The Wrongologist

The Daily Escape:

Mexican Hat Rock, Mexican Hat UT – 2021 photo by Jacky and Rick

The media keeps talking about inflation, saying that it’s bound to hurt the economy any time now. They mean that inflation will make workers ask for higher wages. That will force companies to pay workers more, and thus, lower corporate profits.

Sounds like a problem, but as Bloomberg reports, the fattest corporate profits since 1950 are debunking inflation stories spun by CEOs. US corporations enjoyed the widest profit margins in more than 70 years during the second and third quarters of 2021. US corporate profits before adjustments rose to a record high of $3.14 trillion in the third quarter of 2021. From Bloomberg:

“On earnings calls, plenty of executives complained about the squeeze from rising costs of labor as well as materials. But overall, profits were up 37% from a year earlier, according to data out last week from the Commerce Department.”

Nearly two thirds of publicly traded US corporations have reported higher profit margins this year compared to 2020. One hundred of the largest have booked profit margins at least 50% higher than last year’s levels.

Bloomberg reports that businesses have been paying more to their employees too, with total compensation up 12% in the last quarter vs. a year earlier. It’s not that every worker got a raise. A significant part of the increase was due to millions of Americans simply returning to work. But many got raises too. To date, hourly earnings broadly kept up with the fast-rising cost of living. And in some low-pay industries like leisure and hospitality they’ve outpaced it, although not by enough for those firms to get fully staffed.

The new data on corporate earnings suggest businesses are comfortably passing on their higher costs. In recent months, a number of US companies including Coca-Cola, Procter & Gamble, Chipotle, and Dollar Tree have announced price hikes, claiming that the increases were necessary because of higher wages and material costs.

But the Bloomberg data say that these corporate kings are using price hikes to pass their sky-high CEO pay and marginal increases in material and labor costs to consumers, in order to keep padding their already historically strong profit margins.

Still, politicians are calling for Fed Chair Jerome Powell’s head. Sen. Tom Cotton (R-AK) wrote in the WSJ that Powell doesn’t deserve another term because he caused inflation. Powell’s policies have contributed to US inflation, but there’s zero evidence that US inflation is a problem today.

For months, corporate executives and right-wing politicians have been parroting the claim that inflation in the US is due to Biden’s social spending policies. But the new data show that inflation is going up largely because corporations are driving it.

Remember, corporate profits are up by 37% while inflation amounted to about 6.2% in the same period. In other words, as the economy reopened and prices for goods went up, and corporations used the situation to raise prices a lot.

In fact, the FTC just announced it voted 4-0 to investigate the relationship between competition and supply chain problems. The FTC sent letters to nine dominant firms in supply, retail, and wholesale, mandating they respond within 45 days to a host of questions, as well as give internal documents on various topics.

This matters. Inflation and shortages aren’t neutral forces. The twin problems seem to be *helping* big business improve their profit margins. It’s important to ask why they are happening and who has an incentive to keep them going.

Even Morgan Stanley is now asking corporations to hit the brakes on accumulating profits. Their research division released a report highlighting the gap between corporate profits and worker wages. From the report:

“Real wages…still have to grow by 7.3% in excess of productivity growth to make up the gap….If this catch-up takes place over the next 5 years, unit profits will fall 33% from current levels…This would move the corporate profit share back to its 1990s average on a pre-tax basis and leave it just marginally above on a post-tax basis.”

Imagine. An investment bank telling corporations that they really should be making less profit. Things must be really going to get much worse than we think.

Let’s launch into our weekend, starting with a Saturday Soother. Try to forget about whether a government shutdown will hurt you or Biden, or whether the Supreme Court is now filled with ideological hacks.

Instead, grab a seat by a window and listen to “The Girl with the Flaxen Hair” by Claude Debussy. The Art Nouveau period was obsessed with women’s hair. Debussy was immersed in that world. It’s played here by the LA-based, Sakura cello quintet. Wrongo is a sucker for cello, and there are five of them! This was originally written for piano, and is transposed here for cello: