Yves here. It can’t be said too often: a significant amount of our current inflation is due to companies increasing prices because they can, not because they are seeing corresponding increases in costs. And that’s before getting to the fact that corporate profit share is at a record high level of GDP, nearly twice the level of the early 2000s, which was then deemed unsustainably elevated by none other than Warren Buffett. In other words, some companies are using this inflation as yet another opportunity for grifting, instead of going on a modest profit diet to increase worker pay.
By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking and Hal Singer, Visiting Professor of Economics, University of Utah. Originally published at the Institute for New Economic Thinking website
Microeconomist Hal Singer studies the topic on everyone’s mind: prices. Singer, who teaches advanced pricing at Georgetown’s McDonough School of Business and frequently serves as an economic expert in antitrust litigation (often concerning how firms set prices), says that those who hold workers’ wages responsible for inflation are not only wrong but making the problem worse with policies that fail to hit the real mark.
His work shows that among industries dominated by a few mega-companies, bouts of inflation act as a handy cover for price hikes that have little or nothing to do with costs. You, the consumer, end up paying the price for predatory profit-seekers who have little to fear from soft antitrust laws and lax enforcement. Singer argues that when a company is making huge profits and workers’ wages aren’t keeping up with inflation, you can bet that something shady is happening – like collusion and price-gouging.
Singer spoke to the Institute for New Economic Thinking about practices that hurt consumers and argues that antitrust laws must be updated –- and enforced — to protect us from further harm.
Lynn Parramore: As inflation worries continue, we hear a lot of people blaming the problem on wage increases for workers. You disagree. Why?
Hal Singer: I think that in the present or new economy, wages don’t really enter the calculus of pricing by the firm. You may have heard the expressions “superfirms” [very large and successful companies] or “Network Economy” [an emerging hyperconnected, digitized, interactive economic system]. The idea is that in today’s economic reality, if you’re in a high fixed-cost industry where it costs you a ton to get started and then you take over the industry, the pricing problem basically devolves into one of maximizing revenues. In that situation, costs like the wages of your staff are really secondary considerations.
LP: Can you give an example?
HS: Sure. Think of an airline setting prices on an across-the-country flight. Are they taking into consideration the salaries of the flight stewards when setting that rate? Most likely not. What about a pharmaceutical company? Does it look at the wages of its chemists when pricing the products? Again, probably not. There’s been a severing of the relationship between wages and prices in so many sectors of the economy, particularly those in which inflation is running rampant. I could go on with many examples. I’m in a hotel in New York City right now. You think they’re charging rates based on the wages of the cleaning crews that come in? Not likely. They’re revenue maximizers. They’re just looking at the demand curve. The only thing that enters the calculus is what economists call demand-side elasticity considerations. In other words, how much you can get away with on the demand side in setting prices. The costs are no longer entering the equation.
One thing that has happened in the current economy is that worker power has been completely demolished. That has been recognized by tons of economists, including those at the Federal Reserve (Fed). That lack of power has broken down the historical relationship between unemployment and inflation. Economists call it the flattening of the Phillips curve [a theory that inflation and unemployment have a stable and inverse relationship]. What it means is that it’s going to be very difficult, if not extremely painful, to arrest inflation by targeting all of our energies at the labor market. If the relationship between wages and prices has been severed by a combination of network effects, superstar firms, monopsony power [when a single firm has all the power to buy labor in a market], then employing this policy is like pushing a rope. We’ll never get to the finish line. Look, inflation is still rampant despite these rate hikes and employees are suffering as firms pull back from hiring or lay off workers. The question is, have we really done anything to arrest inflation? The answer is no.
LP: Is your approach to pricing distinct from what most students of economics are taught today?
HS: It’s distinct from neoliberal economists, who think that firms, which are setting the prices, bear no culpability on inflation and instead scapegoat workers and consumers as the problem. In my pricing class, we study the pricing decision of the firms. I guess you have to look at where the funding is coming from. It’s very convenient to let the firms off the hook.
LP: Some are blaming Biden and the stimulus. Any truth to that claim?
HS: I just saw a story to this effect and I disagree. The stimulus was largely a lump-sum $1,400 payment that occurred in 2021 and likely spent in 2021. So, the idea that it’s continuing to have ripple effects in 2022, which we’re nearly at the end of, seems preposterous. I would also note that Biden also continued a direct payment that I believe came at the end of the Trump administration. So it’s not like that policy was new, it was just a continuation. I think that it’s very hard to connect Biden’s payment in 2021 to what’s happening in terms of inflation in late 2022.
LP: When businesses raise prices now, they claim to be simply passing on rising costs to consumers. But your work shows there’s more going on, and you’ve placed blame on corporate profit-seeking for inflation. What’s the evidence?
