AP’s Today in History for June 5th
Sen. Robert F. Kennedy is assassinated in Los Angeles; The Six-Day War erupts in the Mideast; Birth of the Marshall Plan; First reported AIDS cases in the U.S.; Former President Ronald Reagan dies.
Breakfast Tune Whip It – Devo – Banjo Cover
Something to think about, Breakfast News & Blogs below
Corporate profits have contributed disproportionately to inflation. How should policymakers respond?
Josh Bivens Director of Research Economic Policy Institute
April 21, 2022
The inflation spike of 2021 and 2022 has presented real policy challenges. In order to better understand this policy debate, it is imperative to look at prices and how they are being affected.
The price of just about everything in the U.S. economy can be broken down into the three main components of cost. These include labor costs, nonlabor inputs, and the “mark-up” of profits over the first two components. Good data on these separate cost components exist for the nonfinancial corporate (NFC) sector—those companies that produce goods and services—of the economy, which makes up roughly 75% of the entire private sector.
Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFC sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth …
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Something to think about over coffee prozac
…Summers’s whole thread is worth reading, but what’s most interesting is how his thesis seems to cut against what CEOs are telling investors (as well as what he himself said in July, when he said concentration could be inflationary). Wall Street is explicit that margin expansion is the big story of the pandemic. “What we really want to find are companies with pricing power,” said Giorgio Caputo, senior portfolio manager at J O Hambro Capital Management told Bloomberg. “In an inflationary environment, that’s the gift that keeps on giving because companies can pass along their pricing on the way up, and don’t necessarily need to get it back on the way down.”
Margin expansion is one factor that has pushed the stock market to an all-time high, with large firms doing much better than small ones. Bloomberg has noted that behind this are corporate profit margins, which are at a 70-year record. All of which leads to an interesting question. How much of inflation is a result of market power, and how much is due to some other set of causes such as government spending or thin supply chains? Let’s do some rough numbers.
Just before the pandemic, in 2019, American non-financial corporations made about a trillion dollars a year in profit, give or take. This amount had remained constant since 2012. Today, these same firms are making about $1.73 trillion a year. That means that for every American man, woman and child in the U.S., corporate America used to make about $3,081, and today corporate America makes about $5,207. That’s an increase of $2,126 per person.
…Still, in order to know just how significant that amount is relative to inflation, we have to figure out how much inflation is costing the average American. A rough way to get that would be to take the total amount America produces annually, which is the Gross Domestic Product, and multiply that by the inflation rate. That’s $23 trillion of GDP times the 6.8% inflation rate, which comes out to $1.577 trillion, or $4,752 per American.
Taking all of this together, it means that increased profits from corporate America comprise 44.7% of the inflationary increase in costs. That means corporate profits alone are absorbing a 3% inflation rate on all goods and services in America (44.7% of 6.8% annual inflation), with all other factors causing the remaining 3.8%, for a total inflation rate of 6.8%. In other words, had corporate America kept the same average annual level of profits in 2021 as it did from 2012-2019 and passed on today’s excess to consumers, the inflation rate would be 3.8%, not 6.8%. And that’s a big difference, indeed it is the difference between Americans getting a raise, and seeing real wages decline. (It also could explain why inflation is lower in Europe – corporate profits there were very good in 2021, but not as good as in the U.S. And in Japan both inflation and corporate profits were low.)
It gets worse, because this calculation assumes that all 6.8% of the inflationary increase in prices is new. But of course, inflation isn’t zero in normal years, the Fed has an inflation target of 2%. In 2019, inflation hit 1.8%. So if you take the pre-existing inflation rate in 2019 of 1.8% and back that out of the numbers, then it turns out that 60% of the increase in inflation is going to corporate profits.
3% to corporate profits + 1.8% preexisting inflation + 2% from government spending/supply shocks = 6.8% total inflation rate