“Greedflation” is a nonsense idea
economist.com
economist.com
> Last year Andrew Bailey, governor of the Bank of England, asked workers to “think and reflect” before asking for pay rises.
I literally laughed out loud. Everybody should have been asking for pay raises the last two years for at least enough to cover the inflation rate.
Allows us to ask for actual pay raises on top of that.
https://www.ecb.europa.eu/pub/pdf/other/mb200805_focus05.en....
For nearly any Good / Service the price is not 100% labor.
This means that if a price index (PI) goes up 2% and that causes a 2% increase in labor prices those labor prices will have a <2% increase in that PI. Lets be generous and say it has a 1% increase in that PI. That 1% increase will cause a 0.5% increase in the next PI iteration and next time it's a .25% and will effectively become 0% as the number of iterations increases.
The fact that prices aren't 100% labor is also why when looking at minimum wage increases the cost of a good doesn't increase by the same amount that minimum wage does. i.e. increasing minimum wage 20% (historically) doesn't increase a PI by 20%.
So it's illegal to give someone a pay cut?
I guess they lay them off instead, but probably that is a legal issue too?
Luckily going out of business is perfectly ok (I assume), as well as never starting a business in the first place.
And your employer reserves the "right" to be ungrateful/not appreciate you/take a stance in negotiation to try to protect their bottom line and say "no".
If inflation happens, then you ask your employer to give you a raise, and they say yes, and they then pass the difference along (increased payroll cost) to their customers through increased prices of goods and services, that creates more inflation.
More amusingly, I never saw a manager pass on an increase 'to not fuel inflation' further.
From a morale perspective, working year after year at the same place for the same pay kind of sucks. How often do you hear people being responsible for less/taking on less responsibility over time?
Yeah, pay raises aren't good for shareholder value.
Besides, we all know the CEO deserves all the money. They do all the work, why shouldn't they reap all the profits? (/s for those that need it)
https://www.bankofengland.co.uk/freedom-of-information/2022/...
Already been shown that inflation is being abused to raise prices in many places.
Now it might not have started this mess, but it's for sure keeping it going.
It's the ECB itself, normally Unilever's friend, who argued such: https://www.theguardian.com/business/2023/jun/27/corporate-p...
Now fair enough, the ECB should point the finger at itself for it's monetary policy.
Inflation is the rising of prices. If prices are rising around you, it makes sense to raise your own prices. Just like it makes sense for workers to look for raises (i.e. raise their prices).
According to the ECB itself it was the corporates who were the main driver & cause: theguardian.com/business/2023/jun/27/corporate-profits-driving-up-prices-ecb-president-christine-lagarde
>> Though there may be examples of opportunistic or anti-competitive behaviour, the effects are unlikely to have been material.
Then completely fails to substantiate.
Wasn’t worth the click.
The way the system works is we assume a profit-maximization motive by actors, and nothing about that changed before or during the inflation, so it's obvious that something else is going on (i.e. fiscal stimulus during supply chain disruptions).
Look at the growth in margins from 2019-today and tell me that margin growth isn’t egregious. Forget rate changes…look at the base numbers - 15% average profit is usury by most definitions (the US financial system even got a legal carve out for credit cards to be egregiously usurious)
This author wants us to ignore the last 5 years of greed fueled inflation - which used debt to drive margins up - coming due now.
An example from site itself: https://fortune.com/2022/03/31/us-companies-record-profits-2...
It's absurd.
[0]: https://www.macrotrends.net/stocks/charts/XOM/exxon/net-inco...
The term "price gouging" exists because we collectively agree that, at a certain point, yes, excessive profits are indicative of abuse.
This isn't even controversial. The most extreme libertarian economist would agree that, for example, market failures like monopolies can create circumstances where excess profits become egregious.
And we know from history that widespread crises can lead to market conditions that result in excess profits.
> Should companies not be allowed to lose money, either, then?
And this is a silly strawman that isn't worth responding to.
Having record profits and having layoffs, paying stagnant wages, giving exorbitant bonuses to executives for "op-ex reduction," while price fixing is evil.
Usury strictly refers to interest and has no bearing on the profit margin of a risky enterprise that deals in goods and services.
If my landscaper spends $5 in gasoline and an hour and a half to mow my lawn, where he values his own time at $20 an hour, his cost is $35. If he charges me $50 for this service, are you going to call that usurious?
Absolutely
We can also argue about why demand is outstripping supply. Are monopolies keeping out competitors and artificially limiting supply? In some industries probably.
