Summary about inflation --- corporate profits more than doubled in 3 years, they increased by 115% in 3 years between 2019 and 2022. Generally supply bottlenecks and pandemic related government emergency payments are cited as causing inflation, and nonfinanical corporate profits are not mentioned. But creating profits that double the past years' profits means the corporations have added a price increase above and beyond the inflationary costs of production. Pre-tax profits increased from $1.102 trillion to $2.379 trillion, by $1.277 trillion, which comes to $9,823 per household in added expenses. Incomes did not match this extraordinary growth in profits. The data page I cite for this claim is from two sources, 1) the Fed's FRED graph page on pre-tax profits, and 2) the BEA.gov Table 6.16D, "Corporate Profits by Industry", line 13, "nonfinancial corporations". The FRED graph below, note the right hand side, profits jump from $1.336 trillion in Q4 2019 to $2.507 trillion in Q2 2022, a gain of $1.171 trillion, not doubling but increasing by 87%. Later in the essay I cite the studies of William Lazonick that show that over 90% of corporate profits go to dividends and share buybacks, benefitting a minority of already wealthy citizens. This makes for the incredible inequality we know, and for the dangerous economic insecurity that many feel, leading to lives and deaths of despair.
Complicating this extremely high inflation rate is the fact that the "real" median household income decreased by 2.8% from 2019 to 2021. ("real" means inflation adjusted) It's up only 6.8% in 21 years, though the "Real GDP per Capita" is up 27.8%. The median crawls while the average races, showing that economic growth has departed from the lower-earning portion of society.
The Federal Reserve shows pre-tax nonfinancial corporate profits" increased by115% in 3 years, 2019 to 2022. The post-tax profits increased by 92%. (see Flow of Funds, page 10, lines 10 and 18). As I have said before in the last essay, corporations are the primary cause of inflation. At the bottom of that essay, as well as in this one, I detail some of the studies that make this claim.
Professor Hal Singer makes this case against corporate price hikes in an interview at INET Economics; "How Corporations “Get Away With Murder” to Inflate Prices on Rent, Food, and Electricity".
Singer "teaches advanced pricing at Georgetown’s McDonough School of Business and frequently serves as an economic expert in antitrust litigation (often concerning how firms set prices), says that those who hold workers’ wages responsible for inflation are not only wrong but making the problem worse with policies that fail to hit the real mark."
This interview with Singer is a very strong and persuasive argument supporting my argument that corporations are gratuitously raising prices far above costs of production.
The most succinct case for this argument comes from Mike Konczal's paper "Prices, Profits and Power" where he states, on page 4, "In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost. In other words, in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs." Here's a graph of retail trade profits from 2014 to 2021:
Retail trade had two good years. The graph is found at Table 6.17D (BEA.gov), the profit spike in 2020 and 2021, is a leap of over 115%, from $159.175 billion in 2019 to $342.994 billion in 2021. How did this happen? The stores claim they had to raise prices because of higher labor and supply costs, and the goods for sale were more expensive, but obviously they more than matched the additional costs and hiked prices super-high to achieve this profit outcome. Is there another reasonable justification? I'd like to know. Everyone would like to know.
Are Corporations Getting Away with Murder?
I'm making this up-date on March 5, 2023, originally posted on Jan 8, 2023. The graph below, from the Fed FRED page, shows corporate profits; note the great increase from 2020 at the right. This data is repeated more or less at the BEA.gov, Interactive Tables, Section 6, Income and Employment by Industry, nonfinancial corporate profits, Table 6.16.D and Table 6.19.D (pre- and post-tax).
The lower graph shows nonfinancial corporate profits after tax, note the jump, an 87% increase in profits between Q4 2019 and Q2 2022, a period of 2 years and 9 months. Did wages keep up with higher prices? Did this affect low income Americans who were struggling before Covid-19 caused a lockdown? Did the American Rescue Plan's distribution of $1,400 per household in February of 2021 make a difference in 2022?
