Over the past few years, the world has been grappling with the issue of rising inflation. Many economists and commentators have been trying to pinpoint the exact cause of this phenomenon and its impact on the wages of average working individuals. One theory that has gained attention is the idea that corporate profits have surged since the beginning of the Covid-19 pandemic, leading to increased prices and a decline in real wages. However, this theory has often been dismissed as a baseless conspiracy by mainstream economists until recently.
In December 2021, Isabella Weber, an Assistant Professor of Economics at the University of Massachusetts Amherst, wrote a column for The Guardian advocating for “strategic price controls” similar to those implemented during World War II. She attributed the spiraling inflation to “large corporations with market power” taking advantage of supply problems to increase prices and generate windfall profits. This idea was met with criticism from fiscal conservatives and even Nobel Laureate Paul Krugman, who called Weber’s idea “truly stupid.” Fact-checkers from various sources, including the Associated Press and conservative think tanks, also refuted this notion.
Despite the criticism, the idea that corporate profits contribute to rising prices, known as “greedflation” or “seller’s inflation,” has gained traction within the Democratic Party and even the White House. The White House has expressed concerns about monopolies as a risk to supply chains, while former Labor Secretary Robert Reich has consistently argued that “it’s greedflation, stupid.”
Several developments have added weight to the argument that corporate profits are fueling inflation. While wage growth has been a significant factor, real wages have actually decreased. Former Fed vice-chair Lael Brainard pointed to a “price-price spiral,” where companies raise prices more than their input costs, as a driver of inflation. Paul Donovan, the chief economist at UBS Global Wealth Management, also discussed “profit margin-led inflation,” where companies convinced consumers of the need to raise prices despite not requiring to do so.
In a recent report, the International Monetary Fund (IMF) stated that rising corporate profits were the main contributor to Europe’s inflation over the past two years, with companies increasing prices beyond the rising costs of imported energy. This revelation seems to validate the previously dismissed theory that corporations play a role in driving inflation, at least in the EU.
The question then arises: do the same economic conditions of monopolization and stagnating real wages apply to the United States as well? The author believes so, given the impact of the pandemic and the conflict in Ukraine, which could rationalize price hikes for corporations. However, the US, with its strategic advantages such as energy independence, advanced technology, and a skilled labor force, is in a better position compared to the EU. The future prospects of the US economy also appear more favorable in comparison.
Now that the problem of corporate-driven inflation has been acknowledged, it is time to consider potential solutions. Weber’s suggestion of price controls and Reich’s proposal of updates to labor laws are options that draw inspiration from historical examples like World War II and the New Deal era. However, it may also be necessary to look back at the anti-monopoly legislation of the old Gilded Age in order to strip large corporations of their pricing power. Without addressing this issue, inflation will continue to pose a systemic risk to the economy.
It is important to note that the views and opinions expressed in this article are solely those of the author and do not necessarily represent the views of RT.