Reviews | Greed is dead. Long live greed!
Who knew self-righteous tweets about companies “inflating prices” could be so effective?
On Monday, stocks entered a bear market, meaning they closed 20% below their recent high. Sure, perhaps investors worry about lower yields as monetary policy tightens; or maybe, just maybe, investors believe that all that anti-corporate bullying has worked and that corporations will just stop trying to make so much money.
Unfortunately, despite what these populists predicted, the fall in big business fortunes did not coincide with a reduction in inflation. Inflation hit a new 40-year high in May.
It’s almost as if the rapid and unpredictable growth in prices doesn’t create a great environment in which businesses can operate.
Anyone who has looked at economic basket cases like, say, Argentina could have predicted this. But that seems like news to some progressive Democrats, who have argued for months that businesses love today’s inflationary environment because it gives them an “excuse” or “cover” to rip off consumers.
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These populists argue that the rise in prices is not primarily caused by changes in supply and demand related to the pandemic and other shocks. On the contrary, they say that greedy corporations conspire to push prices ever higher, using inflation as a “smoke screen.”
“It’s not about inflation. These are price gouging,” says Sen. Elizabeth Warren (D-Mass.). Grocery prices, she complaintsrose because “greedy corporations are charging Americans extra fees just to keep their stock prices high.” echoes his colleague Bernie Sanders (I-Vt.): “The problem is not inflation. The problem is corporate greed.
Their proof of the greed theory was that prices charged by firms had risen faster than input costs, which meant (at least for a time) that profits were rising.
It looks quite suspicious.
But that’s what you’d expect if consumer demand is really strong and supply remains limited. Goods flew off shelves last year and businesses struggled to keep items in stock as supply chains remained stuck. Their costs rose, but they were also able to sell their limited wares at higher prices because consumers were full of money and eager to buy whatever was available.
Today, business revenues continue to rise, but their costs (labour, fuel, materials) are rising even faster. Additionally, some supply chains seem to have improved; the volume of freight passing through the ports of Los Angeles and Long Beach, for example, is close to record highs. After struggling to keep products in stock for much of the past two years, many companies have now replenished depleted inventory.
This means that many companies spend more per product sold and have accumulated more products in the hope of selling them. However, some items they had in stock are not selling as consumer tastes have changed (more dress clothes, less yoga pants).
The result is that even though consumer spending continues to rise, business costs rise even more. So their profits went down.
It’s not because American companies suddenly turned altruistic, after being humiliated by the viral TikToks of flattering greedy. As I have written many times: companies are still greedy, that is, they always hope to maximize their profits. Their ability to raise prices and make money is determined by demand and supply, which has been loony and unpredictable lately.
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Warren tweeted Friday that “giant corporations are using inflation as a hedge to raise prices and boost profits.” Seemingly progressive activists who had listened to calls for corporate profits to evidence of “ruthless profit manipulation schemes” cut the latter.
There are, of course, some sectors where profits are still booming. Oil and gas companies are doing incredibly well. But, again, it’s not because they suddenly upped the greed dial. There was a huge supply shock, during which Russian energy was effectively taken offline. Meanwhile, energy demand has remained quite strong.
This drove up energy prices and profits.
As I’ve also said before: Greedy demagoguery was confusing at best. At worst, the misdiagnosis of the causes of inflation has diverted attention from remedies that might be modestly helpful (the repeal of maritime tariffs and restrictions or the resolution of immigration bottlenecks contributing to shortages of labor) and created momentum for policies that could worsen inflation (such as price controls).
But if the greed keep pushing their theory, the least they can do is update their talking points.