But we did dump a ton of money via fiscal stimulus into a system that was already stretched thin due to supply chain disruptions. That seems like the most likely explanation for the broad inflation we’re experiencing, though consolidation has likely exacerbated the problem.
People are being laid off and prices are still going up - who is setting the prices? If you're jacking prices to cover sliding sales, yes, you are the problem.
No such thing as profiteering.
It’s a lot easier to do a lot of things when you Other the people you deal with, including exploitation and especially warcrimes.
They don’t talk about citizens or people, they talk about “the market”, which is barely anthropomorphic.
The world, the US, and Capitalism would all survive just fine without McDonald’s, Walmart, or Oracle. In fact it would probably be better off without any of them. Global homogeneity is not awesome, it’s dystopian. Companies having less power than the 90th percentile of countries would be good.
When you have a regional company you can still afford to think of your customers more or less as humans instead of statistics.
Particularly when C-level execs continue to award themselves double-digit pay-rises, then publicly cry that wages should be compressed.
These two things aren't even separate. Part of monetary policy is taxation and subsidies. The argument for "greedflation" is exactly one of poor monetary policy, in that we have allowed corporations (not necessarily any one person, but the corporation as a whole) to dictate too much of our monetary policy, and they're doing a poor job.
Like I agree there's a lot of regulatory capture in the US but I just don't see any reason to think the fed is responding to big business rather than their own preferences.
There are in fact people who are saying its only corporate inflation.
The real reason i'm skeptical of the greed argument is that its just a vibes based guess on whats happening and not based on any data or insight into the situation.
A bit of greed inflation and a bit of how a market economy works during a shortage. Now as shipping costs have dropped, companies have not dropped their prices accordingly because they have to cover their new massive headcounts and severance.
> But if your profits increase by 5%, and inflation increases by 9%
One should actually look not at inflation but at the increase in costs of that company. Not all companies are equally exposed to inflation, they will suffer different price increases.
If your profit margin is increasing, then inflation means less.
A part, perhaps even a large part, of that "some reason" is likely the increase in money supply as well as fiscal stimulus. But consumers still share a part of the blame, if they willingly take on that transaction for non-essential goods and services. Few businesses have the pricing power to jack up their prices arbitrarily high, though there is a clear trend towards consolidation across many industries in the recent decades, and one could definitely argue that the US hasn't busted enough mergers and trusts.
The main reasons why corporations get away with "unfair" margins are:
1) Broken anti-trust regulations.
2) Irresponsible fiscal policy effectively monetized by money printing.
3) Ability of corporations and most wealthiest people to ~bribe~ lobby politicians so 2 would benefit mostly them.
To summarize: the root issue is with the government and the political environment which has created it and allowed its short-sighted and irresponsible actions.
No quibble here with your summary.
So, there is prove that it is anti-competitive behavior. There is prove that all big corporations should be split in pieces. But The Economist decides to ignore that.
The Economist is not that bad. At least, it presents the data. Big monopolies are the source of inflation, the lack of competition is the source of inflation. But it always falls short to get to any reasonable conclusion, and decides to ignore its own data. That's a shame.
"material" means "having real importance or great consequences".
So the Economist is directly stating the opposite of your conclusion: the opportunistic and anti-competitive behavior, if any, is unlikely to have been a significant source of inflation.
When I read them I try not to get anything that wades into their very obvious lassiez-faire bias.
"Greed, for lack of a better word, is good" - a fantastic quote from a fun movie, but it can in fact be true too. If we use greed as a means to drive competitors in a market, competing against each other, resulting in them creatively undercutting one another, driving down prices so that they can sell the most, then the consumer wins out.
But that isn't happening anymore.
The largest corporations in each market have gained dominance through mergers, acquisitions, etc. They can reduce their own costs because of their massive scale, more than anyone newcomer can. The result is less and less competition for even basic things like groceries. Here in Canada, there are dozens of different grocery store brands- and they're all owned by 3 companies, giving the illusion of choice.
If there were lots of competing retailers for common goods, they'd also be competing for labour, offering better salaries and benefits to their employees, which would help alleviate the cost of living crisis we're in now. But that isn't happening either, again because there's fewer and fewer companies to work for.
All the while, the leaders of the world's large corporations are taking hundreds of millions of dollars in salaries, and giving their shareholders billions in profits.
"You don't need a formal conspiracy when interests converge. These people went to the same universities and fraternities. They're on the same boards of directors. They go to the same country clubs. They have like interests. They don't need to call a meeting. They know what's good for them." - George Carlin[0]
When you have a situation like this, it is, in my view, the role of government to step in and break up these companies.
