Office Hours: Is the economy in trouble?
Office Hours: Is the economy in trouble?
Do we need to fear the new inflation numbers?
Today’s inflation numbers confirm what many are experiencing – prices are heading upward. Everything from gas to groceries is becoming more expensive.
It’s called inflation.
I don’t know whether or how inflation is hitting you, but it’s hitting me. This morning I paid almost $5 for a gallon of gas.
Republicans are hammering Biden and Democratic lawmakers. “This will be a winter of high gas prices, shortages and inflation because far left lunatics control our government,” Marco Rubio (R-Fla.) posted on Twitter Thursday.
The message appears to be taking hold. In a recent NBC News poll, 57% of Americans disapprove of Biden’s handling of the economy. Just 40% approve. Meanwhile, in an October Gallup poll, 75% of Americans rate current economic conditions in the country as only fair (42%) or poor (33%), while 68% say the economy is worsening.
Other polls show that inflation and economic concerns are outpacing worries about Covid.
But wait. What about the boatload of good economic news? Employers added more than half a million jobs in October. Unemployment is under 5%. Spending across the economy is returned to its pre-coronavirus trend. The average hourly wage is up nearly 5% from a year ago. The stock market (S&P 500) is up 39%.
Hence the topic of our weekly Office Hours: Is the economy doing well or not? Should we be worried about inflation? If inflation is getting out of control, is it due to Biden and the Democrats? What should Biden be doing to tame it?
Please contribute your thoughts to today’s discussion. I’ll chime in (at 10 am Pacific, 1 pm Eastern) with mine, and answer your questions.
Okay, time for me to spill the beans on what's really going on here. There's one very large culprit behind the higher prices that's not being named. In fact, it may be the biggest culprit. It's the increasing concentration of market power in fewer and fewer big corporations.
If markets were truly competitive, companies would try to keep their prices down in order to maintain customer loyalty and demand. When the prices of their supplies (including labor) rise, they’d cut their profits before they raised prices to their customers -- for fear that otherwise a competitor would grab those customers away. That's the way the market is supposed to work.
But that's not happening. Strange enough in the midst of all this inflation, corporations continue to rake in record profits. U.S. stocks are at record highs, rallying on strong corporate earnings.
More than 80 percent of S&P 500 companies that have reported earnings results this season have topped analysts’ earnings forecasts, according to Refinitiv.
Obviously, then, supply constraints haven't eroded profits. Big corporations don’t worry about competitors grabbing their customers away. They have so much market power they can relax and continue to rake in big money.
In fact, corporations are using the *excuse* of inflation to raise prices even higher and make even fatter profits. The result is a transfer of wealth from consumers (and a major burden on lower-income consumers) to corporate executives and major investors.
This has nothing to do with inflation, folks. It has everything to do with the concentration of market power in a relatively few hands.
For example, in April, Procter & Gamble announced it would start charging higher prices for household staples (from diapers to toilet paper) citing "rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods."
But P&G has been raking in huge profits. In the quarter ending September 30, after some of its price increases went into effect, it reported a whopping 24.7% profit margin. Oh, and it spent $3 billion in the quarter buying its own stock.
How can this be? Because P&G faces almost no competition. According to a report released this month from the Roosevelt Institute, "The lion’s share of the market for diapers,” to take but one example, “is controlled by just two companies (Kimberly-Clark and P&G), limiting competition for cheaper options."
Not coincidentally, Kimberly-Clark announced similar price increases at the same time as P&G.
The fancy term for this is "oligopoly." It means a market controlled by two or three major producers who roughly coordinate prices and production.
Another oligopoly: PepsiCo (the parent company of Frito-Lay, Gatorade, Quaker, Tropicana, and other brands) and Coca Cola.
In April, PepsiCo announced it was increasing prices, blaming "higher costs for some ingredients, freight and labor." Rubbish. The company recorded $3 billion in operating profits and increased its projections for the rest of the year, and expects to send $5.8 billion in dividends to shareholders in 2021.
If PepsiCo faced tough competition it could never have gotten away with this. But it doesn’t. In fact, its chief competitor, Coca-Cola announced price increases at about the same time as PepsiCo, and has increased its profit margins to 28.9%.
And on it goes. Whirlpool increased prices 5 to 12% in 2021, supposedly to "compensate for increased raw material costs, including for steel and plastics." But then, in the 3rd quarter, Whirlpool announced higher profits.
You see a similar pattern in energy prices. Once it became clear that demand was growing, energy producers could have quickly ramped up production to create more supply. But several industry experts say oil and gas companies (and their CEOs and major investors) saw bigger money in letting prices run higher before producing more supply. They can get away with this because big oil and gas producers don’t face much competition.
Again, inflation isn’t driving most of these price increases. Corporate power is driving them. The inflation genie is something of a ruse to justify and disguise these price increases.
It's dawned on me that USians implicitly assume that we live in a command economy and that prices are entirely determined by Them-- sometimes by the president, sometimes by big firms. There remains no sign that we're amid an inflationary process, because the Fed isn't supporting an inflationary process with its interest rate / money supply policy. We are experiencing higher prices due to temporary shortages and important long-pending price corrections.
That said, I don't think the economy is in good shape in ways that don't show up in gas prices. We have been shorting important investments in tangible and intangible infrastructure for over forty years now. The surpluses have been exhausted and the cracks aren't just showing, but spreading.
A lot of the load of every emergency has fallen on labor, which has been increasingly oppressed, so that one of the corrections we're encountering now is in wages, through mass individual withdrawals of labor services, a very painful way to go about it. We need a renaissance of unions whose bread and butter is the interests of labor.
We need to invest in public health. It would help a lot if we stopped thinking of health care as a matter of virtue, to be given as a reward or withheld as a punishment.
We need to invest in educational equity. That we talk so casually about good schools and bad schools is an indictment of our education funding structure.
We need to invest in environmental care on a major scale. Too obviously.
We need to invest in communication equity: resurrect the post office and make sure that robust wifi is available everywhere in the United States.
We need to invest in equitable law enforcement and an equitable justice system. And to stop militarizing police and sheriff's departments both as a thing in itself and to free up resources for health and growth.
We also need to stop devoting such a disproportionate share of national income to the armed forces, another diversion from investment in health and growth.
And all these investments in prospering will pay off for all of us. If we choose them.