The Case Of Too Many 'Flations

How did corporate profiteering as a driver of inflation go from crockery to common sense?

In a recent episode of their ultra-popular “The Odd Lots” podcast, Bloomberg’s Joe Weisenthal and Tracy Alloway introduce us to Ken Jarosch, a baker in Chicago’s suburbs who had an idea a few years ago: the next time there’s a major news event that affects some element of the baking industry, he could jack up his prices without making his customers angry, even if he wasn’t actually affected by what was happening in the headlines. “Whether it’s rye flour, or bird flu that impacts eggs, when it makes national news, just running a business, it’s an opportunity to increase the prices without getting a whole bunch of complaining from the customers,” Jarosch said.

Weisenthal and Alloway argue that thinking like Jarosch’s likely contributes to our current inflation. They call the phenomenon “excuseflation,” and point out that highfalutin industry analysts on Wall Street are starting to notice a similar trend across multiple sectors. “A lot of companies had these one-off or very, very rare excuses to raise prices and begin to find how much the consumer would take,” says economist Samuel Rines.

It is good that the excuseflation argument is catching on in economics circles. We want the members of these circles to understand the economy more accurately. If they are as logical, rational and Enlightened™ as they claim, they might even start to support new, better policies because of it.

We just wish they could have realized all of this two years ago when it was called greedflation, not excuseflation. Ourselves and other progressive analysts have been making precisely the same argument as Weisenthal and Alloway since last year. But when the left are the messengers, and the situation is a live policy debate, the response from the economic literati is laughter, scorn, and doubling down on failed ideas.

It Was Always All There

Over a year ago, our Dylan Gyauch-Lewis wrote in Common Dreams that corporate greed was playing a role in driving inflation. The data weren’t quite there yet to do much statistical analysis, so Dylan’s case relied on tying together the data on corporate profits that were there, and basic accounting. 

Profits are simply the difference between revenues and costs. The conventional view is that corporate price hikes simply came from firms pricing in cost increases from the inflationary environment. If that were true, profits should have stayed largely the same; cost of production rises, but cost to the consumer rises equivalently, so no extra cash has entered the transaction to get pocketed by the firms. 

But that isn’t what happened; corporate profits surged to record levels, indicating that corporate revenues were now far exceeding costs of production. Mathematically, for that to be the case, revenues had to be increasing faster than costs. 

There are only two ways revenues increase: higher prices or moving more volume. Executives have made it very clear that they’ve been doing the former, bragging about it on earnings calls where they are legally required to tell the truth.

Inflation is just prices rising. If lots of big corporations are raising prices, then that will contribute to moves in the overall price level. Simple as that.

To be abundantly clear, neither Dylan nor anyone else at RDP, nor anyone who was seriously making the case for profit-driven inflation, has ever argued that these price hikes are the only cause of inflation, or that any of this is due to companies suddenly getting greedier. That strawman is how it came to be mocked as “greedflation” by the likes of Larry Summers and Jason Furman. When pressed by Jon Stewart about the role of corporate price-gouging in a recent interview, Summers smugly laughed that he didn’t think corporations suddenly got more greedy.

But the argument actually centers on thinking of inflation as a smokescreen, the same way Jarosch did in the Chicago suburbs; when prices are stable, consumers are able to tell when they get ripped off because they notice differences between prices among competing firms. But when prices are rising rapidly all around them, it is nearly impossible to tell whether a given rise in price is just aligning with the newly-higher costs of production, or whether it is a steeper increase for purposes of executives pocketing some extra dough.

Put another way, no one is saying that companies suddenly got greedier. We’re saying they’ve always been greedy, but normally, market forces constrict how much of that greed they’re allowed to act on at once. But when a crisis discombobulates a market, companies can get away with being greedier and there’s nothing to stop them.

Who’s Afraid Of Corporate Profiteering?

Some of the best evidence for this theory came from researchers at the Groundwork Collaborative, who simply listened in on publicly-traded companies’ earnings calls and heard how CEOs discussed inflation. Groundwork and Accountable.US had a whole report on the phenomenon published and circulating in November 2021. Tellingly, the public supported action on greedflation across multiple opinion polls. But the people most dismissive of the public’s views on the economy were — of course — the economists.

