God, Matt is so naive about supply and demand, as if the concept is a law of nature, like gravity. Supply and demand can be and are manipulated repeatedly, especially when repeated rounds of acquisitions in multiple industries reduce competition. He gives the idea of price controls a pass during disasters, but that’s what the hue and cry it about: manipulating prices during crises, jacking them up when supply and/or distribution are disrupted, then keeping them high for as long as possible.
While I agree that “price gouging” is not the sole cause of the inflation the US experienced, it was not irrelevant and, I believe, a significant factor in driving inflation. See Ritholz on how his thinking on this issue has evolved: https://ritholtz.com/2023/11/revisiting-greedflation/ and, in particular, why prices are not actually falling now that inflation has come down. To that I would add that we have not seen much of competitors undercutting the prices of those firms that have dramatically increased prices. Why has this not happened? To me the best explanation is that, as Wall Street analysts say, “lower prices mean lower profit margins, which means a lower stock price, so that’s not happening.”
Thanks, Matt. I'd add that, in the U.S., another factor likely contributing to the rise in demand has been surging migration. There's a few comments here about housing prices, and migration in excess of the pre-pandemic trend has notably accounted for roughly a third of net new housing demand over the past couple of years. To be clear, that's simply an observation rather than an argument for/against migration. In any case, it amounts to another reason to point a finger at "greed."
I don't think Biden and Harris are working on price controls. I agree that would lead to rationing. I think they're working through the antitrust mechanism. It'd be good to have more than 4 companies controlling all of our food.
They all run as lean as they can, so there's no slack if one of them goes down. They might invest in new capacity to try to take market share from each other. They might compete for workers, so some of the windfall profits go to the workers.
Maybe I’m missing something but demand pull inflation sounds exactly like price gouging. Price gouging when demand exceeds supply is mostly good though.
If Kroger took advantage of increased demand to increase profit margins, that’s price gouging just like contractors increasing profit margins after a hurricane. In both cases it’s mostly good.
In normal usage, "price gouging" is definitionally a wrongful act by the seller against the buyer. If you don't agree with that you probably want to use a different term.
Every federal holiday rerun: "The piece so nice, I liked it twice" (h/t The Weekenders)
A timely refresher for me though, as my grocery chain is once again going through a periodic eggs-and-dairy "shortage"...by which I mean, we run out because we refuse to raise prices in accordance with demand, make short-term costly contracts to bridge the gap, or otherwise react reactively. Naturally, our competitor stores in the same shopping center have no such compunction(s) and are not running out on the regular. This doesn't make the customers any less irate though. The Efficient Econ 101 Hypothesis is false: even when there's a $20 learning on the ground, people refuse to pick it up, because it must be fake if it's still there.
(What does continually surprise/disappoint me is how hard it is to actually truly lose a customer over such market shenanigans though. Low prices are powerfully addictive...though of course California's aggressive laws against """price gouging""" surely contribute. This week's DA newsletter told me to See Something, Say Something about Pink Tax, which...I'm sure one could write a whole complimentary column on. Aesthetics are nonfungible and don't have nonzero value, that's the entire point! Demand pull is a thing!)
I think the most important line in this whole article is that "greed is a constant". That's how I argued with people who took up this greedflation line with me in person. Do people really think that corporations got greedier? They have always been greedy, so that doesn't make any sense. They've just found that their old prices don't maximize profits as well as their new ones do. If they end up lowering prices, that won't be generosity, just a judgment that they can make more money by lowering the price and selling more units.
I think Matt is basically right in that you only want to do externally imposed price controls when there's a disastrous result without such controls. For example, if people cannot afford infant formula, that is disastrous, and the government should intervene to make sure that infant formula is both widely available and affordable. Insulin is another such product. But there aren't that many of these products where the product is both necessary and impossible to substitute.
WRT insulin, I have wondered why we don't just have the government get involved in the insulin business. This could take the form of the government building a factory to produce the 2-3 most common types of insulin and selling doses to American citizens with insulin rxs for whatever we determine a fair price is. Alternatively, offer contracts for private producers.
It seems enormously desirable to just shortcut around the drama involved in trying to negotiate prices or threaten price controls or whatever. This has the added benefit of keeping critical infrastructure in the US.
It really does make a lot of sense. The reason why we haven't done it is that before the pandemic, it seemed like both sides of the aisle were really against the government getting into enterprises that the private sector already has a substantial stake in. The pandemic really changed the conversation on this, but the American instinct is still to use the government's money to sponsor private sector endeavors (ie the CHIPS act, the IRA, etc) rather than having the government do things directly.
