In a conversation with ex-@CMAgovUK head Andrea Coscelli, @linakhanFTC said the FTC is reinvigorating its full competition toolkit in line with Congressional intent, including FTC Act Section 5’s unfair methods of competition, to ensure effective competition enforcement. Photo courtesy of FTC on X.com.
Remember, inflation is always a monetary event. Too many dollars (or yen, pounds, pesos, rubles, whatever) chasing too few goods. So before you give any time to the common lie that corporate greed begets inflation, read the review of the recent 60 Minutes interview of FTC Chair Lina Khan written by Ryan Bourne from the Cato Institute. Bourne concludes:
When asked by Stahl directly whether she this believed “greedflation” to be true, Khan said “some executives boast on earnings calls about how inflation is great for their bottom line.”
This is a talking point we’ve explored before here: some greedflationists imply that because some firms enjoyed temporarily higher profits alongside increasing prices, this in itself is proof that profit-seeking, or greed, or whatever else you want to call it, *caused* inflation.
But, as my colleague George Selgin has noted, “Benefiting from inflation ain’t the same as causing it.” As I explained with Bryan Cutsinger, higher profits for many firms is exactly what we might expect if there was a large, unexpected increase in total spending across the economy, caused by a sharp growth in the money supply:
Such an environment can lead to higher short-term profits too because, in a range of sectors, retail prices tend to increase more quickly in response to rising spending than firms’ wages and input costs. The latter are often governed by contracts that are negotiated infrequently, meaning that when output prices rise, real (i.e., inflation-adjusted) wages and other input prices will fall. As a result, corporate profits can increase, at least until wages and input prices adjust.
People’s expectations about inflation play a crucial role in how wages and other input prices are set. In early 2021, few workers and input suppliers were expecting high inflation. They negotiated wage and other input price contracts on that basis. With spending rising and pushing up product prices, alongside stickier wages and input costs, many firms’ profits thus rose temporarily. In fact, as it became clear that the general price level was rising, some corporations no doubt raised their output prices in anticipation of their input and wage costs then going up, contributing further to a temporary profit spike.
The key point is that this wasn’t a function of greed, market power, or profit-puffing. The ultimate cause was a macroeconomic policy that had led spending to explode, forcing up all prices in the medium-term. And there is historical evidence for this short-term relationship between spending and profits too. One implication of this theory is that when total spending deviates positively from trend, corporate profits are likely to as well. Indeed, this positive correlation is precisely what we see in the post-war data for the U.S. (see Figure 2). Even relatively small deviations from trend in total spending are associated with large deviations in corporate profits.
In sum, “greedflationists” like Khan constantly confuse effect for cause in blaming profit-seeking for inflation. All that we’ve seen across the four years as a whole is consistent with monetary policy having been too loose, so driving the lion’s share of the above-normal increase in the price level.
People like the producers and CBS News and Khan constantly present us with a false dichotomy: that inflation was driven supply-shocks or corporate power. They point to facts to “prove” it. When input costs increase first and then retail prices, this is seen as “cost-driven” or “supply-chain” inflation. When retail prices rise first and costs second, it’s profit-led inflation or “greed.”
In reality, spending running wild can cause both of these outcomes, in the short-term, depending on where bottlenecks are first hit and which prices are most flexible. It’s just politically inconvenient to acknowledge that most of the blame lies with macroeconomic policymakers here in Washington DC.
If this were just blame deflection that would be one thing. But faulty theories lead to misguided policy. At best, FTC action against anticompetitive conduct might be able to reduce a good’s price in an individual market. Lina Khan, though, has no power over inflation, which is a macroeconomic phenomenon.
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris.
Please get in touch with E.J. at ejsmith@yoursurvivalguy.com
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