Corporations’ thirst for profits isn’t to blame for inflation, economists say

There’s growing agreement among economists that companies have become more powerful and more profitable over the past several decades — a fact they say pokes a hole in some lawmakers’ arguments that greed for profits is what’s behind spiking inflation.  

The logic among lawmakers about the causes of inflation falls largely along party lines.  

Most Republicans blame inflation on fiscal stimulus sent out during the early days of the pandemic.

“Democrats’ $2 trillion in so-called COVID ‘stimulus’ spending fueled inflation long before Russia invaded Ukraine,” House Ways and Means Committee ranking member Kevin Brady (R-Texas) said in a Thursday statement.

Most Democrats — and a few Republicans — say inflation is due to a lack of competition and an out-of-control drive for profits among corporations.

“The CEOs of some of the biggest companies have been bragging to their investors that inflation has created a terrific opportunity for them to raise prices and boost profits,” Sen. Elizabeth Warren (D-Mass.) said in a statement earlier this year.

Her sentiments were echoed in April by Republican Rep. Randy Feenstra (Iowa), who told CEOs from the heavily concentrated meatpacking industry that “the market share lets you control the price of contracts.”

But economists say that since 1980, the market power of companies over consumers has ticked up an average of about 1 percent a year, allowing them to keep marking up their prices higher and higher above input costs. 

Inflation since 1980 has remained mostly at low levels, and experts say that the notion higher profits would have suddenly contributed to spiking inflation following the pandemic is a tough pill to swallow.  

“I am pretty skeptical about the ‘greedflation’ narrative,” Gabriel Unger, a Ph.D. student in economics at Harvard University and the co-author of an influential paper on private sector market power, said in an email to The Hill.  

“It’s true that markups (and market concentration) have been rising sharply since around 1980. But over almost this whole period, up until the pandemic, inflation has been historically very low. So for most of the past 40 years, we’ve had an economy with high and rising markups, and very low inflation.”  

“It’s possible that in the absence of the former, inflation might have been slightly lower, but I still think this suggests it’s unlikely that high markups on their own cause an explosion of inflation,” he added. 

Unger’s paper, which he co-authored with European economists Jan De Loecker and Jan Eeckhout and published in the Quarterly Journal of Economics in 2020, found that “in 1980, aggregate markups start to rise from 21% above marginal cost to 61% now.” 

Markups can be implemented to account for rising input costs, but excluding these costs, the authors found “an increase in the average profit rate from 1 percent to 8 percent” over the same period. 

The authors also found the most powerful companies have increased their price markups the most. 

“The increase is driven mainly by the upper tail of the markup distribution: the upper percentiles have increased sharply. Quite strikingly, the median is unchanged. In addition to the fattening upper tail of the markup distribution, there is reallocation of market share from low- to high-markup firms,” they wrote. 

Economists say that this viewpoint is gaining wider traction within the field. 

“I don’t know how many people want to sign up for consensus on this, but there’s been a lot of research that people have found reasonably convincing that says that measures of market power seem to have been ticking up. It’s not unanimous, but more people think that’s true now than five years ago,” Chad Syverson, an economist at the University of Chicago Booth School of Business, said in an interview. 

Still, more liberal economists argue that increased concentration — a small number of companies that play a large part in the economy — helps to obscure how companies can work together implicitly to increase consumer prices under the appearance of behaving competitively.  

A recent study from the Boston Federal Reserve found that “the US economy is at least 50 percent more concentrated today than it was in 2005” and that this concentration has the effect of “passing through” cost increases into even higher prices. 

“Our estimates imply that the pass-through becomes about 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century.” 

“Our findings suggest that the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current supply-chain disruptions and a tight labor market,” the authors of the paper found. 

Another study from the left-leaning Economic Policy Institute (EPI) came to a similar conclusion, finding that the increased market power of corporations over consumers has, indeed, resulted in sustained higher prices. 

“It is unlikely that either the extent of corporate greed or even the power of corporations generally has increased during the past two years. Instead, the already-excessive power of corporations has been channeled into raising prices rather than the more traditional form it has taken in recent decades: suppressing wages,” EPI economist Josh Bivens wrote. 

This jump in the market power of companies rhymes with other economic trends that disproportionately favor the wealthy in various segments of the economy.  

For example, there has been a decrease in IRS audit rates for the wealthiest taxpayers and a change in retirement plan rules that favor those who can contribute the most to their IRAs.