The graph above the 2010 to 2020 graph, Profit per unit of gross value added, nonfinancial corporations, shows that from Q1 2020 to Q3 2022, the "profit per unit" has increased by 45%, from 116 to 169. When inflation strikes it increases costs and lowers profits. Such a simple fact is universally denied or ignored by most economists. The interview with Hal Singer, above, is such a breath of fresh air.
In the graph below corporate profits are found to be responsible for almost 54% of the inflation; Josh Bivens completes his essay saying, "First, while most policy levers to restrict corporate profiteering wouldn’t work quickly enough to change profit margins or influence inflation, a one-time excess profits tax might."
Bivens writes at the Economic Policy Institute and published the following graph in April, 2022.
Recently labor has contributed about 8% to inflation, while profits contributed about 54%, about 7 times more powerful than labor's effect. A Huge Reversal: in the past 40 years labor was 6 times more influential than profits.
The Covid pandemic locked-down families, definitely reduced employment and GDP output, but as the vaccinations were released and applied in early 2021, the pent-up savings sprang into action, and the surge created shortages, but the corporations maintained high prices, because total profits were even higher in 2022 than in 2021 when conditions were normalizing.
The real "average weekly earnings of production and nonsupervisory workers", the BLS shows, increased by 2.3% in 3 years, and by 5.6% over 6 years -- that entails 80% of all workers.If weekly and therefore yearly wage income is no greater in 2023 than in 2019, how could workers' income be driving inflation. The top-earning 20% of American families earn 49.6% of all income after taxes and transfers (states the BEA study), all have incomes above $149,000. The top-earning 10% earn 42.5% of all income, after taxes and transfers (states the RealTime study). The percentiles 90 through 9 have an average after-taxes-and-transfers income of $160,000, the top 1% have an average income of $1.3 million (RealTime Inequality). Corporations price their products for these high spending families.
The graph below shows that the median weekly earnings for 80% of all workers spiked and then fell back to levels virtually identical to Q4 2019. (Not to be confused with the "average weekly earnings" I mention above.) Since January, 2021, the Consumer Price Index increased by 15.0%.
Summary: Wages are back to 2019 levels, prices are 15% higher, and profits are 40% to 80% higher. Who gains and who loses? Why did the Democrats lose the House of Representatives, and why does President Biden have such a low popularity rating? Why did the Democrats fail to attack corporations for price gouging?
The Consumer Price Index, also a BLS graph, shows inflation increased by 15.0% in 3 years (Jan. 2020 to Dec. 2022), and by 22.2% over 6 years (Jan. 2016 to Dec. 2022). Furthermore, I show below that the average residential rental cost increased by 27.1% in the same three years, while the median sales price of a home increased by 49%. And, furthermore,
The U.S. Census Pulse Survey of February 22, 2023 asks respondents "Frequency of feeling nervous, anxious or on edge" -- 59% report this feeling in the past two weeks. And answering "Frequency of not being to stop or control worrying" -- 52%. The first question had 210 million respondents, the second had 209 million. See Health Table 1. As for "Feeling down, depressed or hopeless", some 47% responded affirmatively; and "Frequency of having little interest or pleasure in doing things", 48% responded affirmatively, again over 200 million total responding, Health Table 2.
It's a dismal science, they say. Just wait, we can liven things up a little.
Now, back to my original message about inflation --------------
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I dealt minimally with the inflation problem in the last essay. I'll add to the story today, but to those really interested I direct them to a 69 page essay at PERI, the economic platform for scholars at University of Massachusetts, Amherst, authored by Thomas Ferguson and Servaas Storm, "Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy". My essay is at least shorter. The PERI site offers seven (!) other papers on the topic by scholars of high reputation. To my eyes I see a sort of bonanza of approaches worth looking at, especially the essay "Federal Reserve Anti-Inflation Policy: Wealth Protection for the 1%?
