As I watch—and participate in—the great inflation debate, I find myself thinking back to my time as an undergraduate, studying intermediate microeconomics with Professor John F.
It's astonishing that no one wants to touch price controls as the answer to this problem. This reminds me of the joke of two inmates in a prison cell. One guy wants to hang a picture on the wall, but he's trying to bang the POINTED end of the nail into the wall with no success. He's slams down his hammer in disgust and declares: "These idiot prison guards can't even give you nails with the point on the right end!" His cell mate points to the opposite wall and says: "You idiot! Don't you know that nail is meant to go on THAT wall?" Neither man can see the obvious solution to the problem.
Think of the pandemic this way: suppose New York City is blasted by a rogue cold front and temperatures plunge into the single digits in the middle of July. What should New Yorkers do? Curse the cold and stay indoors, stop going to work and curtailing their shopping trips and restaurant visits, or should they get their winter coats and sweaters out of storage and weather out the deep freeze? Yes, it's weird to wear a winter coat during a New York summer, and it's weird to slap on price controls--except in the middle of a pandemic. You do what the circumstances require.
Can price controls work without rationing, as they did in WWII? (Or so I believe.)
Nowadays companies can get around price controls by reducing quantity or introducing a slightly different product with a different name, plus you'd need thousands of bureaucrats to monitor all products and services. And can we set prices on imported items?
If a company really needs to increase its product's price but is prohibited by price controls, it will go out of business.
Wage and price controls seem like a massive intrusion into an incredibly complex economic matrix where it would be almost impossible to keep tweaking correctly. The variables and their fluctuating weights would require a quantum computer set on max.
But, of course, I could be completely wrong. I'm all for whatever works -- who isn't? If we all benefit, we all benefit: great!
If a company is making a profit on a product at a certain price, why on earth would they want to stop making that product and that profit? And given what's happening right now, you'd think it's every manufacturer's dream--"We can sell everything we can make!" Now it's true that there would probably have to be some sort of rationing to make sure all Americans have equal access to necessities--this is something the wealthy don't give a shit about. And if some companies are legitimately hurt by price controls, the gov't can reimburse them through tax cuts or outright cash assistance. The point is, inflation is not like a tornado, flood, or drought that's beyond our control. Inflation is a choice. So you have to decide: whose side are you on? The wealthy or the working class?
I don't understand your question: "If a company is making a profit on a product at a certain price, why on Earth would they want to stop making that product and that profit?" They wouldn't, of course. Why do you ask?
Right now manufacturers are in a sweet spot--they can sell everything they can make. And they have a love/hate relationship with inventory--can't make money without it but can't make money if they keep it. If prices are rising because production costs are going up as well, the gov't can offer tax breaks to firms hurt by controls. But if the rise in prices is simply due to higher demand, then that's price gouging.
"Inflation is a choice." Hmmm, I can't agree with that statement: No one wants inflation, neither the wealthy nor the working class; it hurts everyone, in fact, especially the rich: They have more to lose. If we could control it easily, we would.
Price controls are not difficult on commodities, but would make little sense on most finished consumer goods. But on commodities you can say, this is the limit you can charge for potatoes, or peanut butter, or eggs, or different cuts of meat.
But this is all a very silly thing to do, because the issue is monopolies. If you fix the monopoly, the issue gets resolved.
As a small-time real estate investor, I can see that money is flowing into the housing market. It is not, however, increasing supply and reducing prices. It is driving up the valuations used for loans. Those loans, however, are justified by stickiness in the "cap rate", the ratio of net rental income to valuation. So rents are rising, not falling, because of increased investment.
My first point: This is a very good example of the problem of financialization as a cost driver for increasing prices.
Secondly, on the other hand, most consumer price increases, in the base case should be pulling investment into the consumer sector, thereby increasing supply. Perhaps land rents are an exception, of course, though at first glance, building a house or apartments, or opening up new land via roads and infrastructure for construction, falls under supply. As that, in my mind, is just a base case, one wants to figure out how to get back to that state of nature, perhaps by looking at point one, I think maybe your point.
As he is quick to admit, his methodology is a rough, back of envelope calculation, but he came up with a figure of about 60% of inflation being caused by companies with market power raising prices much higher than their increased costs would justify.
His solution, which makes sense considering his focus on monopolies, is a much more robust antitrust regime. With Lina Kahn at the FTC and John Kanter at Justice it looks like we are getting just that.
However, antitrust is a long-term solution and isn't likely to help in the near term.