Personally I found it much more convincing than this article.
The podcast features a researcher, who has received high pushback from the economics corner although recently more articles support her view somewhat, who says that her research shows corporate profits are the main driver of the 2022+ inflation, and also played a - lesser but under-highlighted - role in the past inflationary periods in the 20th century.
One main reason she highlights is companies expect higher costs and raise prices, but those costs don't materialize, leading to higher profits. This also has a compounding effect throughout the supply chain because each intermediary adds an effect, resulting in a high increase at the consumer end.
That's already backwards, though. Prices are determined by what the market will bear, according to the demand curve and what competitors are charging (which puts a ceiling on it).
Then companies attempt to keep costs as low as possible, and their success or lack thereof determines their profits.
(This assumes a lack of collusion over pricing -- but that's the responsibility of the government to prevent, catch, and deter through antitrust.)
This is an AI generated summary. There may be inaccuracies.
00:00:00 - 00:25:00 In this video, economists discuss the factors driving inflation and how their thinking has evolved. Traditionally, inflation has been attributed to factors such as excessive demand, insufficient supply, or too much money chasing too few goods. However, economists are now exploring alternative explanations, including the wage-price spiral and the profit-price spiral. While rising wages leading to higher prices and vice versa have been a historical concern, recent data suggests that wages have not been keeping up with inflation, prompting economists to examine the role of corporate profits. The video highlights that corporate greed is not the primary driver of inflation, as firms have always pursued profits. However, severe bottlenecks in the economy, such as those experienced after World War II and during the pandemic, can create opportunities for corporations to increase prices and profits. The economists discuss the concept of price controls and the role of corporate profit growth in driving inflation. They find evidence that markup growth, closely related to corporate profits, accounted for a significant portion of inflation in 2021. This challenges the traditional focus on wage growth as an indicator of inflation and suggests that rising profits should also be considered. The idea that the expectations of higher costs in the future could drive inflation, even if costs themselves don't increase, is also discussed. The economists express uncertainty and acknowledge they may not have all the answers, but they feel validated by the evidence gathered and are interested in seeing how corporations will behave in the coming year.
Really stop and think, what would these families and corporations prefer? A bunch of pissed of people in the streets mad at their governments and policies? Or a bunch of people reading a news article that says your concerns are 'nonsense'?
And I made no mention of political orientation, please stop with the tired idea that this is a conservative/liberal issue. I have more in common with a redneck in Alabama than I do with Jeff Bezos. Stop falling for their traps.
In the cases of these newspapers, it's clear they're used to hold political power and push narratives. The willingness for that billionaire to take on CNN for $1 despite it losing money shows that I think.
And I would say, they could easily be owned by readers in a consumer-coop model. These work for many other industries, I don't see why it wouldn't work for newspapers.
I think most importantly, a lot of newspapers now a days are money losing businesses. But they provide political influence (local in most cases) so they're still useful for rich people to push certain agendas whereas genuine competitors just don't have the resources to maintain them.
A coop newspaper would be cool, although if it is viable why isn't it already happening? Or is it?
Anytime rich people say something is bad, one can generally assume that by bad they mean only for them and their entrenched wealth and power and so therefore is good for the rest of us.
It's a bit like saying it isn't Intuit's fault for how crazy it is to file taxes in the U.S., as it's all coming from lawmaker policy. The problem is, Intuit has been working hard to influence said laws in their favor for decades; they are very much responsible for why taxes there are still a quagmire of forms and rules.
This is a wonderful fluff piece that appears to work hard to redirect blame in a different direction.
> Regardless, the fact that companies raise their prices in response to shortages is not only defensible but desirable.
It's not necessarily the demand driven increase that pisses people off. It's when that price becomes the new normal afterwards that becomes the problem. Three guesses as to why it stays there.
This would incentivize companies to be slightly more "greedy" if you define "greedy" by "seeking current profits".
In practice, a bunch of data scientists have looked into "greedflation", and I'm not aware of anyone finding anything significant.
NPR did an episode on it: https://www.npr.org/2023/06/13/1182019025/is-greedflation-re...
If you start with the world view that companies are evil and the source of all problems, it's easy to see "greedflation" everywhere.
Seek and you shall find.
What changed (besides a good excuse) is big data being and analytics being much easier to obtain and manage. If people can't get the same product category cheaper anywhere else and they keep buying it then of course the will raise more aggressively.
I feel the market will eventually correct if "greedflation" is real. Someone must come along and say that they are happy with X% less which is theoretically possible, to capture a market more aggressively and use this narrative as a marketing tool.
