Corporate profits have contributed disproportionately to inflation. How should policymakers respond?

[Nevilledog]

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Matt Stoller
@matthewstoller
Finally an economist looks at the anomaly of this inflationary moment, which is how profits are comprising a much larger portion of price hikes than labor or other inputs.
https://epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/…
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6:59 AM · Apr 22, 2022

https://www.epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/

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, non-labor inputs, and the “mark-up” of profits over the first two components. Good data on these separate cost components exist for the non-financial 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 and labor costs over 60%, as shown in Figure A below. Non-labor inputs—a decent indicator for supply-chain snarls—are also driving up prices more than usual in the current economic recovery.

What does the abnormally high contribution of profits to price growth mean for how policymakers should respond to the recent outbreak of inflation?

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. That said, one effective way to prevent corporate power from being channeled into higher prices in the coming year would be a temporary excess profits tax.

The historically high profit margins in the economic recovery from the pandemic sit very uneasily with explanations of recent inflation based purely on macroeconomic overheating. Evidence from the past 40 years suggests strongly that profit margins should shrink and the share of corporate sector income going to labor compensation (or the labor share of income) should rise as unemployment falls and the economy heats up. The fact that the exact opposite pattern has happened so far in the recovery should cast much doubt on inflation expectations rooted simply in claims of macroeconomic overheating.

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[KS Toronado]

1. Corporate greed and they want more wealthfare

Only Rs will give them more of that with tax breaks & new loopholes.

[ck4829]

2. K&R