Inflation is a global problem primarily driven by supply chain disruptions
We should be investing in our infrastructure and our people rather than trying to make workers poorer
Inflation is frequently in the news and on people’s minds these days, and rightly so. While many pundits and politicians will over-simplify its causes—often in an effort to further their own agendas—the modern global economy is incredibly complicated and interconnected.
I don’t claim to have the answers to every question about inflation, nor the solutions for every problem caused by rising prices, but I do want to provide an overview of key data and policy choices.
In this month’s issue of the Economic Justice and Progress Newsletter, I want to clarify a few misconceptions. Namely, I will argue that:
Inflation isn’t just happening in the United States
Consolidated markets and corporate profiteering exacerbate inflation
Pandemic relief in the U.S. wasn’t a mistake
Combating inflation does not require enduring unnecessarily high rates of unemployment for years to come
Beyond clarifying misconceptions, I will also highlight how supply-chain disruptions—particularly in the oceanic shipping industry—have contributed to global inflation. I also want to briefly discuss what the path forward for the U.S. may look like.
But first, I want to set the record straight: inflation is a global problem in 2022.
Inflation is a Global Problem
Prices are rising in countries across the globe. Not every country is experiencing the same degree of inflation, nor are price fluctuations for the same goods or services contributing to inflation in the same way in every country, but many countries are nevertheless experiencing similar rates of inflation.
Consider, for instance, this excerpt from a recent Axios article titled “U.S. inflation rate is in the middle of the pack globally”:
Inflation in the U.S. is at a 40-year high, but America isn’t alone. Soaring prices are a truly global phenomenon.
The big picture: An analysis of inflation across 111 countries from Deutsche Bank puts the U.S. near the middle of the pack. Among those countries, the median rate of 7.9% year-over-year inflation has more than doubled from 3.0% one year ago, thanks largely to spiking energy and food prices.
Some countries, like Turkey, unfortunately have inflation above 70%, while others have fairly modest inflation hovering around 2%, but inflation is higher than it’s been in years, if not decades, around the world. I prepared the graph below to help visually demonstrate this global trend:
Again, there are nuances underlying what each country is experiencing, and I may go into further detail about this in future articles, but I mainly wanted readers to understand that this is a global phenomenon. I will, however, discuss certain details surrounding underlying factors in the United States and the global economy in general.
I’ve also discussed corporate greed in a previous article before, but wanted to provide additional information and a rebuttal to counterarguments I’ve seen in the months that followed.
Concentrated Markets Contribute to Inflation
Corporate greed—although some would argue that it is a myth, and that even suggesting that it played a role in our current inflationary period is tantamount to spreading an economic “conspiracy theory”—has certainly exacerbated, if not necessarily caused, some of the price increases we’ve seen throughout this pandemic. Now we have more concrete evidence proving what many already suspected.
Economists at the Federal Reserve Bank of Boston released a paper last month titled “Cost-Price Relationships in a Concentrated Economy”. While not specifically measuring an abstract concept like “corporate greed” per se, it examined the relationship between markets becoming more consolidated in the hands of fewer firms—i.e., less competitive—and costs which get passed onto consumers.
These economists examined data including the BLS Consumer Price Index (CPI) and Producer Price Index (PPI) to see how firms’ costs and prices borne by consumers have fluctuated in recent years. They also looked at a measurement of market concentration known as the Herfindahl-Hirschman Index (HHI), and analyzed it alongside the percentage of sales going to the top five firms in various industries. Their graph below shows how both these latter statistics suggest that markets in the United States are becoming increasingly concentrated.
The introduction summarizes the paper’s findings well:
The US economy is at least 50 percent more concentrated today than it was in 2005. In this paper, we estimate the effect of this increase on the pass-through of cost shocks into prices. Our estimates imply that the pass-through becomes about 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century. The resulting above-trend price growth lasts for about four quarters. Our findings suggest that the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current supply-chain disruptions and a tight labor market.
With so many different industries being dominated by the five (or fewer) largest firms, startups being acquired by—and even massive companies merging with—corporate behemoths, it is no surprise that this study would find that our economy is at least 50% more concentrated than it was nearly two decades ago. It also stands to reason that, in less competitive, more concentrated markets, costs are passed on to consumers at a greater rate than if these markets were more competitive.
The Economic Policy Institute further compared corporate profits during the pandemic to the four preceding decades, in addition to similar comparisons of labor and nonlabor input costs throughout the nonfinancial corporate sector. The results, as you can see in the image below, are striking.
Between 1979 and 2019, nearly two-thirds of this proverbial pie went to labor while an average of 11.4% went to corporate profits. From mid-2020 through the end of 2021, however, that average shifted to 53.9% going to corporate profits and only 7.9% went to unit labor costs. Not only do these findings bolster the argument that corporate profits are running amok, but they also cast doubt on tight labor markets driving inflation.
