the result of a company that has given itself over entirely to extractive trickle-down philosophies that place outsize short-term profits and the elite shareholder class above everything else — even the lives of its customers and its own reputation.

Boeing is far from an outlier, though. Big corporations love to falsely argue that safety regulations and worker protections are threats to their livelihoods that will undoubtedly kill jobs and hurt the economy as a whole. For instance, you may recall that at this time last year the health of the entire American banking system was in question as mid-sized banks failed and no one was sure how far the collapses would go. Lawmakers proposed some regulations that would, in the words of Senator Elizabeth Warren, “make banking boring again” by eliminating risks.

But almost exactly a year after the collapse of Silicon Valley Bank, Peter Coy writes that “A wide-ranging lobbying campaign by the nation’s biggest banks and their allies seems to be succeeding in beating back a proposal put forward last year by three federal agencies (the Federal Reserve, the Comptroller of the Currency and the Federal Deposit Insurance Corporation) to require shareholders of big banks to put more of their skin in the game so that if things go bad, the banks won’t have to drastically cut lending or turn to taxpayers for a bailout.”

It’s not just federal regulations that big businesses are trying to combat. Some companies are even trying to fight more responsible practices proposed by their own shareholders. “Exxon Mobil is suing two activist investors to prevent their proposal calling for emissions cuts at the oil giant from going to a vote of shareholders,” writes J. Edward Moreno at the New York Times.

Back in the salad days of the trickle-down era, the media would faithfully transcribe corporate claims that the failures of these massive institutions are really a failure of the workers — arguing it costs so much to pay workers that quality is sacrificed. And in fact one Boeing whistleblower did blame the door plug bolt issue on “wage competition [which] means Boeing is having trouble hiring employees to replace all the experienced people who left during the pandemic.”

Respectfully to that anonymous worker, I’d point the finger at the $61 billion in profits that Boeing’s CEOs and boards handed away to themselves and other wealthy shareholders with no strings attached before I started blaming rising worker paychecks for the problem. They had enough money to compete for the most talented workers on the planet and the safest jets on the planet, but they just decided to stuff their pockets instead.

But thankfully, we don’t live in an era of unexamined trickle-down lies anymore, and I haven’t seen the bogus “lazy, overpaid worker” trope take hold in the larger media. If you want to find out where Boeing’s problems began, all you need to do is follow the money. And the money has for decades been hoarded at the very top.

Union Are Winning Huge Gains for Workers — but Now Workers Need to Join Unions

“In the largest university faculty strike in U.S. history, thousands of professors and lecturers throughout the California State University system walked off the job on Monday to demand higher compensation, a protest that was expected to cancel most classes early in the academic period,” wrote Soumya Karlamangla at the New York Times on Monday.

Faculty was expected to strike for up to five days, but it only took 24 hours before CSU leadership offered a strong tentative agreement which the Guardian explains “calls for a 5% raise retroactive to last year and another 5% raise on 1 July. It also increases the minimum wage for the lowest-paid faculty.” Workers returned to work on Tuesday, though they have yet to vote on the agreement.

The tentative CSU faculty victory is the latest in a long series of successful union actions that began two years ago with the widespread unionization of Starbucks locations around the country. This month, another chapter in the Starbucks labor dispute unfolded when the Supreme Court agreed to hear a case that Starbucks filed against “a federal judge’s order to reinstate seven employees who were fired at a store in Memphis amid a union campaign there.” The Court’s decision could potentially further weaken the National Labor Relation Board’s power to protect workers who try to unionize.

The decades-long trickle-down campaign to weaken the power of unions and strip away the regulatory power of the NLRB has been incredibly successful. It is now very difficult for workers to successfully unionize in most parts of the country — so much so that even though last year saw the highest-profile labor victories in recent memory, union density actually dropped to record lows in 2023.

“The union membership rate dropped by one-tenth of a percentage point to a new low of 10 percent last year, the Labor Department said Tuesday, while the total number of union members in the United States grew by 139,000 last year, with gains in the private sector offsetting losses in government jobs,” writes the Washington Post’s Lauren Kaori Gurley, adding “The decrease in the union membership rate happened because the labor market added a whopping 2.7 million jobs in 2023, with nonunion positions growing at a faster pace than union ones.”

Even though unions are more popular than ever, the unionized portion of the workforce keeps dipping. Clearly, the scales are tipped against unions.

A new report from the Center for American Progress offers some insight into what our leaders can do to increase union membership and union power. “In particular, Congress needs to act,” CAP writes. “Most notably, it must pass the Protecting the Right to Organize Act, the Public Service Freedom to Negotiate Act, and other important reforms to ensure workers have strong rights, incentives to join unions, and a clear path to collective bargaining, such as those that promote sectoral bargaining.”