If we're worried about "greed," then instead of controlling prices we should be directly taxing greed -- or rent seeking. There are all sorts of reasonable causes for increased prices, but there is little reason why we should tolerate the unreasonably high profits that are the consequence of market power. One way to tax greed and rent-seeking would be to impose a progressive corporate excess profits tax whose rate increases as return on equity increases over some "normal" level of profit. A tax rate indexed to the level of super-normal profits would often encourage greater investment and, in some cases, discourage increased prices.
If two companies both earn the same taxable income, but one scraped out only a 5% return in a competitive market, while the other enjoys a 40% return due to pricing power, why should they both pay the same income tax rate? I suggest that the company with the higher ROE should pay a higher tax rate. Why wouldn't this be right?
Thanks for this thoughtful piece. I already built a regression model taking debt/gdp ratio, employee wages, googling_inflation, and corporate profits (smoothed by averaging months at the edge of each quarter together). Corporate profits was the best predictor of inflation (leaving out google trends on inflation which is the best predictor by far) but you gave me an idea of what else to look for. Ie disposal income and spending rates of consumers.
Joe Manchin did us all a favor by pushing against the Build Back Better bill. Instead of choosing one or two Activists’ issues to fund for 10 years, Bill writers included far too many desires funded for just a couple of years. Funding the Child Tax Credit long term would be a smart investment. Believing that Americans would rush to fund 8 or 9 other Progressive policies just because they had a taste for year or two is due to the DC Bubble. We hope Kamala will focus on one or two priorities at a time to increase chances of gaining funding.
So I just canceled my subscription to the New York Times.
They informed me that the cost of that subscription would increase to $300/year, a 15% increase over my prior cost and a 53% increase in their subscription price since 2020 (compared to overall inflation of 19%).
Call if greed, call it asking the price that demand is happy to pay. Not by me, anyway. You want to rake in huge profits *and* then spike your prices? Fine, but you can do it without me.
Plus, their biased coverage of the Ukraine war makes me want to vomit.
Every article is "why this is bad for Ukraine" whatever is happening and why morale in Ukraine is plummeting and why Russia is about to take the nth "strategic" abandoned small town (which never turns out to be strategic; the NYT doesn't know what the word means).
See Phillips O'Brien on this.
I just don't get it. Did Zelensky deny them an interview or something?
Relatedly, the best summary of how it feels to be a proponent of free trade comes from a 21 year-old Reason Magazine article, which is as true today as it was then: "it often seems as though free traders are trapped in a public policy version of Groundhog Day, forced to refute the same fallacious arguments over and over again, decade after decade." (https://reason.com/2003/10/30/lous-blues-2/)
I remain confused that greedflation is even a thing. It doesn't really matter whether businesses have gotten greedier or not.
The only universe this seems consistent with is one where the only restraint on increasing prices is how nice of people business owners are. Apparently if they are maximally evil they can charge an infinite price?
It's all so divorced from profit maximization that I don't even know how to respond. Is weird that the people that hate corporations the most seem to have a theory that relies on them charging prices below the ones that make them the most money for most of the time.
I notice that people then pivot to market power, but it's not plausible that market power suddenly increased in the span of a couple months. Particularly when M&A was at a historic *low*.
The politics around this price-gouging issue are pretty interesting. The Harris campaign is from the mainstream wing of the Democratic Party, and its economic advisors are all the same types of normal economists who advised Biden, Obama, and Clinton, so it's highly unlikely that a Harris administration would sincerely believe that price-gouging was the main explanation for inflation. The value of focusing on price-gouging is *precisely that they know it's an incorrect explanation* and will therefore bait Republicans into responding with "You can't do that!" Which makes the Republicans look insensitive and like they're trying to protect their big business allies, and throws them off their ideal talking points.
We should be concerned with "excess profits," not "price-gouging." There may be all sorts of reasonable explanations for increased prices, but, we should be less accepting of super-normal profits.
God, Matt is so naive about supply and demand, as if the concept is a law of nature, like gravity. Supply and demand can be and are manipulated repeatedly, especially when repeated rounds of acquisitions in multiple industries reduce competition. He gives the idea of price controls a pass during disasters, but that’s what the hue and cry it about: manipulating prices during crises, jacking them up when supply and/or distribution are disrupted, then keeping them high for as long as possible.
While I agree that “price gouging” is not the sole cause of the inflation the US experienced, it was not irrelevant and, I believe, a significant factor in driving inflation. See Ritholz on how his thinking on this issue has evolved: https://ritholtz.com/2023/11/revisiting-greedflation/ and, in particular, why prices are not actually falling now that inflation has come down. To that I would add that we have not seen much of competitors undercutting the prices of those firms that have dramatically increased prices. Why has this not happened? To me the best explanation is that, as Wall Street analysts say, “lower prices mean lower profit margins, which means a lower stock price, so that’s not happening.”