This dwindling slice of the economic pie going to labor comes at a time when we’ve seen relatively high nominal wage growth, yet real wages are still falling for working families like they have all too frequently in recent decades. BLS data shows that overall wages are generally not rising more than 7% in the past year or so, though some industries like leisure and hospitality are seeing (in my opinion, long overdue) wage increases exceeding 10%, but we’ve seen the Consumer Price Index rise at rates above 8%.
But I suspect—and a great deal of evidence suggests—that inflation being less transitory than many experts expected has less to do with these factors and more to do with disruptions to global supply chains. Nonlabor costs increasing as a share of input costs, like we see in the EPI chart above, corroborates this theory.
Market consolidation, however, still played an important role in supply chains and contributed to the fragility of our global economy.
Global Supply Chains and Disruptions
While the United States has multiple deficiencies in its supply chains, one of the weakest links in global supply chains throughout the pandemic has been oceanic transport. In February, The American Prospect did an in-depth analysis of the container ship industry, its history, and how it led to so many bottlenecks throughout the pandemic. The U.S. economy, as noted previously, is at least 50% more concentrated overall; the oceanic shipping industry, on the other hand, appears to have concentrated even more so in recent decades.
According to an International Transport Forum study, three shipping alliances:
…represent around 80% of overall container trade and operate around 95% of the total ship capacity on East-West trade lanes, where the major containerized flows occur.
Due to this consolidation in the hands of just a few firms operating as alliances, the pandemic shift in consumer habits away from services like travel and dining towards purchasing products—durable goods in particular, as you can see in the chart prepared by the Federal Reserve Bank of Cleveland below—and cascading disruptions falling like dominoes around the world and creating a chain reaction of delays, oceanic shipping costs have skyrocketed.
The previously mentioned American Prospect article tracked prices and profits for the oceanic shipping industry throughout the pandemic:
The price of shipping a 40-foot container from China to the United States was once around $2,000. By August, it had soared to a record $20,000, a tenfold increase. By January, rates receded, but only to around $14,000, still enough to produce incredible profits for a concentrated industry. Shippers earned $25 billion in 2020; research consultant Drewry predicted $300 billion for 2021 and 2022.
When so many products are shipped overseas in this increasingly globalized economy, shipping costs increasing tenfold sends shockwaves throughout the economy. The degree to which companies will then pass these increased costs to their customers, as we’ve seen, is impacted by the degree of consolidation within that industry.
Thankfully, the Ocean Shipping Reform Act passed through Congress and President Biden signed it into law earlier this month. The Act should help to undo some of the damage done by a deregulated, consolidated shipping industry, but it may take time to untangle this mess.
Despite these troubling circumstances, I still don’t think everything can be chalked up to “profiteering” alone.
With so many disruptions happening throughout the world, from the pandemic impacting different ports at different times—including the world’s busiest port, Shanghai—to the Suez Canal being blocked by a massive ship which ran aground last spring, natural disasters increasingly becoming the norm as climate change accelerates, ports around the world having hundreds of ships waiting to be unloaded, and delays causing shipping containers to sit empty in one part of the world while another port has a shortage, many of these costs undoubtedly stem from the industry being in disarray.
Still, whether greed or disorganization is the primary factor, prices and profit margins are increasing, and consumers are often the ones left paying the price.
The United States has other infrastructural problems associated with getting these shipping containers unloaded from ports and their contents onto shelves, and The American Prospect’s series of articles on our supply chain covers many of those details, but oceanic shipping impacts the entire world. The ongoing war in Ukraine also impacts the entire world, our current supply chain, and where future investments in supply chain infrastructure may be made.
In this period of inflationary pressure being felt around the world, the international supply chain is an integral part of this story. To bounce back from pandemic disruptions and proactively mitigate future disruptions, we must invest in a more resilient supply chain at home, and encourage cooperation and peace abroad.
However, far too many pundits and politicians act like the United States is the only country in the world experiencing inflationary pressure, and either ignorantly or maliciously attribute it to policies like President Biden’s pandemic response.
COVID Pandemic Persists as U.S. Relief Runs Dry
It has been more than one year since the third and final Economic Impact Payments, or “stimulus checks”, were authorized, and nearly one year since the enhanced unemployment insurance expired. It has also been nearly one year since the first monthly Child Tax Credit payments went out to families, and we’ve seen six months of those payments no longer being sent.
Yet we’re still hearing specious arguments about how these and other Biden administration policies presumably sparked inflation around the world. Rather than the disruptions of war, plague, and natural disasters unfolding around the world—all while corporate profiteers increase their margins and returns to labor decline—prices must be rising, if I’m understanding these perspectives correctly, because public funds kept families from falling into poverty last year.