Jason Furman tweeted appreciatively when one of the Washington Post’s house conservatives called greedflation “a conspiracy theory,” before partly walking the praise back. More typical was Northeastern economist William Dickens’ claim that greedflation was “a convenient political meme … Maybe there’s some of that going on. But in general this is not some nefarious plot where all of a sudden people in business are trying to take advantage of consumers.” The Wharton School’s Z. John Zhang had a similar take: “In the inflationary environment, everybody knows that prices are increasing. Obviously that’s a great opportunity for every firm to realign their prices as much as they can.”

In other words, these economists agree greedflation is a thing. They just believe it’s not important. “The real disagreement is over whether higher profits are natural and good,” the Times’ Lydia DePillis wrote. 

Contrast this with the interest in “excuseflation” now. Why the difference? 

We think there’s three factors at play. The first, and most defensible, is that there’s just clearer quantitative data today, so numerically-inclined economists feel more confident making declarative assertions about the economy. That’s well and good if you’re an academic just trying to put out rigorous papers. But last year, greedflation was part of a live-ammo policy debate, when (gasp!) political actors were trying to understand inflation, and weigh their options to counter it. In these situations, policymakers are always working off incomplete information, so it’s all the more important not to dismiss a probable analysis outright.

That leads to the second factor. Economists dismissive of greedflation often posited that it was a distraction from the “tough medicine” they claimed the economy needed, by which they meant raising interest rates to destroy full employment. 

Summers articulated this preference the most often and the most vigorously. But his alternative explanation of inflation — a wage-price spiral, rather than a combination of supply shocks and price-gouging — has far more gaps in both theory and evidence. If fiscal stimulus started a wage-price spiral, why did wage growth mostly lag behind inflation? Additionally, even as inflation has slowed, overall employment has remained very strong. If the wage-price spiral were true, this should be impossible. Plus, pointing to a U.S.-specific fiscal stimulus as the starting point for a global inflationary environment makes very little sense. And, again, corporate executives are literally telling investors — in calls they cannot legally lie on! — that they are hiking prices well beyond what is necessary to cover increased input prices.

In other words, America’s most prominent economist was making some pretty ridiculous claims, which had less concrete evidence than the theories he dismissed. But the idea that the only, correct response to an inflationary spike is to raise interest rates — and that any other policy consideration is a form of “science denial,” in Summers’ words — is a basic article of faith for many economists, especially those of Summers’ generation.

Some of those economists simply hate organized labor. But there is also, we think, an element of professional snobbery that’s more universal. Economists tend to conceive of themselves as the only people capable of thinking about economic matters in an organized and rigorous way; when someone disagrees with an economist, even if their facts are right and their argument is sound, they’re necessarily engaging in “science denial,” in the words of Summers. They have to be impatiently, paternalistically reminded that gravity is real, the earth orbits the sun, and the Fed destroys labor when there’s inflation. Economists have to reckon with this attitude issue. It’s helped to cause a lot of the worst policy of the last 40 years.

Finally, let’s just contrast the two portmanteaus: “greedflation” and “excuseflation.” One of these implies a moral indictment — companies are raising prices because they’re greedy. The other simply describes a business tactic — companies are raising prices because they’re using inflation as an excuse. One of them condemns business’ behavior as immoral, the other mostly reserves judgment.

Is it any surprise which term has gotten a warmer reception in the business world?

No CEO wants to face the reality that exploiting global chaos to pocket some extra cash is, you know, unethical. The fact that so many titans of industry engaged in this skeevy, underhanded practice shatters their illusion of themselves as benevolent overlords, and of markets themselves as essentially just. Most economists have plenty of direct financial, and indirect psychological, stakes in these justifications for the status quo as well.

At long last, it seems we can all agree that big business used inflation as an excuse to increase prices past their increased production costs, and pocket the difference. But big business and its justifiers can’t let themselves face that doing so was wrong.