Last fall, as container ships piled up outside the Port of Los Angeles, it looked as if inflation was going to be with us for longer than many had predicted. Curious how C.E.O.s were justifying higher prices, my team and I started listening in on hundreds of earnings calls, where, by law, companies have to tell the truth. While official statistics on inflation such as the Consumer Price Index can tell you that prices are rising, earnings calls provide rich, qualitative data that speak to why and how.
Executives from the nation’s largest publicly traded companies had a lot to report to their shareholders about supply chain snarls, product shortages and rising prices — mostly that they were very good for business. What was striking in the earnings calls was not the supply chain shortages or companies’ typical profit motives; it was the plain old corporate profiteering. The Economics 101 adage that “inflation is just too much money chasing too few goods” doesn’t come close to the full story. This raises the question: When companies are exploiting consumers in a time of national crisis, when should government step in?
Companies that historically might have kept prices low to pick up profit by gaining additional market share are instead using the cover of inflation to raise prices and increase profits. Consumers are now expecting higher prices at the checkout line, and companies are taking advantage. The poor and those on fixed incomes are hit the hardest.
As Hostess’s C.E.O. told shareholders last quarter, “When all prices go up, it helps.” The head of research for the bank Barclay’s echoed this. “The longer inflation lasts and the more widespread it is, the more air cover it gives companies to raise prices,” he told Bloomberg. More than half of retailers admitted as much when surveyed.
Executives on their earnings calls crowed to investors about their blockbuster quarterly profits. One credited his company’s “successful pricing strategies.” Another patted his team on the back for a “marvelous job in driving price.” These executives weren’t just passing along their rising costs; they were going for more. Or as one C.F.O. put it, they were “not leaving any pricing on the table.”
The Federal Reserve chair, Jerome Powell, said that sometimes businesses are raising prices just “because they can.” He’s right. Companies have pricing power when consumers don’t have choice. Sometimes this is because demand for consumer staples like toilet paper, toothpaste and hamburger meat is relatively inelastic. If you need a box of diapers, you need a box of diapers. Other times pricing power comes from concentrated market power. In industries like meatpacking and shipping — in which giants have over 80 percent of market share at times — it’s easier to take big markups when there aren’t major competitors to undercut you.
What we learned on these earnings calls was quickly reflected in data. Despite the rising costs of labor, energy and materials, profit margins reached 70-year highs in 2021. And according to an analysis from the Economic Policy Institute, fatter profit margins, not the rising costs of labor and materials, drove more than half of price increases in the nonfinancial corporate sector since the start of the Covid pandemic.
Despite clear evidence that a majority of price increases are not justified by rising costs, there is a fierce debate in Washington about what, if anything, policymakers should do to address it. This debate primarily stems not from questions about the cause of price increases but from differing viewpoints on whether policymakers should play a role in ensuring fair and just prices.
Most economists believe that markets are efficient allocators of scarcity and that governments should have little, if any, role in guarding against unfair pricing. They argue that price hikes will help cool demand and alleviate scarcity by efficiently rationing goods by consumers’ ability to pay. If sellers take price hikes too far, customers will just go to a competitor across the street. But what if there are no competitors? Not to worry: Truly exorbitant markups will all but guarantee new businesses entering the market. Many economists even argue that publicly traded companies have an obligation to shareholders to bring in as much profit as possible. If they see any interventionist role of government, it is in suppressing demand through interest rate hikes by the Federal Reserve, a blunt policy tool with a high likelihood of throwing the country into a recession.
On the other side of the debate are a majority of Americans, including me, who look at the economy and see businesses exploiting supply chain bottlenecks, foreign war and a pandemic to bring in record profits on the backs of consumers. We don’t dispute that the system is working well for Fortune 500 companies and Wall Street investors, but we want lawmakers to stop the profiteering that has gone too far.
Although economists may not like to admit it, prices are not immune from political considerations. In fact, 38 states and the District of Columbia already limit price increases on certain goods through price-gouging statutes designed to prevent companies from capitalizing on abnormal disruptions, like pandemics and hurricanes, that lend themselves to scarcity and price gouging. In other words, the bulk of state legislatures have decided that although shareholders might like to see bottled water sold for $100 a gallon and gas for $5 after a hurricane, that is neither fair nor in the public interest.
Lawmakers must do even more. They should pursue a federal price-gouging statute to give regulators the authority to stop companies from exploiting crises to wring out more profit. Last week, Democrats in Congress announced plans to do just that. They could go further to discourage profiteering through the tax code — whether by increasing the corporate tax rate or by imposing excess-profits taxes like those proposed by Senators Sheldon Whitehouse and Bernie Sanders. This is not new; the government took similar action during times like World War II and as recently as 1980 for oil and gas. Regulators, even without new legislation, should start by enforcing existing laws, including ones against price fixing, price gouging and collusion.
The supply shocks we are experiencing are just a dress rehearsal for those to come. Climate change will bring increasingly severe and frequent disasters that wipe out crops, flood manufacturing plants and disrupt trade routes. The White House Council of Economic Advisers admitted as much in its latest annual Economic Report of the President. More scarcity will undoubtedly bring more opportunities for profiteering, and policymakers need to close their introductory economics textbooks and actually look at the economy. The question we should be asking is not whether companies will exploit those disruptions — we know they will — but what we can do to stop it, or else companies will just make the rest of us pay the price.