Greedflation is still fake

A reply to Lever and David Sirota

David Sirota roped me into a piece he wrote last week, the thesis of which is that “after corporate media lied America into a war and a financial crisis, data show they lied about a main source of price hikes — and brutal policies followed.”

My alleged sin was the May 2022 article “Greedflation is fake” about takes like this one from Public Citizen, which appeared to be arguing that inflation was caused by some kind of exogenous increase in corporate greed.

At that time, some were floating the idea that the economy needed price controls in order to combat this surge in greed. If you need to jog your memory, I’d recommend reading Robert Reich’s article “Corporate greed, not wages, is behind inflation. It’s time for price controls.” Or taking note of Elizabeth Warren’s “Price Gouging Prevention Act of 2022,” which would have turned the FTC into a kind of national price regulator.

There is absolutely a time and a place for price controls and rationing in economic policymaking. One of my grandfathers was a communist and a naval aviator during World War II. My other grandfather was an economist who spent the war working at the Office of Price Administration where he helped secure the future of the free world by organizing a rationing and price control system for footwear. I recommended rationing and price controls for Europe during the winter of 2022-2023 to help deal with Vladimir Putin’s efforts to cut off the continent’s supply of natural gas.

But my point in the greedflation piece was twofold:

• Greed is a constant in the economy, not a variable, and it doesn’t explain why inflation was so much higher in 2022 than in 2019.

• Price controls and rationing are a reasonable response to certain kinds of supply disruptions associated with war or natural disaster, but if you use them to address run-of-the-mill excess of demand you end up with shortages.

Sirota’s new piece completely ignores the text of what I actually wrote, and instead goes to town on the idea that a large share of the increase in prices is accounted for by an increase in profits. This supposedly proves that I am part of a cabal of media liars whose “inflation myth crushed the working class.”

This is nonsense.

The whole point is that overstimulating the economy generates price increases and windfall profits, which is why ideally you wouldn’t overstimulate the economy.

We somewhat overstimulated the economy

A good clue as to how we ended up with an overstimulated economy is Joe Biden’s statement on February 5, 2021 that “the way I see it is the biggest risk is not going too big — it’s if we go too small.” I heard similar variations on this theme both on and off the record from the White House’s economic and communication teams multiple times during the transition and during the debate over the American Rescue Plan. Joseph Stiglitz, endorsing the administration’s approach, explained several months later that “while weighing the risks, we also must plan for all contingencies. In my view, the Biden administration has correctly determined that the risks of doing too little far outweigh the risks of doing too much.”

This is something that I also said at the time because I thought it made a lot of sense.

Policymaking is difficult because it involves a lot of uncertainty. If, when faced with uncertainty, you decide it’s important to err on the side of overstimulating rather than understimulating, then the odds are good that you will end up overstimulating. And that’s what happened.

With my critical hat on, I would say that relative to sound policy design, the ARP made two errors. One is that it included a bunch of state and local fiscal aid money that was knowably unnecessary given the actual condition of state budgets. This has contributed somewhat to inflation, and also politically allowed Greg Abbott, Ron DeSantis, and other GOP governors to position themselves as hostile to Biden’s big spending while also using Biden’s big spending to cut taxes and hand out raises to cops and teachers. The second problem with ARP is that it included a pilot version of the refundable Child Tax Credit that was always meant to become a permanent program and not a temporary stimulus. That’s fine in the spirit of “don’t let a good crisis go to waste,” except it turned out that Joe Manchin had fundamental objections to the idea, which meant it wasn’t a good idea to spend money on it.

But still, the correct policy ex ante was to do something that more likely than not would look like overstimulus ex post. And that was the stated policy.

And as I said, despite certain quibbles, I think it was a fine calculus. The past couple of years of high inflation have been tough. But inflation is falling and I don’t think the bad inflation of the past will have any serious long-term consequences for the American economy. That’s in contrast to high unemployment, which causes a lot of long-term scarring. The super-rapid jobs recovery is a very important policy achievement, and inflation has been an unfortunate downside of that achievement. But it’s very easy to understand in conceptual terms, and it fits perfectly with the observation that profit margins have risen.

Supply, demand, and profits

Two things can happen if demand for the goods or services you sell goes up. One is that you can sell more stuff — an increase in quantities. The other is that you can raise prices.

What one hopes for in a stimulative policy is a large increase in quantities and a small increase in prices. And at a time of high unemployment, that’s a very reasonable thing to hope for. After all, most companies should be able to relatively easily increase quantities sold by hiring unemployed people to do the extra work. That’s the stimulus working.