For the past few months, there's been a vicious debate over the sources of inflation and the proper way to contain it. Part of this comes from the fact that the United States recorded the largest jump in inflation since 1981 this year. Another big part is the ongoing debate about what supercharged inflation in the first place, as well as what set of policies can keep it in check.
At the moment, some economists insist inflation is primarily being driven by wage growth, Biden’s $1.9 trillion pandemic relief program, and waves of stimulus checks ("stimmies") that provided as much as $600, $1,200, and $1,400, and were sent out from April 2020 to March 2021 (some of which were sent out under Trump, as well).
The underlying theory is relatively simple: When wages go up, prices follow. When prices increase, businesses will try to sell more by hiring more at higher wages. Higher wages further increase the costs of production (and thus prices) as well as demand to a point where it outpaces supply, sustaining inflationary price increases. Similarly, it’s argued that the stimulus checks were part of a historic $1.9 trillion government spending program that pushed demand too high and helped overheat the economy by giving people thousands of dollars of disposable income to spend.
To curtail this, economists like former Treasury Secretary Larry Summers have publicly said that more unemployment is necessary, ranging from five years of unemployment above 5 percent to one year above 10 percent, via Federal Reserve interest hikes. Right now, unemployment sits at 3.6 percent, or 6 million people—Summers is saying that millions of Americans need to lose their jobs in order for inflation to come down. As laid out in a line of questioning between Rep. Alexandria Ocasio-Cortez and Federal Reserve Chairman Jay Powell, 10 percent unemployment would not only mean an additional 10.5 million people losing their jobs but also a 20 percent Black unemployment rate.
Basically, some economists, including those who can speak directly to the president, have looked at the scary financial landscape—the lasting impact of COVID-19, a war in Ukraine that severely limited oil and grain supply, record corporate profits—and decided that the real problem here is that American wages are too high and stimulus checks sent in the mail early in the pandemic were too big. However, it's becoming increasingly clear that inflation is driven by corporations taking advantage of the pandemic to increase profits. Indeed, “the largest price hikes in 2021 tended to emanate from the most concentrated industries in 2020,” economist Hal Singer told Motherboard in an interview.
Take the argument that wages and disposable income are going up, not down: CNN Business analyzed U.S. Bureau of Labor Statistics data and found that real wages (wages minus rising costs of living) have gone down 3.5 percent over the past 12 months. An early June study by the Institute for Policy Studies found that executive pay not only outpaced wage growth, but that worker wage cuts were also paired with record stock buybacks—and yet, there has been no analogous argument that a CEO wage-price spiral is pushing prices up.
Another hole in the explanations for inflation that blame workers is that typically in the lead-up to inflationary periods we’d see a decrease in unemployment coupled with an increase in the corporate sector’s labor compensation manifesting as real wage growth and shrinking profit margins. As the Economic Policy Institute pointed out in April, the opposite has happened: Corporate profit margins have surged as corporations have leveraged excess power into price hikes.
A much more compelling explanation, then, needs to not only account for corporate market power being channeled into price hikes, but also acknowledge the elephant in the room: the persistent supply shortages we’ve all experienced since 2019.
Since the beginning of the COVID-19 pandemic and its lockdown measures, factory production has been slowed down or outright halted at various points, but so too has cargo shipping, warehouse operation, and trucking. All of this has disrupted production, distribution, and thus the supply of key goods such as food and parts like semiconductor chips (key parts of any and every electronic device) and the prices of nearly every good and service across the economy.
In December, economist Matt Stoller calculated that 60 percent of inflationary price increases were going toward corporate profit margins, but he also pointed to a range of dynamics across various industries allowing inflation to provide cover for price hikes. Meatpacker distributors may claim beef prices are skyrocketing because of inflation and not collusion, but a close look reveals cattle rancher suppliers haven’t hiked their prices. The global automotive industry has been even more explicit: Daimler's chief financial officer, Harald Wilhelm, told the Financial Times that his firm would "consciously undersupply demand level[s]" even after the semiconductor supply crisis constricting production ends.
