Labor costs point to corporate profit as main inflation driver
thehill.com
thehill.com
Competition is inadequate and incentives don’t exist to price well.
Review the history of what happened.
Covid landed. Then the federal reserve printed tons of money (shows up clearly in the percentage of government spending as share of US GDP and M2 money supply).
Then there was a delay and then inflation began to increase.
Inflation is always and everywhere a result of printing.
And the inflation is global. In fact? The U.S. is faring better than most other countries.
And inflation is even worse if you were using a deflationary currency like Bitcoin.
The fact that someone can go through the last few years and see inflation clearly driven by war, inflation clearly driven by supply chain problems due to COVID, inflation clearly driven by Brexit when looking at the UK, and comment “inflation is always and everywhere a result of printing” is just ideological blinkerism at its finest.
They aren’t in isolation, printing money when the supply chain is constrained is going to sky rocket demand, and send inflation through the roof
The a later paragraph says "Since the labor share [of inflation] is declining" which entirely different than "drop in labor costs".
So what's actually happening is labor costs are going up. They just aren't going up as fast as profits. Why can't they just write that?
And the examples given "oil and gas" is an odd one, since profits vary wildly. When oil costs are down, profits are down. When oil costs go up, profits go way up. It's a capital intensive industry, and that's how it's paid for. Oil is never sold at some small profit margin.
Odd way to start the article when later on
> Earlier this week, Donavan said the slowing labor cost growth underscored “how little of the current inflation is labor related.”
Not arguing with the overall premise, but labor costs are still going up.
How can profits drive inflation. Profits have no form. They're just an accounting thing, a calculated value: the difference between revenue and costs.
Comments like this always perplex me. Did you read the article? If yes, what other possible interpretation is there? If no, why comment a question like this that would most likely be clarified in the article?
If every business decides to arbitrarily double their profit margin, then prices will rise, but none of that price rise goes to salaries, nor cost of materials, or anything else but a corporate bank account.
This effectively drains money from consumers, without returning anything to them via salaries.
So, assuming businesses are more profitable, they ultimately have 2 things they could do with that extra profit:
1. Hoard it and do nothing with it
2. Invest it
In the case of 1, doing this is tantamount to taking money out of circulation (i.e. lowering supply). When the supply is lowered then everyone else’s purchasing power increases which is a benefit to them.
In the case of 2, investing it, either by starting new businesses or loaning it, means that they are effectively redistributing that money to others in the form of wages. Which is beneficial to workers who also happen to be consumers.
When suppliers notice their customers raising prices, they raise prices to capture some of that increase. Likewise, workers will try to increase wages.
The result is a profit-price spiral that gets misdiagnosed as wage-price spiral.
What keeps this from happening, I think, is the presence of competition which would stop both cohorts, workers and businesses, from increasing their prices indefinitely
Except that wages tend to change less fluidly than prices so there’s usually a lag resulting in less purchasing power for consumers.
In the long-term, yes. In the moment, the experience of rapidly rising prices really sucks. It doesn't occur smoothly or evenly.
> What keeps this from happening, I think, is the presence of competition which would stop both cohorts, workers and businesses, from increasing their prices indefinitely
You are absolutely right. And inadequate competition in many sectors is definitely a contributor to current inflation.
And it's not like any of the above is some shadowy conspiracy. It's the mainstream practice that is literally taught in business schools worldwide and championed by politicians, most famously by Regan and Thatcher. You're paraphrasing the "trickle down" theory yourself.
Real wages for workers in what context? The US? The industrialized nations? Perhaps the better explanation for this (assuming it’s true) is that the median worker in industrialized nations has had productivity that has grown at a slower rate than the median worker in developing markets.
Would be interesting to see what the worldwide statistics are for CEO to worker pay.
> They do that specifically by depressing the wages of their employees to make room for dividends.
Can’t “workers” also be shareholders? If not in their own companies, then at least in any publicly traded company. The world isn’t cleanly divided into “worker” and “owner”. People can be both. And again, those dividends have to go somewhere. My original post applies here, where it either gets hoarded or invested, and no matter which one happens, it is beneficial to the consumer at large.
I’d consider “trickle down” to be quite the misnomer. I think “trickle up” is more apt because in the end, all it means is that the people who make the money in the first place, get to decide what they do with it as opposed to being taxed and sending their money off to a centralized (often divided and inefficient) govt to decided what to do with it.
Yea but most people aren’t. Lower-income people barely have retirement accounts with index funds in it. The people that are “owners” in a meaningful sense are not workers.
Plus, the market, and peoples’ places in it are not static. Many lower income people are lower income due to the fact that they are young and don’t have the knowledge/experience of their older peers. They don’t stay that way. They are able to earn more and save/invest more as they level up their skills
1. It doesn’t have to be collusion. They could even raise margins ahead of expected downturns to prep for savings. There could even be a global pandemic that reduces supply, leading businesses to raise prices in relation to demand and shortages, but those same companies not reducing prices when supply increased.
