Economist explains record corporate profits despite rising inflation
MICHEL MARTIN, HOST:
Prices are up all over the place - at the gas pump, at the grocery store, at the car lot. This week, the federal government reported a 7.5% increase in the cost of goods all across the board compared to a year ago. The consumer price index showed a 4% rise in housing, a 12% increase in the price of meat, and the cost to buy a used car is up more than 40%.
But here's another reality. While families are dealing with sticker shock, profits for companies that put these goods on shelves - well, those are skyrocketing. Data from the U.S. Commerce Department shows that corporate profit margins are the largest they've been in 70 years, and that's caused progressive leaders like Senators Bernie Sanders and Elizabeth Warren to cry foul, saying some companies are using the pandemic as a cover to raise prices far more than is warranted.
As is often the case where economic theory is concerned, there are a variety of opinions about this, so we've called Isabella Weber. She is a professor of economics at the University of Massachusetts Amherst. She has studied pricing policies in the context of rapid economic transitions, and she is with us now to talk about all this. Professor Weber, welcome. Thank you so much for joining us.
ISABELLA WEBER: Thank you so much for having me, Michel.
MARTIN: So we see the price of pretty much everything going up, and we are told that these are supply chain disruptions or labor shortages, both of which are pandemic-related. And at the same time, corporations are reporting record profits, and that just seems counterintuitive to many people. So what's your take on why those two things are happening at the same time?
WEBER: Yeah. I mean, first of all, we have to realize that the supply chain issues are very real, right? So in normal times, companies, also very large companies, mainly compete over being able to deliver their products quickly, attracting customers through advertisement and so on. So if demand goes up, they basically react by delivering more of the stuff that they are producing. But what's happening now is that suddenly, because this gigantic conveyor belt system, if you want so, is not working properly, stuff gets stuck. And suddenly, companies, even very large companies, have difficulties delivering.
MARTIN: I think people understand that. You know, if people want to buy things and they're in short supply, of course they will be more expensive. But I guess the question would be, what is the line between kind of normal market functioning and market manipulation? Is there a lot, and who decides what that line is?
WEBER: Companies always want to maximize profits, right? In the current context, they suddenly cannot deliver as much anymore as they used to. And this creates an opening where they can say, well, we are facing increasing costs. We are facing all these issues. So we can explain to our customers that we are raising our prices. No one knows how much exactly these prices should be increased. And everybody has some sort of an understanding that, oh, yeah, there are issues, so, yes, of course companies are increasing prices in ways in which they could not justify in normal times.
But this does not mean that the actual amount of price increase is justified by the increase in costs. And as a matter of fact, what we have seen is that profits are skyrocketing, which means that companies have increased prices by more than cost. In the earnings reports, companies have bragged about how they have managed to be ahead of the inflation curve, how they have managed to jack up prices more than their costs and as a result have delivered these record profits.
MARTIN: So the Biden administration in November took aim at energy costs. The president said he would have the Federal Trade Commission investigate possible market manipulation or price gouging in the energy sector. So what would that look like?
WEBER: President Biden has called out that the prices for unfinished gasoline were down by 5%, where the prices at the gas station went up by 3%. So in other words, companies that are selling gas at the gas station are increasing prices by more, or, in this case, are not handing down the price decrease that they had enjoyed in November. This was the argument of the president. So, yes, the president has to step in. How exactly to do it is beyond my expertise as an economist.
MARTIN: Before we let you go, do you see a will to do that? I know that that's not strictly your area of expertise, but among the people that you talked to, your sort of peer economists, is there a consensus about the way forward here?
WEBER: Well, I'd say that we are in pretty uncharted waters because we are in this situation where specific prices are shooting up, which we haven't seen in a long time because we have had this global supply chain system that, yes, had always the vulnerabilities that we are seeing now but in stable times has been working pretty well. So in that sense, I think that economies are not terribly well-prepared to think about the problems that we are facing. So we need to think about a different kind of response, and this requires us to have a very open conversation instead of the kind of confrontations and often knee-jerk reactions that we have been observing in recent weeks.
MARTIN: That's Isabella Weber. She is an economist and professor at the University of Massachusetts Amherst. Professor Weber, thanks so much for talking with us. It's been fascinating.
WEBER: Thank you so much for having me, Michel. Transcript provided by NPR, Copyright NPR.