If that sounds like an insurmountable goal, you should note that there’s also a powerful glimmer of hope in the preamble to the report: The 10% union membership of the American workforce today closely resembles the percentage of unionized Americans in 1935, just before the National Labor Relations Act was passed. Right after Congress passed the NLRA, union membership skyrocketed to just over a third of the American workforce:

If our leaders provided the framework for workers to unionize once before, they can do it again.

This Week in Middle Out

• President Biden canceled another $5 billion in student loan debt last Friday, freeing 74,000 Americans from years of payments that would have prevented them from fully participating in the economy. This Washington Post story explains which Americans are most likely to be burdened by student loan debt: A majority of people with debt are between the ages of 25 and 34, and most of those loans are for less than $20,000,
• The New York Times reports that economists are starting to take climate change seriously, incorporating both the problems caused by climate change and the benefits created from its solutions into account as they build models and policies.
• States around the country are starting to consider wealth taxes, reports David W. Chen. “So far in 2024, lawmakers in 10 states have introduced wealth-tax bills or are working on introducing them, according to Amber Wallin, senior policy and outreach director at the State Revenue Alliance. They are California, Connecticut, Hawaii, Maryland, Minnesota, Nevada, New York, Pennsylvania, Vermont and Washington.”
• The FTC ordered Intuit to stop pitching its TurboTax software as free, when most users wind up paying a fee to file taxes with TurboTax. And in another blow to Intuit, the IRS is running a beta test of its actually-free tax-filing software for residents of 12 states. “The direct file pilot will be open to low- and moderate-income taxpayers with simple returns,” writes Ann Carns.
• “At least 250,000 more teenagers are now working compared to before the pandemic, part of a gradual but consequential shift that is boosting employment at restaurants and stores, and changing cultural norms,” reports the Washington Post. “In all, 37 percent of 16- to 19-year-olds had a job or were looking for one last year, the highest annual rate since 2009, according to Labor Department data.”

This Week on the Pitchfork Economics Podcast

Now that a bipartisan group of Congresspeople are making real progress toward enhancing the Child Tax Credit to combat child poverty, this week’s episode of Pitchfork Economics is a reprise of a 2021 conversation Nick and Goldy had with legal scholar and poverty expert Wendy Bach about the power of a strong Child Tax Credit.

Closing Thoughts

This week, the New York State Attorney General’s Office announced that they had reached a historic settlement on behalf of Uber and Lyft drivers who were victims of wage theft. The two rideshare companies will reimburse employees $328 million in unpaid wages, with Lyft contributing $38 million and Uber paying the rest. Around 100,000 employees will receive up to $25,000 checks from the companies.

I want to be clear that this is a big deal for those workers, and it will hopefully cause gig economy employers to think twice before holding back wages that their workers are legally owed. The single biggest wage-theft settlement in American history is undeniably a step in the right direction.

But there’s an old saying that punishing wrongdoing with a fine simply makes criminal behavior legal for the wealthy. When Elon Musk makes a reported $536 every second, would he really consider Texas’s maximum $300 ticket for doing 30 miles over the posted speed limit a meaningful penalty? While impoverished Americans might find their whole lives turned upside down by a speeding ticket, wealthy people can just consider the cost a potential expense in exchange for going exactly as fast as they want.

Wage theft is the single biggest theft committed in America every year — far outstripping larceny, burglary, and car theft combined. And yet employers who steal wages are rarely caught, and even if they are caught the only consequence they pay for wage theft infraction is a relatively small penalty in addition to the wages they owe. While shoplifters understand that they could face legal consequences if they’re caught, employers who don’t pay their workers everything they’re owed know that the worst case scenario is that they’d suffer the mildest slap on the wrist if they were to get caught.

If any Uber employee was caught embezzling a sum of nine figures from the company, that worker would be frog-marched into a police car and hauled off to jail in front of a gaggle of press cameras. (In fact, we’ve already seen two men arrested for allegedly scamming a low seven figures from Uber.) But when Uber steals from its workers, it just has to pay the money they owe and suggest that they’ll try to do better in the future. Meanwhile, many of those 100,000 workers likely failed to pay bills, rent, and other expenses — not to mention that those workers would have spent that money in their communities, creating jobs with their consumer demand.

It’s well past time for federal officials to consider the idea of criminalizing wage theft. While a nine-figure payout is very likely to raise eyebrows in boardrooms of exploitative corporations, nothing is likely to attract the attention of thieving employers like watching a wage thief perform a perp walk on the nightly news and stand trial for their crimes. Consequences that can’t be waved away with a big check are more likely to get the desired results than a slap on the wrist.

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

Zach