Corporate profits

Economist Explains Record Corporate Profits Despite Rising Inflation: NPR

NPR’s Michel Martin talks with economics professor Isabella Weber about the price hikes and inflation that’s happening alongside soaring corporate profits.



MICHEL MARTIN, HOST:

Prices are up everywhere – at the gas pump, at the grocery store, in the parking lot. This week, the federal government reported a 7.5% increase in the cost of goods across the board compared to a year ago. The consumer price index showed a 4% rise in housing, a 12% rise in the price of meat, and the cost of buying a used car rose by more than 40%.

But here is another reality. As families grapple with the shock of the stickers, the profits of the companies that put these products on the shelves – well, those are skyrocketing. Data from the U.S. Commerce Department shows corporate profit margins are the widest in 70 years, prompting progressive leaders like Senators Bernie Sanders and Elizabeth Warren to cry foul, saying some companies are using the pandemic as a hedging to raise prices far more than is warranted.

As is often the case in economic theory, there are a variety of opinions on this, so we called Isabella Weber. She is a professor of economics at the University of Massachusetts at Amherst. She has studied pricing policies in the context of rapid economic transitions, and she is with us now to talk about it all. Mr. Weber, welcome. Thank you very much for joining us.

ISABELLA WEBER: Thank you very much for inviting me, Michel.

MARTIN: So we see the price of almost everything going up, and we’re told it’s supply chain disruptions or labor shortages, both related to the pandemic. And at the same time, companies are posting record profits, which seems counterintuitive to many people. So what do you think about why these two things are happening at the same time?

WEBER: Yeah. I mean, first of all, we have to realize that supply chain issues are very real, right? So in normal times, companies, including very large companies, mainly compete for the possibility of delivering their products quickly, attracting customers through advertising, etc. So if demand increases, they basically respond by delivering more of what they produce. But what’s happening now is that all of a sudden, because this gigantic conveyor belt system, if you will, isn’t working properly, things get stuck. And suddenly, companies, even very large companies, have difficulty delivering.

MARTIN: I think people understand that. You know, if people want to buy things and there are few of them, of course they will be more expensive. But I guess the question would be, what is the line between the normal type of market operation and market manipulation? Are there many, and who decides which line is?

WEBER: Businesses always want to maximize their profits, don’t they? In the current environment, they suddenly cannot provide as much as before. And that creates an opening where they can say, well, we’re facing rising costs. We face all these problems. We can therefore explain to our customers that we are increasing our prices. Nobody knows exactly how much these prices should be increased. And everyone sort of understands that, oh, yes, there are issues, so, yes, of course, companies are raising prices in ways that they couldn’t justify in normal times.

But this does not mean that the actual amount of the price increase is justified by the increase in costs. And in fact, what we’ve seen is that profits are skyrocketing, which means companies have raised prices more than costs. In earnings reports, companies bragged that they managed to beat the inflation curve, managed to push prices up more than their costs, and as a result made those record profits. .

MARTIN: So the Biden administration in November tackled energy costs. The president said he would ask the Federal Trade Commission to investigate possible market manipulation or price gouging in the energy sector. So what would that look like?

WEBER: President Biden called that unfinished gasoline prices were down 5%, where prices at the gas station were up 3%. In other words, companies that sell gasoline at the gas station are raising prices further or, in this case, not passing on the price cut they enjoyed in November. That was the president’s argument. So, yes, the president has to intervene. How exactly to do this is beyond my expertise as an economist.

MARTIN: Before we let you go, do you see a willingness to do that? I know it’s not strictly your area of ​​expertise, but among the people you’ve spoken to, your fellow economists, is there consensus on the way forward?

WEBER: Well, I would say we’re in pretty uncharted waters because we’re in this situation where specific prices are skyrocketing, which we haven’t seen in a long time because we’ve had this chain system. supply which, yes, has always had the vulnerabilities that we see now, but in stable times it has performed quite well. So in that sense, I think the economies are not very well prepared to think about the issues that we face. So we have to think about a different kind of response, and that forces us to have a very open conversation instead of the kind of confrontations and often knee-jerk reactions we’ve seen in recent weeks.

MARTIN: It’s Isabelle Weber. She is an economist and professor at the University of Massachusetts at Amherst. Professor Weber, thank you very much for speaking to us. It has been fascinating.

WEBER: Thank you very much for inviting me, Michel.

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