Debate Desk
Did Corporate Greed Cause the Price Spike of 2021 to 2023?
Companies were no greedier in 2021 than in 2019; prices rose because too much money chased too few goods, and supply could not keep pace.
The claim
Those who blame "greedflation" argue that large companies used the cover of supply problems to raise prices by more than their costs rose, that record profits proved it, and that the cure is price controls, windfall taxes, or tougher antitrust action against firms with market power.
The answer in three points
- Greed is a constant, and a constant cannot explain a change. Businesses wanted higher profits in 2019 just as much as in 2022. What changed was the amount of money in the economy, the shortage of goods and workers, and the demand that came from large federal payments.
- Higher profits are what rising demand looks like at the start of a price spike, because firms with fixed capacity sell more units at higher prices. They do not prove that firms conspired. They signal that buyers were bidding for scarce supply.
- The prescription matters. Price controls produce shortages, because a ceiling below the market price tells producers to make less. The record of such controls in the 1970s is one of gas lines and empty shelves.
The practical test of any explanation is whether it predicts what happened afterward. The money-and-supply account predicted that prices would cool as the Federal Reserve tightened, as supply recovered and as federal payments ended, and that is what followed. An account that rests on a sudden change in the character of businesses predicts nothing, and offers a cure, price controls, with a poor record. Families deserve an explanation that points to something a government can fix.
The numbers
- The Bureau of Labor Statistics reported that the consumer price index rose 9.1 percent over the twelve months ending June 2022, the highest annual rate in four decades.
- The Federal Reserve held its target rate near zero from March 2020 until March 2022, according to the Federal Open Market Committee's published decisions.
- The Congressional Budget Office reported that federal deficits in fiscal 2020 and fiscal 2021 were each above $2.7 trillion, the largest in peacetime history up to that point.
What they will say next
"Executives said on earnings calls that they were raising prices." A company that raises prices when its costs rise is doing ordinary business, and executives talk about it openly because their investors ask. It is not a secret agreement, and the same executives were reporting shrinking margins when costs were rising faster than prices.
"Why did inflation fall without a recession then?" Because the supply chain cleared, workers returned, and the Federal Reserve raised rates. Each of these is a better explanation than a sudden decline in greed.
"Concentrated industries can set prices." Where a firm really has market power, antitrust law already applies and conservatives support enforcing it against actual wrongdoing. That is different from blaming a price level that rose across an economy of millions of sellers.
"Profit margins hit records, so firms must have raised prices beyond costs." Margins rose in some sectors and fell in others, and aggregate profits reflect volume, product mix and the timing of costs. When a shortage hits, the firms with goods in stock earn more. That is a signal to producers to make more, and the way to protect families is to let that signal work and to clear the obstacles to supply.