Studies show, however, that the United States would not be in a much better situation with respect to inflation—and, for many reasons, would likely be in a worse situation overall—had we not intervened during the pandemic. The Federal Reserve Bank of San Francisco released a paper in March which concluded (emphasis mine):
…the sizable fiscal support measures aimed at counteracting the economic collapse due to the COVID-19 pandemic could explain about 3 percentage points of the recent rise in inflation. However, without these spending measures, the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage.
Even if we assume these policies contributed a full three percentage points to the current 8.6% annualized rate of inflation, subtracting that 3% and holding all else equal—even though the lack of pandemic relief would have had catastrophic consequences which make truly holding all else equal in this hypothetical situation impossible—that would put us at around the same rate of inflation France is currently experiencing.
What’s more, the Federal Reserve Bank of San Francisco released another paper this week specifically examining supply-driven inflation, which would stem from issues like we discussed in the previous section, and demand-driven inflation caused by consumers. They concluded that:
…supply factors are responsible for more than half of the current elevated level of 12-month PCE inflation. This in part reflects supply constraints from continued labor shortages and global supply disruptions related to the pandemic and the war in Ukraine. While demand factors played a large role in the spring of 2021, they explain only about a third of recent elevated inflation levels.
The graph below shows the results of their analysis side by side.
This suggests that all of the disruptions occurring around the world, including the ongoing pandemic, would still likely cause the United States to overshoot the 2% inflation the Federal Reserve aims to maintain. And while institutions around the U.S. unfortunately appear to have virtually given up containing the spread, we regrettably crossed a grave milestone last month of more than 1,000,000 deaths from COVID-19.
It didn’t have to turn out this way. Mistakes have been made along the way, but the path forward doesn’t need to be beset by more unforced errors.
Economics textbooks typically outline Congressional fiscal policy as well as the Federal Reserve using monetary policy to combat inflation. However, with an administration that has lost its political momentum, the Federal Reserve is taking, in my opinion, drastic measures.
Federal Reserve Announced Largest Interest Rate Increase Since 1994
The Federal Reserve announced last week that it would be raising interest rates by 75 basis points, or 0.75%, which is the largest increase since 1994. The Fed’s Open Market Committee outlined their logic for doing so in the press release which coincided with the announcement:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate.
The Federal Reserve certainly should play a role in mitigating inflation, but it has a “dual mandate” to use monetary policy to keep prices stable and unemployment low. However, their decision to increase interest rates while the economy is still recovering—and while we need to make critical investments in infrastructure to alleviate long-term inflationary pressures stemming from supply chain deficiencies—suggests that they may be pivoting to their old ways of attempting to combat inflation while leaving workers to fend for themselves.
A recent quote from Fed Chairman Jerome Powell was rather revealing of the extent to which workers may once again be on their own (emphasis, again, is mine):
So in principle, it seems as though, by moderating demand, we could see vacancies come down, and as a result—and they could come down fairly significantly and I think put supply and demand at least closer together than they are, and that that would give us a chance to have lower—to get inflation—to get wages down and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially.
I have no idea how attempting “to get wages down” is going to unload shipping containers any faster, how it’s going to better contain a global pandemic, how it’s going to bring about peace in Europe, how it will promote competition in increasingly consolidated markets, or how it will address underinvestment in U.S. infrastructure. Still, at least Powell is ostensibly going to try to avoid having unemployment rise significantly.
Elsewhere, former Treasury Secretary Larry Summers described perhaps the worst case scenario of responding to inflationary pressure with anti-worker policies:
We need five years of unemployment above 5% to contain inflation -- in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment…
The most charitable interpretation of this quote would probably be to infer that Summers meant to say that “we would hypothetically need five years of unemployment above 5%…” et cetera, according to certain frankly outdated academic models, but we tried this during the recovery following the last recession and it was a disaster, so let’s try something else instead.
To help readers better understand the comparisons between the 2020 recession and the last recession, I prepared the graph below which shows unemployment rates following the beginning of both the Great Recession and the Pandemic Recession.
Given the stark contrast between these recession recoveries, I hope policymakers do indeed try something else this time. But what might these other policies look like?
Combating Inflation while Promoting Economic Justice
In short, Congress should have maintained the political momentum necessary to pass effective fiscal policy, while working alongside a Fed which more delicately applied monetary policies.
Passing the Biden administration’s agenda should have been the bare minimum, and given how modest it truly was, it should have been—and, in my opinion, it still is—politically viable. Consider, for instance, the Build Back Better agenda which aimed to reduce costs for essential goods and services, including:
Childcare
Higher education
Prescription drugs
Healthcare
Housing
Failing to increase housing supply like the Build Back Better Act would have done, particularly at a time when housing costs are disproportionately contributing to core inflation, is an unforced error that Congress made.