The Ferguson and Storm essay was published at the INET site, Institute for New Economic Thinking.
Here's my version, it amplifies a much shorter comment I left at the INET site.
Inflation: A Closer, More Accurate Story
We badly
need a new "inflation story". The Federal Reserve’s policy of
increasing interest rates arguably has harmed the economy and is logically
flawed; it is based on a false story that wage income is pushing up prices.
Instead, I argue, corporate price gouging has been ignored and the Fed's free
money policy of "quantitative
easing" has also been ignored. The nation deserves an explanation as to
why corporate profits in 2022 are 70% higher than profits 3 years earlier. And we
need to know how the Fed’s infusion of over $4 trillion into the
economy has affected prices.
Corporate profits of non-financial firms have risen by 70% in almost 3 years. In Q4 2019 “Nonfinancial corporations” recorded $1.324 trillion in profits, about the same as the seven preceding years back to 2012. In Q3 2022 their profits were $2.2752 trillion, an increase of $961 billion, a 70% increase in less than 3 years. This comes from BEA.gov, Table 6.16D. Interactive Tables. The added cost of $961 billion comes to more than $7,300 per household distributed across the nation.
From BEA.gov, Table 6.16D, Corporate Profits, only "Nonfinancial" shown
How do you make a profit during an inflationary season with costs of materials and labor rising? You pass along the added costs and pass along a stiff price increase if the market will accept it. The paper "Prices, Profits and Power" by Mike Konczal deals with mark-ups above the cost of production. He states on page 4, "In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost. In other words, in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs."
Here's a look at the profit increase of "Retail Trade" from Table 6.17,
Their combined profits increased by 115% over two years, 2020 and 2021, a jump from $159.175 billion to $342.994 billion. How does that work? Their costs increased and they had to raise prices. Or so many locked-down consumers hit the stores and bought like mad. Or they jacked up prices enormously. Tell me what happened.
Inflation began its upward drift in January, 2021, as the vaccines were being distributed and the lockdown was eased; household savings rate was very high, averaging 19% for over 12 months. As the lockdown was lifted, prices and inflation began rising. The Consumer Price Index has risen 13.8% between January 2021 and November 2022, a 22 month period. In the same 22 months, the average weekly earnings, adjusting for inflation, for all workers decreased by 4.4%, by the U.S. Census account, and have returned to exactly at the same pre-Covid level by another account.
The Consumer Price Index chart at the BLS, all items U.S. Cities'
And Dean Baker provides a graph of non-health-care consumption; the above norm consumption coincides with the jump in inflation.
The onset of the pandemic in March 2020, it will be remembered, caused massive job loss, some 25.491 million workers (15.5% of the February 2020 labor force) lost work in two months between February and April 2020. Many dropped out of the labor force; if none had dropped out the unemployment rate would have been 19.0%. The Employment to Population ratio captures the sharp decline:
The next slides comes from the Center for Budget and Policy Priorities, the essay "Chart Book: Tracking the Recovery from the Pandemic Recession", December 22, 2022. It shows unemployment hitting 24%. Workers in low-wage industries fared much worse than higher paid workers.
Another
fact often missing from the discussion is that in the past six months, June, 2022, to December,
2022, the Bureau of Labor Statistics’ Consumer Price Index has risen by 0.16% which is an annualized increase of 0.32%. This is verging on deflation. So, inflation may be tamed
already! If wages were pushing up inflation, and they weren’t, it’s been over
for six months. Why then does the Fed insist on hiking the interest rate, and
slowing the economy, especially new home building?
