Businesses have increased their profits at the same time that they have raised their prices, so it’s natural to ask whether profiteering is responsible for inflation.
The numbers support the idea that companies have widened their profit margins through higher prices. According to data from the Bureau of Economic Analysis, corporate profits plunged in the 2020 recession, but they have since rebounded, and they were 22 percent higher in this year’s July-to-September quarter than in the same period two years earlier, before the Covid-19 pandemic.
What’s more, profit margins are the highest they’ve been since at least 1947, which is as far back as the Bureau of Economic Analysis has quarterly data. The bureau doesn’t report profit margins, but I pieced together margins for domestic nonfinancial corporations by dividing their profits after taxes, inventory adjustments and depreciation by their gross value added. (Gross value added is a sector’s contribution to gross domestic product.)
The profit figures, because they’re for corporations, are dominated by big companies. Lots of midsize businesses have also found that they can raise prices and make them stick, said Charles Scharf, the chief executive of Wells Fargo, in a conference call with stock analysts on Dec. 7. “Many, many have pricing power that they say that they’ve never seen before,” he said, according to a transcript from FactSet. “And these are people whose parents started these companies, and they’re running them, and they just say, ‘We’ve never been able to raise prices like this and get it,’ and they’re getting it.”
Are high profits in the time of Covid-19 bad? How much profit is too much? Under what circumstances is it legitimate for a company to raise prices? When is doing so extortionate? If the profit is a problem, can the government restrain prices or profits to benefit consumers without inadvertently breaking the capitalist machinery?
These aren’t easy questions, and I don’t have firm answers. But I want to touch on some of the arguments that are being made by both sides.
One issue is whether a lack of competition — monopoly or oligopoly — is allowing companies to soak consumers. If it is, then antitrust would be a natural remedy. On Dec. 10, the White House criticized the big four meatpackers that together control 55 percent to 85 percent of the market for pork, beef and poultry. In a blog post, Brian Deese, director of the National Economic Council, and two other staff members wrote that the meatpackers’ price hikes were contributing to inflation while “their gross profits have collectively increased by more than 120 percent since before the pandemic, and their net income has surged by 500 percent.”
On Nov. 29, the Federal Trade Commission, under its new chairwoman, Lina Khan, announced an investigation into the causes of supply-chain snafus that have raised prices and resulted in shortages. (The investigation does “not have a specific law enforcement purpose,” it said.) It sent orders for information to nine companies: Walmart, Amazon, Kroger, C & S Wholesale Grocers, Associated Wholesale Grocers, McLane, Procter & Gamble, Tyson Foods and Kraft Heinz.
Perhaps surprisingly, some business groups are cheering the F.T.C. on. The Main Street Competition Coalition, which was formed in October and represents independent grocers, pharmacies, convenience stores and farmers, wrote to the F.T.C. that its members “are increasingly subject to discriminatory terms and conditions, including less favorable pricing and price terms, less favorable supply, less favorable retail packaging, and sometimes an inability to access products in short supply that are available to their competitors.”
It’s telling that the one tier of business that’s not reporting higher profits is small business. A November survey of small businesses by the National Federation of Independent Business found that more businesses were reporting lower than higher profits by a margin of 17 percentage points. The share saying they were raising prices was the highest since 1979, but that was because costs were up.
But the US Chamber of Commerce in a letter released Dec. 15 said that the actions by Khan and the F.T.C. “demand increased congressional attention and oversight.” The chamber says the agency is “overstepping its regulatory authority, undermining our system of checks and balances, ignoring due process and bypassing longstanding regulatory norms to expansively regulate industries and manage our economy with a government knows best approach.”
Competition, or the lack of it, isn’t the only criterion for profiteering. Another is whether sellers are taking advantage of extreme stress — in this case, the pandemic — for commercial gain. Most US states have laws prohibiting price gouging by retailers in times of crisis, such as jacking up the price of plywood that people need to board up their houses and storefronts before a hurricane.
The problem with attempts to restrain profiteering is deciding where to draw the line. For example, while monopoly and oligopoly are bad for consumers, it would be unreasonable for regulators to reach for perfect competition with zero pricing power. Every business tries to differentiate itself — even with something as simple as a new sign out front — to give it a bit of an edge over the competition so it can charge a bit more. Reaching for more profit by trying to escape commodification is the engine of capitalism and innovation.
It’s also true that raising prices in response to a surge in demand can benefit society in certain circumstances. It prevents shortages by suppressing demand and giving producers an incentive to increase production. It makes sure that the limited supply gets into the hands of those who value it most highly. That’s a Pollyanna-ish take, of course: The Economics Observatory in Britain explains why sometimes gouging really is gouging, as when there’s no realistic way to increase supply.
I’ll wrap this up by turning to the wisdom of some of the world’s best economists. In 2012, the Initiative on Global Markets at the University of Chicago’s Booth School of Business asked a panel of top academic economists what they thought of a bill then being considered by the Connecticut Legislature that said that during a “severe weather event emergency, no person within the chain of distribution of consumer goods and services shall sell or offer to sell consumer goods or services for a price that is unconscionably excessive.”
A few favored the bill. One was Angus Deaton of Princeton, who said, “Efficiency is less important than distribution under such transitory conditions.” By “efficiency,” he meant using price signals to match supply and demand. By “distribution,” he meant getting the goods to consumers at a price they could afford.
More of the economists, though, thought the Connecticut bill was a bad idea or were uncertain, and not all of them were conservatives. Their comments were brief but interesting. A sample:
David Autor of Massachusetts Institute of Technology: “It’s generally efficient to use the price mechanism to allocate scarce goods, e.g., umbrellas on a rainy day. Banning this is unwise.”
Pinelopi Goldberg of Yale (who later served as the chief economist of the World Bank): “Torn about this. The term ‘unconscionably’ seems too loose — is it a 20 percent or 500 percent markup? But the goods need to be allocated somehow.”
William Nordhaus of Yale: “At best, symbolic. At worst, would return to price controls of the 1970s.”
Kenneth Judd of Stanford: “The vagueness of the law means more businesses will shut down, which is the same as setting price to infinity.”
Anil Kashyap, University of Chicago: “Seems like pandering.”
Profit-seeking is good. Profiteering is bad. But who gets to decide which is which?
The New York Times