"Companies with market power raising prices much higher than their increased costs would justify." That seems to be subjective and even unreasonable, to a certain extent, i.e., why can't Cadillac, for instance, charge whatever they think the market will bear? Supply and demand capitalism seems to be the proper arbiter there. However, government may well need to get involved when, say, meat companies with a monopoly raise prices just because they can. Each situation needs to be looked at individually and dealt with specifically; one size does not fit all: Throwing a blanket over all companies is a recipe for problems of all sorts.
As with so many I talk to who think for themselves, you answer your own question.
Not every company has the market power to increase profit margins to whatever level they want. Competition restricts that ability. That helps moderate price increases to consumers.
Supply and demand is fine if there aren't monopolies and oligopolies distorting the equation.
It's not as subjective as you may think. Did you read Stoller's post? I think he has a pretty good method for determining who has that kind of market power.
As to Cadillac, Stoller thinks the 14 auto firms controlling almost all brands are an oligopoly with market power to set higher prices than costs plus a reasonable profit would indicate.
Another example: The four meatpacking companies that control 80% of the market make up an oligopoly with market power to set whatever prices they want without having to consider being undercut by a competitor. The same is true for the four big food commodity companies, Cargill, ADM, and I forget the other two.
You are correct, each situation needs to be looked at individually. I don't think I implied otherwise.
Or as John Henry might have put it, "a., c., f., and h." Thank you, Stephanie, for using John's pedagogical style to make the point that the answer to problems (in economics for example) often requires more than the convenient or conventional simple explanation.
Plastic. PVC. Out of control prices. I am building a house (it was NOT pandemic inspired - it has been a long time goal with unfortunate timing). Underground power or overhead. Does not matter, the supplies for this work are off the charts prices. I was quoted about $8200 for 350' underground set up. The PVC alone for 2 runs: power and communications, was $3700. The labor was a mere $1400.
I got a generator, so I had to get a gas can for premium gas for it. $35 for a 5 gal plastic container. At $4.85 a gallon it is still cheaper to fill it with gas!!
And China - which makes everything for us - stopped accepting our recycling, so all the plastic that could be recycled for something like a gas can isn't getting there.
And if you think prices for this kind of stuff is coming down anytime soon you are dreaming!!
Thoughtful article. Keep the data flowing
It's astonishing that no one wants to touch price controls as the answer to this problem. This reminds me of the joke of two inmates in a prison cell. One guy wants to hang a picture on the wall, but he's trying to bang the POINTED end of the nail into the wall with no success. He's slams down his hammer in disgust and declares: "These idiot prison guards can't even give you nails with the point on the right end!" His cell mate points to the opposite wall and says: "You idiot! Don't you know that nail is meant to go on THAT wall?" Neither man can see the obvious solution to the problem.
Think of the pandemic this way: suppose New York City is blasted by a rogue cold front and temperatures plunge into the single digits in the middle of July. What should New Yorkers do? Curse the cold and stay indoors, stop going to work and curtailing their shopping trips and restaurant visits, or should they get their winter coats and sweaters out of storage and weather out the deep freeze? Yes, it's weird to wear a winter coat during a New York summer, and it's weird to slap on price controls--except in the middle of a pandemic. You do what the circumstances require.
Can price controls work without rationing, as they did in WWII? (Or so I believe.)
Nowadays companies can get around price controls by reducing quantity or introducing a slightly different product with a different name, plus you'd need thousands of bureaucrats to monitor all products and services. And can we set prices on imported items?
If a company really needs to increase its product's price but is prohibited by price controls, it will go out of business.
Wage and price controls seem like a massive intrusion into an incredibly complex economic matrix where it would be almost impossible to keep tweaking correctly. The variables and their fluctuating weights would require a quantum computer set on max.
But, of course, I could be completely wrong. I'm all for whatever works -- who isn't? If we all benefit, we all benefit: great!
IIRC, wage and price controls were not absolute. If a business could justify some price increases due to increased costs, that was allowed.
If a company is making a profit on a product at a certain price, why on earth would they want to stop making that product and that profit? And given what's happening right now, you'd think it's every manufacturer's dream--"We can sell everything we can make!" Now it's true that there would probably have to be some sort of rationing to make sure all Americans have equal access to necessities--this is something the wealthy don't give a shit about. And if some companies are legitimately hurt by price controls, the gov't can reimburse them through tax cuts or outright cash assistance. The point is, inflation is not like a tornado, flood, or drought that's beyond our control. Inflation is a choice. So you have to decide: whose side are you on? The wealthy or the working class?
I don't understand your question: "If a company is making a profit on a product at a certain price, why on Earth would they want to stop making that product and that profit?" They wouldn't, of course. Why do you ask?