Consumer Price Index, with 6 months of very flat inflation after an 18 month 13.8% surge
The poorer families and citizens whose precarious living conditions were made worse by Covid (by illness, deaths, lockdowns and job layoffs) and then by inflation (beginning in January 2021) increased their consumption with the assistance of the federal Economic Impact Payments (stimulus checks), enhanced unemployment checks, the increased Child Tax Credit and other benefits. The Supplemental Poverty Measure for 2021 (page 58) shows that child poverty was reduced by 59% (almost 2/3rds, from 12.6 to 5.2 from 2019 to 2021) in 2 years. But the EIPs were an income replacement action, not a serious factor in causing inflation.
The web page RealTime Inequality shows that the post-tax and post-transfer incomes of the
lower-earning 50% of U.S. households grew by 6.9% (or $2,600), rising from $36,700 to $39,300 from January 2020 to September 2022. The lower 50% earns
16.6% of all income after taxes and transfers, according to RealTime
Inequality, a web page created by University of California economists. (The
average U.S. household income is between $144,000 and $161,000, to put that
$39,300 into perspective.) This web page shows the pre-tax, pre-transfer share
of total national income of the lower 50% is 8.6% of all income – only 8.6% --,
and the post-government-transfer share is 16.6% -- still not enough to drive
inflation. Raising the incomes of half of all households who earn a sixth of all income by less than 7% -- it's laughable to claim that this is driving inflation.
This RealTime Inequality graph shows Income Share of three groups, the lower 50% (orange at bottom), the upper-middle 40% (blue), the top 10% (red). The beginning date is 1/2020, end date is 9/2022. Which group has the power to drive up prices?
As I’ve
mentioned at my blog often, “average weekly earnings
for production and nonsupervisory workers” (80% of all full-time workers) were
higher in 1967 than in 2022, 55 years ago. The Real (inflation adjusted) GDP
(economic output) per capita (human being) increased by a multiple of 2.6 or by
161% during those 55 years, between 1967 and 2022. But weekly wages for 80% of workers did not
rise at all! And the real annual wage income for men in 1973 has increased by 4.4% (U.S. Census, Table P-2), while the GDP/capita increased
by 123%. This indicates a complete break-down of economic efficiency and
fairness, and it goes ignored by the general public and our political
representatives. The general effect of permanent low wages for most workers is
social upheaval.
The Causes of Inflation Were primarily opportunistic price hikes:
Several economists point out that inflation was mostly caused by out-sized corporate profits. Josh Bivens at the Economic Policy Institute claims that 54% of inflation was caused by corporate price hikes; and Matt Stoller, the anti-trust expert, claims 60%, and Mike Konczal at Roosevelt Institute explains that corporate price mark-ups and profits increased at a rate faster than any time since the 1950s. American families saved their incomes during 2020 pandemic, as a result of the lockdown, and then began shopping and buying when the lockdown was eased in early 2021. The BEA.gov shows, Table 2.1, that the savings rate during the 12 months from March 2020 to March 2021 was 19%, the highest rate ever recorded, it normally ranges from 5% to 8%.
This is called by economists “pent-up demand”. Corporations saw it as a golden opportunity to increase their prices. But the status of private wealth had also changed.
Total
wealth now is at its highest level in relation to annual national income. The
Fed's Flow of Funds report shows a ratio of disposable national income to household
net worth (otherwise known as private wealth) (See Household Net Worth, Table
B.101.). The ratio was at an all-time high in Q1 2022; savings were 8.25 times higher than income. The historical normal is around 5.2 times higher. In
December 2021 private savings peaked at $150 trillion, and since have retreated
to $143 trillion.
A graph at the Fed’s FRED site shows the same ratio, “net worth as a percentage of disposable income”, and between 1946 and 1996, the range stays close to 520%, then from 1996 to 2016 it resembles a roller coaster ride, ranging from 560% to 650%, and then it grows to 825% in January of 2022, before falling to 769% in September 2022.
From July 1973 to September 2022, wealth to annual income ratio.
Apparently, savings has become hoarding, the nation never has “saved”
as much as it does now. The question has to be asked, is this a wise use of resources,
or is it a manifestation of a bad and imbalanced distribution of income?