When oil prices went negative in 2020, did Robert Reich buy any for the cost of production plus a reasonable profit?
Thanks, Matt. I'd add that, in the U.S., another factor likely contributing to the rise in demand has been surging migration. There's a few comments here about housing prices, and migration in excess of the pre-pandemic trend has notably accounted for roughly a third of net new housing demand over the past couple of years. To be clear, that's simply an observation rather than an argument for/against migration. In any case, it amounts to another reason to point a finger at "greed."
I don't think Biden and Harris are working on price controls. I agree that would lead to rationing. I think they're working through the antitrust mechanism. It'd be good to have more than 4 companies controlling all of our food.
They all run as lean as they can, so there's no slack if one of them goes down. They might invest in new capacity to try to take market share from each other. They might compete for workers, so some of the windfall profits go to the workers.
Antitrust is the way to go here.
Maybe I’m missing something but demand pull inflation sounds exactly like price gouging. Price gouging when demand exceeds supply is mostly good though.
If Kroger took advantage of increased demand to increase profit margins, that’s price gouging just like contractors increasing profit margins after a hurricane. In both cases it’s mostly good.
In normal usage, "price gouging" is definitionally a wrongful act by the seller against the buyer. If you don't agree with that you probably want to use a different term.
Hmm, seems like higher corporate taxes would be a better answer to "price gouging" rather than price controls.
Also what are people really trying to accomplish arguing that "greedflation" is a thing?
They're trying to build support for punishing businesses for inflation
They're just attempting to deflect the fact that the Democratic Party added fuel to the inflation fire.
Every federal holiday rerun: "The piece so nice, I liked it twice" (h/t The Weekenders)
A timely refresher for me though, as my grocery chain is once again going through a periodic eggs-and-dairy "shortage"...by which I mean, we run out because we refuse to raise prices in accordance with demand, make short-term costly contracts to bridge the gap, or otherwise react reactively. Naturally, our competitor stores in the same shopping center have no such compunction(s) and are not running out on the regular. This doesn't make the customers any less irate though. The Efficient Econ 101 Hypothesis is false: even when there's a $20 learning on the ground, people refuse to pick it up, because it must be fake if it's still there.
(What does continually surprise/disappoint me is how hard it is to actually truly lose a customer over such market shenanigans though. Low prices are powerfully addictive...though of course California's aggressive laws against """price gouging""" surely contribute. This week's DA newsletter told me to See Something, Say Something about Pink Tax, which...I'm sure one could write a whole complimentary column on. Aesthetics are nonfungible and don't have nonzero value, that's the entire point! Demand pull is a thing!)
I think the most important line in this whole article is that "greed is a constant". That's how I argued with people who took up this greedflation line with me in person. Do people really think that corporations got greedier? They have always been greedy, so that doesn't make any sense. They've just found that their old prices don't maximize profits as well as their new ones do. If they end up lowering prices, that won't be generosity, just a judgment that they can make more money by lowering the price and selling more units.
I think Matt is basically right in that you only want to do externally imposed price controls when there's a disastrous result without such controls. For example, if people cannot afford infant formula, that is disastrous, and the government should intervene to make sure that infant formula is both widely available and affordable. Insulin is another such product. But there aren't that many of these products where the product is both necessary and impossible to substitute.
WRT insulin, I have wondered why we don't just have the government get involved in the insulin business. This could take the form of the government building a factory to produce the 2-3 most common types of insulin and selling doses to American citizens with insulin rxs for whatever we determine a fair price is. Alternatively, offer contracts for private producers.
It seems enormously desirable to just shortcut around the drama involved in trying to negotiate prices or threaten price controls or whatever. This has the added benefit of keeping critical infrastructure in the US.
It really does make a lot of sense. The reason why we haven't done it is that before the pandemic, it seemed like both sides of the aisle were really against the government getting into enterprises that the private sector already has a substantial stake in. The pandemic really changed the conversation on this, but the American instinct is still to use the government's money to sponsor private sector endeavors (ie the CHIPS act, the IRA, etc) rather than having the government do things directly.
If we're worried about "greed," then instead of controlling prices we should be directly taxing greed -- or rent seeking. There are all sorts of reasonable causes for increased prices, but there is little reason why we should tolerate the unreasonably high profits that are the consequence of market power. One way to tax greed and rent-seeking would be to impose a progressive corporate excess profits tax whose rate increases as return on equity increases over some "normal" level of profit. A tax rate indexed to the level of super-normal profits would often encourage greater investment and, in some cases, discourage increased prices.