Right now manufacturers are in a sweet spot--they can sell everything they can make. And they have a love/hate relationship with inventory--can't make money without it but can't make money if they keep it. If prices are rising because production costs are going up as well, the gov't can offer tax breaks to firms hurt by controls. But if the rise in prices is simply due to higher demand, then that's price gouging.
"Inflation is a choice." Hmmm, I can't agree with that statement: No one wants inflation, neither the wealthy nor the working class; it hurts everyone, in fact, especially the rich: They have more to lose. If we could control it easily, we would.
You didn't want it to rain, but now it is. You can either grab an umbrella or get soaking wet.
Price controls are not difficult on commodities, but would make little sense on most finished consumer goods. But on commodities you can say, this is the limit you can charge for potatoes, or peanut butter, or eggs, or different cuts of meat.
But this is all a very silly thing to do, because the issue is monopolies. If you fix the monopoly, the issue gets resolved.
As a small-time real estate investor, I can see that money is flowing into the housing market. It is not, however, increasing supply and reducing prices. It is driving up the valuations used for loans. Those loans, however, are justified by stickiness in the "cap rate", the ratio of net rental income to valuation. So rents are rising, not falling, because of increased investment.
My first point: This is a very good example of the problem of financialization as a cost driver for increasing prices.
Secondly, on the other hand, most consumer price increases, in the base case should be pulling investment into the consumer sector, thereby increasing supply. Perhaps land rents are an exception, of course, though at first glance, building a house or apartments, or opening up new land via roads and infrastructure for construction, falls under supply. As that, in my mind, is just a base case, one wants to figure out how to get back to that state of nature, perhaps by looking at point one, I think maybe your point.
Back in December, 2021, Matt Stoller wrote a great piece on the contribution of profiteering and price gouging to the current high inflation.
https://mattstoller.substack.com/p/corporate-profits-drive-60-of-inflation?utm_source=url
As he is quick to admit, his methodology is a rough, back of envelope calculation, but he came up with a figure of about 60% of inflation being caused by companies with market power raising prices much higher than their increased costs would justify.
His solution, which makes sense considering his focus on monopolies, is a much more robust antitrust regime. With Lina Kahn at the FTC and John Kanter at Justice it looks like we are getting just that.
However, antitrust is a long-term solution and isn't likely to help in the near term.
"Companies with market power raising prices much higher than their increased costs would justify." That seems to be subjective and even unreasonable, to a certain extent, i.e., why can't Cadillac, for instance, charge whatever they think the market will bear? Supply and demand capitalism seems to be the proper arbiter there. However, government may well need to get involved when, say, meat companies with a monopoly raise prices just because they can. Each situation needs to be looked at individually and dealt with specifically; one size does not fit all: Throwing a blanket over all companies is a recipe for problems of all sorts.
As with so many I talk to who think for themselves, you answer your own question.
Not every company has the market power to increase profit margins to whatever level they want. Competition restricts that ability. That helps moderate price increases to consumers.
Supply and demand is fine if there aren't monopolies and oligopolies distorting the equation.
It's not as subjective as you may think. Did you read Stoller's post? I think he has a pretty good method for determining who has that kind of market power.
As to Cadillac, Stoller thinks the 14 auto firms controlling almost all brands are an oligopoly with market power to set higher prices than costs plus a reasonable profit would indicate.
Another example: The four meatpacking companies that control 80% of the market make up an oligopoly with market power to set whatever prices they want without having to consider being undercut by a competitor. The same is true for the four big food commodity companies, Cargill, ADM, and I forget the other two.
You are correct, each situation needs to be looked at individually. I don't think I implied otherwise.
Or as John Henry might have put it, "a., c., f., and h." Thank you, Stephanie, for using John's pedagogical style to make the point that the answer to problems (in economics for example) often requires more than the convenient or conventional simple explanation.
Plastic. PVC. Out of control prices. I am building a house (it was NOT pandemic inspired - it has been a long time goal with unfortunate timing). Underground power or overhead. Does not matter, the supplies for this work are off the charts prices. I was quoted about $8200 for 350' underground set up. The PVC alone for 2 runs: power and communications, was $3700. The labor was a mere $1400.
I got a generator, so I had to get a gas can for premium gas for it. $35 for a 5 gal plastic container. At $4.85 a gallon it is still cheaper to fill it with gas!!
And China - which makes everything for us - stopped accepting our recycling, so all the plastic that could be recycled for something like a gas can isn't getting there.
And if you think prices for this kind of stuff is coming down anytime soon you are dreaming!!
Worth noting: monopoly expert Matt Stoller credits profiteering with 60% of current inflation.
Why not limit price increases to the rate of inflation? Publish the comparisons and you have identified the price gougers for the consumers.