The next graph from the Fed's FRED series,
Households; Corporate Equities and Mutual Fund Shares; Asset, Market Value Levels (BOGZ1LM193064005Q)
Twenty trillion dollars ($21 tr.) was gained in the 21 month period, Q1 2020 and Q4 2021. This is an 87% gain in value!
At the trough of the Great Recession, Q3 2009, the value of stocks was $7.039 trillion, and by Q4 2021, 12 years plus 3 months the value stood at $42.489 trillion, and adjusting for inflation, this is an increase by a multiple of 4.4 times or 440% over a 12 year period. In the same period the real GDP per capita increased by 16% and the average weekly earnings for nonsupervisory workers by 13%.
RealTime Inequality shows the growth of wealth by percentiles from 1976 to 2022. Note that the lower 50% of households has no recordable wealth.
Between March 2020 and September 2022, 30 months, the “median sales price of houses” increased by 41%, from $322,600 to $454,900. This is the sharpest increase on record. The maintenance of low interest rates had an effect, but the cooling stock market and the lure of investing in real estate also pushed up prices.
The
American economy is a very sad picture of extreme inequality, and this is
demonstrated on the web page RealTime Inequality. The page was created by University
of California, Berkeley, economists.
Some reputable economist should put all these details into an orderly package. One last detail has to do with the allocation of corporate profits. Corporations create the majority of products in the U.S., employ most people, and create the most surplus (profits which become excess savings). The findings of professor William Lazonick show that over 90% of corporate profits for the past 15 years have gone to shareholders in the form of dividends or stock buybacks. Where did nonfinancial corporate profits go between 2010 and 2019? "Shareholder payments––stock buybacks plus dividends––have on average totaled 100 percent of nonfinancial corporations’ corporate profits over the last decade", he states in the intro to this study. In this article he states that 93% of profits went to either stock buybacks or dividends ($5.3 trillion or 54% of profits to buybacks, and 3.8% trillion to dividends, another 39% of profits), that's $9.1 trillion out of $9.8 trillion going to shareholders.
This graph shows the course of dividends and stock buybacks over 40 years or so.
Employees have not shared in the growth of the economy, only shareholders have. The capitalist system has an Achilles heel; businesses seek higher profits by suppressing wages, and then offering lower priced goods. This creates pressure to keep employee incomes low; it also destroys the customer base. And low wages create high inequality which creates high economic fragility. Furthermore, gratuitous price gouging by corporations during an emergency proves in a sense that the “invisible hand” no longer works to maintain actual value of products. Gratuitous price hikes and high mark-ups over the cost of production is a phenomenon of exploitation and greed as well as a noncompetitive environment (read the highlights of Konczal's study). Prices were pushed as high as possible after a year-long emergency period of lockdown and depressed demand. The story of workers’ rising incomes pushing up costs masks the real story. And the general public seems to understand, as everyone knows, rising input costs (due to inflation) do not raise profits (by 70%), they tend to lower profits. The essay by Thomas Ferguson and Servaas Storm explaining inflation is worthy of consideration. And it might not be a bad idea to review the logic of Dan Alpert who predicts a period of deflation. He says,
"
today is January 8, 2023
The article is by Hal Singer, a professor at University of Utah; a quote: "I’m in a hotel in New York City right now. You think they’re charging rates based on the wages of the cleaning crews that come in? Not likely. They’re revenue maximizers. They’re just looking at the demand curve. The only thing that enters the calculus is what economists call demand-side elasticity considerations. In other words, how much you can get away with on the demand side in setting prices. The costs are no longer entering the equation."
A sample from Mike Konczal's paper published in June, 2022, "Prices, Profits, and Power", on page 4 he writes,
"While markups averaged 1.26 between 1960 and 1980, they have been on a slow and consistent rise since then, averaging 1.56 during the 2010s. In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost. In other words, in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs."