2. The article actually states that many businesses have recorded record profits recently while costs stayed the same. It’s literally happening in front of us, don’t deny it is a possibility while witnessing it as a reality.
> In the case of 2, investing it, either by starting new businesses or loaning it, means that they are effectively redistributing that money to others in the form of wages.
Why does that have to go to wages? They could distribute it to executives and shareholders as dividends or stock buybacks, or use it to invest into many schemes like private equity that don’t help average people eg. buying twitter and layoff half the employees… which is the opposite of increasing distribution.
It does have to be collusion, otherwise competition to keep prices low
> don’t deny it is a possibility while witnessing it as a reality
I’m not denying that profit margins (of some companies) are higher. I’m claiming that it is not to the detriment of the consumer at large. Also for every company that is seeing increased profits, there’s another one that is seeing a decrease
> Why does it have to go to wages?
It has to go somewhere, right? Even if it goes to “shareholders” or “executives”, or “private equity”, either they are hoarding it (increasing everyone elses purchasing power) or they are investing it (spending it on someone elses wages).
The act of buying Twitter just transfers money from one person to a group of other people (shareholders) who are then free to do what they want with their newfound liquidity. Again, if they hoard that money, then it increases purchasing power for everyone else, and if they invest/save it, then it goes to paying peoples wages
Competition works half as well as people think it does. It’s long shown that companies will see collective price rises for products even in the absence of direct collusion. Most products don’t trend to being sold at-cost, which is what you’d expect in this case. Why do any products have any product margin? Isn’t every product margin an opportunity for competition?
> I’m claiming that it is not to the detriment of the consumer at large.
I don’t know. I personally haven’t noticed inflation much but we’re talking about it an awful lot for nobody to be affected. The people affected the most are the people who can least afford it.
> Even if it goes to “shareholders” or “executives”, or “private equity”, either they are hoarding it (increasing everyone elses purchasing power) or they are investing it (spending it on someone elses wages).
Trickle down isn’t real. Lots of money gets spent in ways that doesn’t effectively help wages. Money does get hoarded, but it’s not enough to be meaningfully helpful at purchasing power.
Yes. Which is why marginal revenue does trend towards marginal cost, contrary to what you’re claiming. High margins are a signal to the market that more supply is needed
> Trickle down isn’t real.
Trickle down is a misnomer. It’s actually more like trickle up as all it means is that people who make the money get to decide how to spend it vs. having a centralized, top-down organization (the government) decide how to spend it
> Money does get hoarded, but it’s not enough to be meaningfully helpful at purchasing power.
If hoarded money is not enough to meaningfully help purchasing power then the other side of that coin is that the increased profits of these companies is necessarily not enough to meaningfully effect purchasing power in a negative way. In both cases, it’s the same amount of money, just on different sides of the ledger
Increasing profit margin requires either increasing price per unit or decreasing cost per unit.
Decreasing cost per unit doesn't affect consumer prices.
Increasing price per unit would send customers to competitors.
Only a monopolist can just 'decide' to double their profit margins.
Literally, the article in question stated that price per unit has been rising while costs stayed the same.
> Increasing price per unit would send customers to competitors.
Not if competitors did it too.
> Only a monopolist can just 'decide' to double their profit margins.
No. Or at least we’d have to broaden the definition of monopoly. Eg my local grocery store can raise prices a lot (maybe 25% even) before the cost compels me to drive to a farther-away store, but even then I’d assume the other stores were higher and not bother. Maybe it’s a monopoly in the sense “the only grocery store vineyardmike can walk to” but it’s hardly a monopoly.
Relatedly, California has announced they’re suing big oil companies for all raising prices without seeing a cost increase, and there are national politicians that want to fix the price of oil to cap its profit margins short term in response to the price increases in 2022 (which are unrelated to the cost of producing oil).
Now let’s walk through how price increases actually occur. During the pandemic, people started buying out all the toilet paper at their local grocery store. When this happens, what does the grocer do? They put in an even larger order in for more toilet paper than they usually do as they see they are selling out quickly. After all they want to make sure they are stocked up for their customers. Well, all the other grocers around the country and the world are doing the same thing. Unfortunately, the TP co. only has so much supply and production capacity, so they sell to the highest bidder.
Now the grocery stores that were able to procure the TP, had to pay a higher price than usual. Of course they want to make a profit so they will have to increase the prices they charge to customers.
And if people are spending more money on TP, then that means that have less money to spend on something else. So just because one industry sees increased profits, doesn’t mean they all do. In fact, it means other industries see lower profits.
Now apply this dynamic to the oil market/industry.
And California seems to be uniquely an outlier in terms of gas prices compared to the rest of the country. Is it either a.) oil companies are extorting Californians for some reason, or b.) onerous regulations California has put on fossil fuels and oil companies that has cause the price of oil to be so high compared to other states? Again, Occam’s razor