Hiltzik: Corporate profits and inflation go hand-in-hand

Here’s an inflation remedy you don’t hear much about: Decreasing corporate profits.

If that sounds like a drastic, even radical, idea, it may be because economic commentators and news pundits have been obstinate about the role higher wages play in promoting growth. push inflation higher.

As I recently reported, an argument is even being made that the solution to inflation is to push unemployment higher.

Mark the company is real. Bringing them down will benefit the economy.

– Mike Konczal, Roosevelt Institute

What’s curious about that idea is that economic statistics show that corporate profits play a much larger role in driving inflation than wage growth or today’s low unemployment rate.

Wages have been higher than last year, but the increase has been accompanied by inflation, which is why so many workers and their families are feeling the pain of higher prices. However, the company’s profit margins have skyrocketed into the stratosphere, outpacing the rate of inflation and dragging it higher.

Mike Konczal and Niko Lusiani of the Roosevelt Institute report in a new 2021 article: “Revenues and profits skyrocketed in 2021 to their highest levels recorded since the 1950s. “Furthermore, the U.S. companies increased their growth and profits in 2021 at the fastest annual rate since 1955.”

Even so, worker reviews remain a popular topic among inflation watchers. The latest example comes from the Wall Street Journal, which on Monday published an interview between its senior market columnist, James Mackintosh, and former US Treasury Secretary Lawrence Summers, a well-known inflationary Cassandra.

In what sounds like a delicious “late afternoon cure-all salmon at a London hotel” (don’t ask why Mackintosh feels compelled to reveal the menu), they seem agree that “empowered new workers” are among the “biggest forces driving higher in the long run” [interest] rates,” in the words of Mackintosh.

Mackintosh explains to his readers that higher prices are “necessary to keep prices in check. “Labor unions have formed where previously unavailable, including Amazon, Apple and Starbucks websites…. Stronger unions create a more inflationary environment.”

A few things about that. First, if Mackintosh has evidence that stronger unions cause inflation, he should show his work, since there is generally no evidence to support the premise. Rather, there is evidence to the contrary.

In the 1950s, when one-third of all U.S. nonfarm workers were union members, annual inflation averaged about 2%. In the 1920s, another golden age of union membership, prices actually dropped; The price spike associated with the United States’ entry into World War I took place in 1920).

The current high inflation, as it happens, has flared up while union membership in the private sector hits a dismal 6.1% in 2021. The number of highly qualified workers due to a representative union fell last year to 15.8 million, down 137,000 from 2020.

Strikes and organized activities have been widely reported as encouraging signs for unions, but remain modest amid a general decline in organized labor.

As for Amazon, Apple and Starbucks, which have received the call from Mackintosh, there is no sign that those companies are feeling any pressure from organizing labor, although Amazon and Starbucks have launched intense campaigns of union vandalism. Earlier this month, Apple employees in Towson, Md., won the first union vote at any of the company’s retail stores.

Amazon’s profit margin was 7.1% last year, up from 5.53% in 2020 and 4.14% in 2019. The profit margin at Starbucks was 14.4% in the last fiscal year ended. The company announced plans to return $20 billion to shareholders through dividends and share buybacks over the next three years.

Apple had a string of positive results, including a 25% better profit margin in its last full fiscal year, which ended September 25, and the following two quarters, through March 26. .

In April, the company said it would increase shareholder payout through a 5% dividend increase to 23 cents per share and a $90 billion increase in its existing share buyback program.

In short, the story is: Don’t cry for these companies because they are facing a push to unionize.

The bigger story is that expansion of corporate margins has outstripped wage growth over the past two years, including during periods of rising inflation. According to the Bureau of Economic Analysis, from the first quarter of 2020 to the end of 2021, the labor cost of enterprises increased by about 7%, but the profit after tax of enterprises increased by nearly 14%.

Konczal and Lusiani found that while the firm’s average price increases, a fair proxy for profits, were on average about 26% higher than marginal costs from 1960 to 1980 and about 56% in the 2010s, they have skyrocketed to 72% by 2021.

“In other words,” they wrote, “in 2021, we see a sharp increase in … companies as a whole separating their prices from their underlying costs.”

They added, “it wasn’t necessarily more profitable, but they did in 2021.” Net profit margin, or profit divided by sales, averaged 6% in 2010s; in 2021, this has increased to 9.5%, “the highest value on record.”

The authors acknowledge that the trend may have corrected over the past few months. Konczal, director of macroeconomic analysis at the Roosevelt Institute, told me: “But the corporate ticker is real.

“Bringing them down will benefit the economy, especially if you don’t think that the profits necessarily need to be more invested but simply paid out as bonuses to shareholders and bosses,” he said. .”

Businesses inevitably face real inflationary pressures. The most important concerns oil prices, either directly in fuel prices or indirectly through rising raw material prices due to higher energy prices. The tightening of the supply chain also contributed to the increase in the prices of parts and raw materials.

But higher profit margins suggest that businesses are raising prices more than necessary to cover their own higher costs.

At this point, businesses may feel they have the ability to raise prices in part because consumers expect it, given the continued reports of inflation concerns. (This is one way that inflation tends to feed itself.)

However, it is possible that the company’s profits will decline due to a combination of natural factors. Businesses may decide to absorb some of the increases in wages and other costs, such as fuel, without passing them all on to consumers and adding value.

There are signs that some of that may be happening: Retailers are preparing to cut prices to move obsolete or surplus merchandise out of stock and off the store floor. Some consumer companies may feel greater resistance from customers if prices continue to remain high, especially if they see competitors slashing prices.

But as long as the narrative about the causes of inflation remains focused on wages and employment, policymakers could make the wrong choices about how to bring it down. “There is room for these profits to drop,” says Konczal. Federal Reserve Chairman Jerome H. Powell “didn’t say much about corporate profits and the potential for a drop in profits and markup of those profits and help alleviate some of the pressure.”

https://www.latimes.com/business/story/2022-06-29/how-corporations-contribute-to-inflation Hiltzik: Corporate profits and inflation go hand-in-hand

Edmund DeMarche

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