If two companies both earn the same taxable income, but one scraped out only a 5% return in a competitive market, while the other enjoys a 40% return due to pricing power, why should they both pay the same income tax rate? I suggest that the company with the higher ROE should pay a higher tax rate. Why wouldn't this be right?
Thanks for this thoughtful piece. I already built a regression model taking debt/gdp ratio, employee wages, googling_inflation, and corporate profits (smoothed by averaging months at the edge of each quarter together). Corporate profits was the best predictor of inflation (leaving out google trends on inflation which is the best predictor by far) but you gave me an idea of what else to look for. Ie disposal income and spending rates of consumers.
Here’s the data I used https://docs.google.com/spreadsheets/d/1BQBd6iSHRYXMar-NGP9YHh5zVxziKjc1VvXPr0lBaTY/edit
But I can't find any monthly data on consumer spending. Any ideas of where I could find this. Quarterly and annually isn't going to do it.
Joe Manchin did us all a favor by pushing against the Build Back Better bill. Instead of choosing one or two Activists’ issues to fund for 10 years, Bill writers included far too many desires funded for just a couple of years. Funding the Child Tax Credit long term would be a smart investment. Believing that Americans would rush to fund 8 or 9 other Progressive policies just because they had a taste for year or two is due to the DC Bubble. We hope Kamala will focus on one or two priorities at a time to increase chances of gaining funding.
So I just canceled my subscription to the New York Times.
They informed me that the cost of that subscription would increase to $300/year, a 15% increase over my prior cost and a 53% increase in their subscription price since 2020 (compared to overall inflation of 19%).
But journalism is a struggling business and it's important that we pay them what they need to keep their heads barely above water . . . except that the Times just announced that their profits went up 41% in the last year (https://www.marketwatch.com/story/new-york-times-says-new-digital-only-subscribers-helped-profit-rise-41-c05b5e7c)
Call if greed, call it asking the price that demand is happy to pay. Not by me, anyway. You want to rake in huge profits *and* then spike your prices? Fine, but you can do it without me.
Plus, their biased coverage of the Ukraine war makes me want to vomit.
"their biased coverage of the Ukraine war makes me want to vomit."
Biased against whom? (This is the first time I've seen anyone claim the NYT was biased on the subject of the war in Ukraine.)
Every article is "why this is bad for Ukraine" whatever is happening and why morale in Ukraine is plummeting and why Russia is about to take the nth "strategic" abandoned small town (which never turns out to be strategic; the NYT doesn't know what the word means).
See Phillips O'Brien on this.
I just don't get it. Did Zelensky deny them an interview or something?
Thank you for the context.
I appreciate articles like these. Sometimes there's a really dumb idea out there that needs debunking. The obvious ain't gonna state itself.
Relatedly, the best summary of how it feels to be a proponent of free trade comes from a 21 year-old Reason Magazine article, which is as true today as it was then: "it often seems as though free traders are trapped in a public policy version of Groundhog Day, forced to refute the same fallacious arguments over and over again, decade after decade." (https://reason.com/2003/10/30/lous-blues-2/)
Matt Welch on the Fifth Column referred to MY and a few others as "the progressives who are allowed to say obvious things that are happening."
Granted this was 2020 when that was more difficult.
I remain confused that greedflation is even a thing. It doesn't really matter whether businesses have gotten greedier or not.
The only universe this seems consistent with is one where the only restraint on increasing prices is how nice of people business owners are. Apparently if they are maximally evil they can charge an infinite price?
It's all so divorced from profit maximization that I don't even know how to respond. Is weird that the people that hate corporations the most seem to have a theory that relies on them charging prices below the ones that make them the most money for most of the time.
I notice that people then pivot to market power, but it's not plausible that market power suddenly increased in the span of a couple months. Particularly when M&A was at a historic *low*.
Bingo.
The politics around this price-gouging issue are pretty interesting. The Harris campaign is from the mainstream wing of the Democratic Party, and its economic advisors are all the same types of normal economists who advised Biden, Obama, and Clinton, so it's highly unlikely that a Harris administration would sincerely believe that price-gouging was the main explanation for inflation. The value of focusing on price-gouging is *precisely that they know it's an incorrect explanation* and will therefore bait Republicans into responding with "You can't do that!" Which makes the Republicans look insensitive and like they're trying to protect their big business allies, and throws them off their ideal talking points.
We should be concerned with "excess profits," not "price-gouging." There may be all sorts of reasonable explanations for increased prices, but, we should be less accepting of super-normal profits.
Who gets to decide how much profit is acceptable?
How do you define "excess profits"? Do you have any examples?
The prospect of earning outsized return is what drives businesses to innovate or to put into practice innovations.