An inflation conspiracy theory is infecting the Democratic Party
Category: Op/EdVia: hallux • one week ago • 17 comments
By: Catherine Rampell - WaPo
A conspiracy theory has been infecting the Democratic Party, its progressive base, even the White House. It’s not quite as self-sabotaging as the horse-dewormer-cures-covid false theory that swept up many Republicans last year, but it’s pretty damaging nonetheless.
Call it “Greedflation.”
The theory goes something like this: The reason prices are up so much is that companies have gotten “greedy” and are conspiring to “pad their profits,” “profiteer” and “price-gouge.” No one has managed to define “profiteering” and “price-gouging” more specifically than “raising prices more than I’d like.”
For example, a bill introduced on Thursday by Democratic Sens. Elizabeth Warren (Mass.) and Tammy Baldwin (Wis.) and Rep. Jan Schakowsky (D-Ill.) bans “price-gouging,” which it defines as “unconscionably excessive” pricing.
What counts as an “unconscionably excessive” price, you ask? TBD, but it’s definitely going to be illegal.
The problem with this narrative is that it’s just a pejorative tautology. Yes, prices are going up because companies are raising prices. Okay. This is the economic equivalent of saying “It’s raining because water is falling from the sky.” Well, why ?
Why are companies, which have always been “greedy” (or, one might say, “profit-maximizing”), able to raise prices now ? What changed between early 2020, when corporate profits and inflation were plummeting, and today, when both metrics are “unconscionably” up?
The answer is important, because it determines what policymakers can or should do about it.
Here is how economists explain the recent run-up in inflation: Demand is strong, thanks to pandemic-forced savings plus expansionary government policies (stimulus payments, low interest rates, etc.). Meanwhile, supply remains constrained by covid-related disruptions, labor shortages, other unfortunate shocks . Companies can’t ramp up production quickly enough to procure all the stuff that consumers want to buy, whether that “stuff” is oil, furniture or eggs.
Consumers still want to buy all this stuff, though, and Americans overall have an unusually high amount of cash on hand . So they are willing to pay more. That pushes prices up.
A concrete example: In 2019, a car dealer that raised prices 10 percent might have lost customers and watched inventory sit. Today, that dealer can raise prices 20 percent and still have trouble keeping anything in stock. That’s because cars remain hard to come by, and customers are willing and able to pay a premium for whatever’s available.
The solution to the broader increase in prices, then, is ramping up supply (e.g., getting more workers in the labor force, removing trade barriers, encouraging oil-drilling); and/or, tamping down demand (e.g., raising interest rates).
Companies are somehow conspiring to boost inflation, this thinking holds, because they can use it as an “ excuse ” to “ profiteer .” No matter that major business groups have actually been hawkish about inflation , since unpredictable price growth can make it difficult for them to plan (and increases the prospect of recession).
So what’s the supposed evidence that businesses are pro-inflation? The greedflationists — including President Biden — complain that executives are boasting on corporate earnings calls about how much money they’re making. This might sound like a smoking gun if you have never listened to an earnings call, in which executives usually boast about how great profits are or will be.
I’ve been scolded before, including by White House senior aides, for making a fuss about Democrats’ demagoguery on this issue. So what if Biden and Democratic lawmakers want to grandstand about corporate greed? Who cares whether Biden asks for another gratuitous investigation into whether “ illegal ” conduct is driving up gas prices? This kind of populist anti-corporate rhetoric polls well , they say. It does no harm. It’s just cheap talk, so Democrats can show they’re Doing Something about inflation.