Opinion | Are Large Corporate Profit Margins Causing Inflation?

Profit margins and corporate profits in the United States last year were the highest since at least the 1950s, according to analysis released Tuesday by the Roosevelt Institute, a progressive think tank. This raised questions about a possible relationship between corporate greed and inflation.

But it’s not just a story of companies pushing up prices to make more money, Mike Konczal, one of the paper’s authors, who is director of macroeconomic analysis at the institute. “Is greed the only or main reason for inflation?” He asked. “I would say no. This is part of the mix of explanations that should be considered.

The Roosevelt Institute article sheds light on one of the biggest economic questions of 2021: what is the primary cause of today’s high inflation – strong demand, supply shortages or rising profit margins? Those who cite strong demand blame the Biden administration, Congress and the Federal Reserve for overstimulating the economy. Those who cite supply shortages point to disruption caused by anomalies such as the Covid-19 pandemic and Russia’s invasion of Ukraine. The enemies of firm size focus on the excess profit theory.

There is evidence for all three explanations, according to the article, “Prices, Profits and Power: An Analysis of 2021 Firm-Level Markups,” by Konczal and Niko Lusiani, director of the Roosevelt Institute’s Power Team.

The chart above shows the net profit margin, which is a company’s after-tax net profit divided by its sales. Konczal and Lusiani used data from S&P Global’s Compustat unit that dates back to 1955. They also looked at firms’ profit margin, the difference between the prices they charge and their marginal costs, which they define as the cost of goods sold and labor, but not selling, general and administrative expenses.

The strong demand theory of inflation relies on the fact that markup increases were widespread across many types and sizes of businesses, suggesting that the strength of demand for goods and services in Economy scale was a significant factor in the price increases, the authors found.

At the same time, margins rose more sharply in industries that experienced disruption, indicating that supply chain issues were also an inflationary factor. Sectors with high margins include real estate, mining, quarrying, and oil and gas extraction. (The biggest margin increase the authors found was in finance and insurance, which is a little odd, since that sector was clearly not bottlenecked.)

The third explanation, increased profit margins, is not an alternative but rather a complement to the demand and supply explanations. It indicates that companies have seized the opportunity of strong demand and weak supply to increase their profits. This theory is supported by the authors’ finding that, after adjustments for size, firms that raised prices before 2021 were most likely to raise prices in 2021. This indicates that they had a position on the market which allowed them to impose prices more easily. increases and make them stick.

Konczal and Lusiani used a methodology that was developed for an influential article, “The Rise of Market Power and the Macroeconomic Implications,” by Jan De Loecker, Jan Eeckhout, and Gabriel Unger, which was published in The Quarterly Journal of Economics in 2020. “The big difference is that they find a gradual increase from 1980 to 2015,” Konczal said, comparing earlier research with his and Lusiani’s findings. “This is a very abrupt and sudden change in 2021.”

I asked Konczal what he thought Roosevelt’s article implied for public policy. He said it shows that “there’s room for those profit margins to shrink” through competition, antitrust enforcement, or the presidential jaw (which he called “the bully’s pulpit”). ). He said there were already signs in national accounts data – not included in Roosevelt’s article – that profit margins fell slightly in the first quarter of this year from their recent highs and could decline further. . The document also supports the case for legislative and administrative action to open bottlenecks in supply chains and for the Federal Reserve to be “more patient and less erratic” in raising interest rates. , did he declare.

According to a new study by economists Elias Ilin of the Federal Reserve Bank of Atlanta, Laurence Kotlikoff of Boston University and Melinda Pitts of the Atlanta Fed. The three researchers looked beyond federal income taxes and analyzed the effects of all major federal and state programs, such as Medicare, Medicaid, and Section 8 housing vouchers. Benefits are based on income of the family, so forming a family through marriage tends to reduce benefits per person. Economists estimate that if there were no financial penalty for getting married, women with children in the lowest income quintile would have a 14% higher marriage rate.

“Given the importance for children of living with both parents and the economic benefits for children and adults of forming and maintaining a nuclear family, looking for ways to make the tax system marriage-neutral seems very helpful,” the article concludes.

“So we cannot, in the third world, simply borrow or buy science from those who precede us. Pure science we can take as it comes, but we have to do a lot of the applied science on our own.

– Arthur Lewis, Nobel Banquet Speech, 1979

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