HS: If firms were simply passing along higher costs, then we wouldn’t expect to see their profits go up. Yet profits are at a historical high right now. That’s telling you that they’re not passing along cost increases. I’m not sure that they have any cost increases. The prices are rising much more quickly that the costs. So that kind of rejects the idea in the abstract.
To be concrete, I think that electricity is a market that people should focus on. And rental markets and food. These are the largest contributors to inflation. It’s very hard to believe, when you look at the profits of the electricity firms, which are skyrocketing right now, that they’re dealing with increased costs. Really, it suggests that their costs are not going up, or to the extent that they’re going up at all, the price hikes are far outpacing those costs.
Look at rental properties. If an institutional investor bought a bunch of rental properties in a neighborhood in say, Miami or Atlanta, how have their costs been going up? What costs are they facing at the margin, exactly? Are we talking about the clean-up crew? The security guards? The prices are clearly being set on the demand side. There’s no cost to explain why rents are exploding.
LP: Why aren’t companies afraid of driving away consumers away with predatory pricing? In your work, you’ve mentioned the profit-seeking price hikes in the meat-processing industry, putting a steak dinner out of reach for many. Why isn’t the meat processor worried about driving away business?
HS: It’s hard for consumers to move away, particularly when you’re talking about food. You could change your diet, but it’s pretty hard after you’ve developed certain preferences for meat over your lifetime. It’s hard to switch on a dime. There’s a central tenet in pricing theory that the more concentrated an industry, all things being equal, the easier it is to coordinate on prices. This coordination can be happening explicitly, like you pick up the phone and you tell your competitor, hey, let’s go and do this. Or you can do it tacitly. If there are just a few of you there, you can feel your way through to higher prices.
There’s a story I love telling. I was in a courtroom in December 2021. A price-fixing case. Under oath, one of the executives said that his cartel, which concerned capacitors [energy storage components], functioned most efficiently during times of inflation! I nearly fell out of my chair. What he was basically saying was that a small dose of inflation can serve as a focal point. A way for a bunch of different firms in a concentrated industry to focus their attention on a new target to kind of move in unison, to coordinate their pricing. It occurred to me right at that moment that we’re in big trouble, given how concentrated all markets in the U.S. economy have become over the last 15 to 20 years.
The other thing that a small bout of inflation does is that it softens the beachheads, to use a war analogy about how they would drop bombs on the beaches to allow the troops to march in. Today, when a consumer goes into a restaurant, say a steakhouse, and she sees a $50 price, she’s already been conditioned to expect that the price was going to be higher. She’s more likely to go along, to just tolerate the price hikes. She doesn’t see it as evil, just something that everyone’s doing. This is another reason we don’t see people just defecting and imposing price discipline. It’s going to be very hard for consumers to defeat this by protesting en masse.
What I’m calling for is a different approach entirely to how we arrest price increases that are coming largely from a very specific segment of the economy. The analogy I give is that if there’s a fire in your guest bedroom, you don’t go and bulldoze the whole house. You don’t start spraying water in the den. You go to the source of the fire and put the fire out there. It’s hard for me just watching this unfold because we know exactly where the price hikes are coming and we think we know who is implementing them and why. And yet we’re going to try to correct it through some general prescription that involves throwing sand in the gears of the economy writ large and aimed particularly at the labor market.
LP: How is this behavior of these companies to coordinate on prices legal? Isn’t that anti-competitive?
HS: The antitrust law is soft on this area known as tacit collusion. So firms in concentrated industries kind of feel their way to price hikes tacitly as opposed to via an explicit agreement. They don’t pick up the phone and say “Hey what should we charge our customers today?” but they do it through dynamic interaction over time. I was an expert for plaintiffs in a case involving an antitrust class action against Delta and AirTran for seeking to collude to overcharge for bag fees. A CEO of AirTran told the world during an earnings call that he would never impose the first bag fee, but if Delta were to go first, AirTran would follow with certainty. So he basically made a conditional pledge to a rival over the airwaves. The judge decided that this was not in violation of the anti-trust laws because he saw it more as tacit collusion than explicit collusion.
Now, there is one place where you could stop this under the current laws: the Federal Trade Commission (FTC). The FTC has special powers to enforce what are called “invitations to collude.” That would be under Section 5 of the FTC Act. No other agency, no other private enforcer could stop invitations to collude. But we’re not seeing it yet. The FTC is doing a lot more these days. It’s more vibrant than it has been in the last 30 or 40 years, but they’re limited in their resources and I don’t think there’s a focus yet on what firms are saying during earnings calls. The Groundwork Collaborative [an economic activist group] has been documenting all the shenanigans that have been taking place during earning calls where rivals are effectively cajoling their compatriots to reduce capacity or raise prices with them. You’ll hear an executive say, “oh, there’s too much capacity in this industry.” Or, “we’re going to take the lead on this.” They’re suggesting that others should follow without explicitly asking for it.