Since then, a host of studies have affirmed this analysis. In late December, the St. Louis Federal Reserve Bank published a paper showing semiconductor-dependent industries increased prices 4 percent more than industries that did not rely on semiconductors―notable because the former represented 40 percent of manufacturing production.. A June paper by the Federal Reserve Bank of San Francisco found that two-thirds of the factors responsible for today’s inflationary period were not demand-related, with one-half connected to labor shortages and supply chain issues sparked by the pandemic and Russia’s invasion of Ukraine. A Federal Reserve Bank of Boston paper revealed that the United States has grown "at least 50 percent more concentrated" since 2005 and that the market power of firms in concentrated industries was likely amplifying inflation. A June study by the Roosevelt Institute laid out how historic price markups were driven in part by firms that enjoyed excess market power and were well-positioned to take advantage of the pandemic and policy responses, helping deliver the highest profit margins ever in 2021.
Bringing all this to a head is a recent survey by economist Hal Singer, which demonstrated that firms in monopolistic industries like pharmaceuticals or oil refining have been able to leverage market power into the record-high prices driving inflation. Singer also went on to show that in highly concentrated industries that aren’t monopolistic, price coordination and collusion takes many forms, such as earnings calls where executives signal to one another they're willing to coordinate a price hike.
“Inflation provides a pretext, a focal point, and a talking point during earnings calls, so that firms can feel their way to monopoly prices. They are effectively making invitations to their rivals to collude,” Singer told Motherboard in an interview.
Altogether, this picture suggests non-demand factors have played a much larger role in driving inflation. This has huge consequences not just for how we talk about the problem but also for how to solve it. Instead of blaming stimmies and labor power, we should be blaming corporations with excess market power, the pandemic, and the war in Ukraine. And instead of using the Federal Reserve to force a recession, policies that tackle profit margins, supply crises, and market power should be prioritized.
Profit margins can be tackled with an excess profit tax; supply chain crises and opportunistic price markups could be eased with strategic price controls; the FTC could discourage forms of price coordination by making examples of executives bold enough to use public channels to collude; and corporate concentration can be tackled with antitrust policy. The Roosevelt Institute study pointed out that there was "already a strong case for increasing antitrust scrutiny of the corporate sector before the pandemic. Increasing competition and reducing market power would bring down inflation to some degree, no matter its cause."
Legal scholar Sanjukta Paul writes in the Boston Review that we shouldn't stop at increasing scrutiny, and must go even further by expanding it as part of a bid to create a political economy that prioritizes "democratic, egalitarian structures of economic coordination" as opposed to ensuring the optimal functioning of one premised on “control and domination.” One way that might manifest could be by affirmatively using antitrust to achieve non-monetary outcomes such as racial inequality, or privacy rights, or freedom of speech—before they become issues, instead of addressing them after the fact.
Some of the major economists who insist on demand-centered solutions have already acknowledged as much: In mid-June, Summers went on NBC’s Meet the Press and suggested the government pass a bipartisan budget bill that tackled pharmaceutical market power and reduced prices in a bid to reduce inflation. "That's within our reach if we just use the government's large purchasing power through Medicare," Summers said. Yellen has also echoed this sentiment, telling Congress in early June that it can help curb inflation by helping Americans find affordable housing, bringing down prescription drug prices, and making investments in renewables to reduce energy costs and utility bills.
Still, that has not stopped Summers from dismissing attempts to inflationary explanations centered on market power and supply crises as “science denial,” or from others as smugly naming this theory “greedflation.” Even as the evidence mounts against narratives that blame workers or the stimulus for inflation, orthodox economists defend the valor of austerity and urge the Fed to effectively engineer a recession that will crush workers at the time of an upswing of labor organizing and crush the poorest Americans at a time when they are struggling to recover.
“It is a quasi-religious belief, with which economists are indoctrinated in graduate school. Their proof consists of pointing to two variables rising at the same time—wages and inflation. That's it,” Singer told Motherboard. “Raising interest rates is the most regressive way to deal with inflation. This belief, and the complete suspension of cost-benefit analysis here, either comes from an anti-worker sentiment or a callous indifference to the suffering of workers.”