I know it's easier said than done when there are few players in an industry and the barrier to entry is rather high.
I guess that when prices are rising sharply anyway, it's easier to raise them and it won't be noticed so much. And their competitors probably make the same calculation.
At least, that's what I understand by it.
Money should have a market price, not be manipulated by a few people in power.
Spiral (or run-away inflation) would suggest an accelerating curve, while the price mechanism is actually closer to logarithmic, i.e. it starts fast, slows down and converges around the new equilibrium. It's basically a decentralized optimization algorithm.
I guess this is what happens when you are a centrist publication in 2023.
https://www.forbes.com/sites/errolschweizer/2022/09/12/how-p...
https://www.npr.org/2023/05/19/1177180972/economists-are-rec...
But many of those costs have dropped, some to pre-pandemic levels or even lower, but the consumer prices have not dropped to match, and profits are growing.
https://www.cnbc.com/2022/05/18/wingstop-is-seeing-meaningfu...
Wingstop raised prices of wings during lockdown (even switching to being "Thighstop" for a while). Now prices are back down to earth, but they haven't modified their prices to match.
Is it really that hard? Faith in our system's ability to produce desirable results is waning (greed may be among the reasons, poor leadership during the worst parts of the pandemic may also be). That makes money feel more fictional than usual, which means it's worth less.
Turns out people don't put as much energy into playing games that they think are meaningless.
The imf has found that higher profits “account for almost half the increase” in the euro zone’s inflation…
It sounds like it’s a legitimate idea. Do they disprove the IMF finding? With the rise of oligopolies it seems to me that pricing power isn’t subject to downward pressures one would normally expect in a market with healthy competition.
In an efficient system, maybe we can blame monetary policy. But we don't have an efficient system; most of us live under mono/ologipolistic supermarket "regimes". They don't compete, they collude. And they're taking advantage of price volatility to gain profits.
"Our costs have gone up 7%, so we should raise prices"
"How much?"
"How about 10%?"
"Sounds good"That's the problem with attacking inflation -- it's not about changing current conditions but about changing expectations.
Ha, if only.
The company I work for has increased their prices about a 10 times in the last 2 years.
But other companies sign one-year contracts with customers, for example. There's no need to be snarky about it.
"Greed" implies malice aforethought, but these things just make paperclips. They'll charge as much as they can get away with, and hopefully that leads to good outcomes through "market forces" or whatever.
Frameworks which cannot predict the future well are not very useful.
For instance, did we envision Jeff Bezos suddenly found Jesus on this day? https://aws.amazon.com/blogs/aws/amazon-s3-glacier-price-red...
The thing that gets me is that this is such an obviously bad model (that market prices vary based on participant greed variation) and I would expect people in tech to want a better explanatory mechanism and yet it is madly popular here. Really makes me question a lot of the other predictions and modeling in this community.
Greedy people lose their influence and ability to call the shots as a result of popular outrage, which in turn is a result of comments on HN and other forums complaining about greed :)
You posit some greedy people and posit that whether price goes up or down is no longer due to their greed but due to their market power.
It is better because it is falsifiable. I think if you took this pattern of modeling and used a modern LLM as a Socratic teacher you would rederive a model of pricing that is more closely aligned with reality.
Ultimately, this is all very well-trod ground coming from the tradition of Popper and friends.
It's as unsurprising as RT's opinion on who blew up the Kakhova Dam was.
Gouging is good. I'm sure they'll be lowered again when supply stabilizes. Any time now.
you can't blame it on labor or desirable price based rationing when it all ends up in the profit column.
The thesis that "shortages create higher profits" is also not proven at all. Yes, in a shortage prices get higher, but at the same time there's less sales. Not to mention that downstream business also suffer from higher prices.
In the end this article comes from a place of treating capitalism as a machine that should be left untouched. Governments, consumers and workers must behave and fall in line, but God forbid questioning who's taking home the money that's mobilized to compensate for certain issues (COVID, war) and what could be done to stop that. Apparently it's never the fault of companies, as if they were some natural phenomenon whose behavior can't be changed.
If profit seeking is increasing the general price level of goods (via a “coincidentally” coordinated raising of prices), how is it not causing inflation?
This was discovered by pandemic price increases caused by increased costs. The new plateaus have just never dropped, even as their costs have dropped.
So to be clear, you agree with the article that companies increased prices in response to inflation, and therefore couldn't have been the preliminary cause of it.
I say excessive because it’s not sustainable. The median wages can’t support these profit margins indefinitely.
> where corporate profits are falling
Bull-fucking-shit