We don’t think that companies should be discussing their future pricing or capacity plans via conference calls. The Department of Justice (DOJ) and FTC’s Collaboration Guidelines say that this is likely to be anti-competitive. But there’s really nothing that we can do short of the FTC prosecuting under Section 5 of the FTC Act to stop it from happening.
LP: We’re hearing some economists asserting that their research shows no link between market concentration and producer price inflation. Why are they wrong?
HS: Well, I guess we’re in a world of dueling studies, but I and others have found the opposite. I was looking for the relationship between concentration and prices in 2020 and I found that the most highly concentrated industries were the source of the biggest price hikes in 2021. And the relationship was pretty robust. Concentration in industries in 2020 predicted price hikes in 2021. I did it again for an earlier time using a larger data set and I found the same relationship.
LP: Some economists even hold that market concentration is not a bad thing.
HS: Yeah, there’s a fight between neoconservative and progressive economists. Neoconservatives would argue that concentration is a reflection of some kind of superstar firms taking over with lower costs, and those savings will all rebound to the benefit of consumers. That’s not my view.
LP: What can be done in terms of regulation and the legal framework to curb collusion and price-fixing?
HS: One thing that we need to look at is how to deconcentrate the economy generally. There have been studies, including by the Fed, showing that in a (pre-Covid) city where institutional investors own more of the rental properties, the rental prices were higher than what would be expected. There was a story that came out this week in ProPublica about an algorithm that’s being used by rental property owners to coordinate price hikes. I’m also worried that in addition to institutional ownership in general, there could be a concentration of ownership – the same institutional equity firms buying up a large swathe of properties in a given neighborhood. No one has studied it yet but it’s something that I want to move to next. It seems to me that if we can establish a linkage between concentration and rental inflation at the neighborhood level, the simple fix would be that no individual owner could, say, control more than 5% of the properties in a given neighborhood.
That would be a fairly sensible rule. After deconcentrating the economy, which I realize is easier said than done, the next thing, I think, is price controls. There are a lot of economists, like Isabella Weber at the University of Massachusetts, who now are coming out and saying it. The idea here is that we do have a tradition of price controls in this country. Some of them have been more successful than others.
LP: Can you say a bit about what worked and what didn’t?
HS: During wartime, in the forties, we used price controls fairly effectively. In the seventies under Nixon, we tried again, and those seem to have been considered less successful. But Weber has explained that she didn’t feel that Nixon put full faith and effort of the White House behind it. In any event, I think that as a short-term targeted fix, say, in the rental example, it could work. If it was going to take us a few years to deconcentrate holdings of rental properties, then I think it would make a lot of sense to subject the institutional owners to some sort of price cap for the rate at which they could accelerate rents while they were divesting their properties. And I know that this is, in fact, being tried in certain countries, such as France, where rents have skyrocketed. I feel like we’re heading in that direction. Folks are basically just being priced out of these rental properties.
LP: How do you assess what Biden has done on inflation? What should he do going forward?
HS: I would give him a strong B+. His heart is in the right place. The Inflation Reduction Act is a good bill but the problem is that it isn’t really going to take effect until way out in the future. The list of drugs – the ones Medicare could bargain over — was shrunk down and it won’t take effect until years from now. So for me, that prescription, while helpful, isn’t going to bring the immediate relief that we need.
I don’t think that Biden uses the bully pulpit as effectively as he could. There’s a great episode where President Kennedy, at the onset of his administration, called out steel makers who were engaging in a massive collective price increase and effectively called them un-American. I realize that’s fairly harsh, but you can use the bully pulpit to call out certain firms that are engaging in outrageous profit-taking. And I feel like Biden would be well-served to pick on certain industries in particular and basically say, look, you’re causing a bunch of suffering, you’re making huge profits, and if you don’t knock it off, we’re going to start to consider everything, including price controls. We’ll have congressional hearings and we’ll call up your CEOs. I don’t feel like there’s been any serious threat leveled at executives either in the electricity industry or with these rental properties. They’re just getting away with murder and they’re going to continue to do so until someone calls them out.
LP: You mentioned action in France. Any other notes to take from other countries?
HS: We’re seeing price controls in the U.K. with respect to electricity and France with respect to rent, and I also saw a clever idea in Spain where I think they’re giving away train tickets to encourage people to stop getting in cars and driving. The point is that the FTC could use its powers to enforce invitations to collude. We could tweak the antitrust laws in a way that allows the DOJ and the attorneys general to go after firms for tacitly colluding. There’s this whole array of policies outside of the Fed’s rate hikes that could be tried to curb inflation in the U.S. but aren’t. So, as much as I’m upset with what the Fed is doing, they’re looking out and they don’t think that anyone’s going to give them help with this problem. They think they’re the only ones and they only have one tool and they’re using it. There’s this weird stand-off where no one is communicating to the Fed that we will pursue alternative remedies.