Investing in healthcare, childcare, home and community-based care services, universal preschool, expanding Medicare to include dental, vision and hearing benefits, allowing Medicare to negotiate prescription drug costs, and investing in our manufacturing and supply chains, would have lowered many costs borne by working families. However, we only passed the bipartisan infrastructure package and allowed the Build Back Better Act to wither away in the Senate.
This would just be a start, of course, and would fall short of more ideal long-term solutions like Medicare for All and a Green New Deal.
In helping to contain the spread of COVID around the world, and thus mitigating the risk of even more unpredictable pandemic-related economic disruptions, the Biden administration could simply fulfill a campaign promise. Nearly a year and a half into his presidency, Biden still has yet to fulfill a campaign promise he made to healthcare activist Ady Barkan, and the entire world, that he would not enforce patent protections for the COVID-19 vaccines developed with significant assistance from our public funds. The more people around the world receive vaccines, the less this virus will continue spreading uncontrollably, but these patents put short-term profits over people and long-term prosperity.
Getting gas prices down would be a trickier subject, as the best long-term solution is obviously to move to alternative sources of energy, both so that we can continue living on a habitable planet, but also so that monarchies and authoritarians no longer have such sway in the global economy. However, the transitionary period in the interim is more difficult to navigate.
Given the disconnect between the price of a barrel of oil and gas prices, evidence pointing to the bottleneck at the oil refinery level seems increasingly more relevant to our current predicament. Market consolidation and single-mindedly chasing profits once again appear to be factors in this story, but the solution of investing in more refineries is at odds with weaning the world off fossil fuels. I am losing faith that market forces will bring about an “efficient” long-term solution, but that is a topic for another article.
Some Senators, including Senators Elizabeth Warren and Bernie Sanders, are trying to thread this needle of preventing price gouging without inadvertently exacerbating supply and capacity shortages. To that end, these Senators proposed the Price Gouging Prevention Act of 2022.
If enacted, the Act would make it unlawful to charge “an unconscionably excessive price during an exceptional market shock,” which would include periods following natural disasters, states of emergency, wars, health crises, and other identifiable market disruptions.
Critics of the bill argue that this leaves too many things up to interpretation, but many laws and regulations function like this. For example, in accounting, the United States follows Generally Accepted Accounting Principles, or GAAP, which have many specific rules about how to fairly state a company’s financial position. When a specific rule doesn’t exist for certain situations, as often happens in a constantly evolving business environment, regulators go back to underlying principles for guidance.
This often sets up an adversarial situation where each party tries to prove guilt or innocence, which isn’t always clear cut, but sometimes this is necessary when it’s difficult to predict every possible situation for which a specific rule must be made. But even when there is a specific rule, some companies may still technically follow the letter of the law while circumventing the “spirit” or intention of that law.
Although the Act places a burden on regulators to prove their case that certain pricing schemes are “unconscionable”, it does offer some specifics. The Price Gouging Prevention Act includes specific instances in which a company would be presumed to be in violation of this proposed law as well as ways for companies to prove their innocence. The accused company or person could, for instance, prove that the price increase is:
…directly attributable to additional costs that are not within the control of the person and are incurred by the person in procuring, acquiring, distributing, or providing the good or service.
This could also be up to interpretation, but it would be up to the two parties to prove their cases in a wide variety of situations. Whether gas prices skyrocket during a war, or utility companies start charging thousands of dollars per megawatt-hour for electricity after a storm, companies will have to prove that doing so relates to costs outside of their control.
I don’t necessarily doubt that the bill could be improved, and I acknowledge that this is going to be a difficult needle to thread for many reasons. But before I wrap this article up, I want to share a few thoughts on other ways we can make short-term progress.
Postmaster General Louis DeJoy should have been replaced long ago, and we should electrify our postal fleet as soon as possible. Now that the Biden administration has new appointees on the USPS Board of Governors, they should make replacing DeJoy a top priority.
Also, there should be consequences for union-busting billionaires who threaten to fire workers for the supposed infraction of working from home. Rather than discouraging telecommuting, we should be encouraging it and investing in our digital infrastructure.
With fewer people forced to congregate indoors at work, perhaps this may have the side effect of slowing the spread of COVID. Some workers don’t have the luxury of being able to work from home, but fewer people gathering in general also means fewer workers—who are stuck at workplaces for several hours on a given day—would be getting exposed to COVID at work.
Ultimately, I’d like to see the Biden administration get their agenda through Congress while the Democratic party still has a slim majority. We can still pass the Build Back Better Act to invest in people, the PRO Act to protect workers who want to organize and unionize, and we still need to pass the For the People Act and the Ban Congressional Stock Trading Act if we are to have a truly representative democratic republic.
In the meantime, share your thoughts on these subjects in the comments, get organized, stay safe and take care of one another.
Thank you for reading my newsletter and taking the effort to learn about making the world a better place. I look forward to hearing your thoughts on how we can make progress towards a more just economy.
-JJ
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