At the Groundwork Collaborative, we like to say that we are the economy. What we mean is that we shouldn’t evaluate the health of the economy just by how the stock market is doing, how big CEO bonuses are each year, or whether Fortune 500 profits are charting new records. Instead, we should evaluate the strength of the economy by how well the workers, families, consumers, and small business owners who power our economy are doing.
So we were pretty horrified when Larry Summers recently argued that throwing millions of Americans out of work is the cure for inflation. “In order to do what’s necessary to stop inflation,” he said. “The Fed is going to raise interest rates enough that the economy will slip into recession.”
When a so-called solution to inflation involves making countless workers and their families worse off, it is not a solution. It’s just cruel. It reflects a fundamental misunderstanding of why prices are rising in the first place.
Let’s examine the facts.
There are many causes of recent price increases – supply chain bottlenecks, foreign war, and a pandemic that brought our economy to a standstill. But one cause that economists like Summers completely ignore is the role that corporate profiteering is playing in rising prices. This fact isn’t up for debate. According to the Bureau of Economic Analysis, corporate profit margins have reached their highest level since 1950. That means that corporations aren’t just increasing their prices to cover any increased labor or material costs, they’re going further and expanding their profit margins along the way by using the myriad of conflicts as a foil.
There is also new evidence in a recent paper from Roosevelt Institute demonstrating that “markups,” the amount corporations charge above their actual costs, skyrocketed along with profits last year to their highest levels in 70 years and at the fastest annual pace since 1955. Tellingly, the giant corporations with high market share – those with price-setting power at the least risk of being undercut by competition – were the ones increasing their prices the most last year. Corporate power is clearly an important factor in recent price increases
All of this data aligns with what we at Groundwork have heard from one corporate executive after another on hundreds of earnings calls: corporations are increasing their prices not simply because of increased labor and materials costs, but because they can. In fact, they are boasting. These mega-corporations know that customers have little choice but to pay more for essential goods and services, and they’re willing to push prices as far as they can go.
Companies like Visa and Mastercard, which control 70% of the credit card market, offer a perfect case study in corporate price gouging. These companies already benefit from inflation because it pushes up ticket prices – and they charge “swipe fees” that are based on a percentage of the total sales price. As Visa’s CEO told investors, “historically, inflation has been a positive for us.”
But they aren’t stopping there. Mastercard recently doubled its “digital enablement fee,” bumping up the cost of every single online transaction. Altogether, Visa and Mastercard used the cover of inflation to increase swipe fees by over $1 billion since 2021, squeezing consumers and small businesses who operate on tight margins the most.
And if you thought that some corporations will bring prices down as supply chain bottlenecks are resolved and their costs drop, think again. When the CEO of PPG, an international paint company that owns Glidden, Comex, and Olympic, among other major brands, was asked by a market analyst on an earnings call if they would drop their prices when the costs of raw materials subside, he responded: “We’re not going to be giving this pricing back…” He justified his argument by noting that the increased prices are “being accepted by our customers” – and they can’t argue that their competitors aren’t doing the exact same thing.
In other words, the law of gravity doesn’t apply to corporate America. They are going to use their power in the market to take as many price increases as they can on the way up, but they aren’t going to be giving anything back on the way down.
Thankfully, policymakers have options that would bring down prices and hold corporations accountable – without taking Summers’ misguided advice and leaving workers and families out to dry.
Congress can pass legislation directly preventing price-gouging during national crises, like the COVID-19 Price Gouging Prevention Act. They can tax the massive windfall profits corporations are pulling in from increased prices and put that money back into the pockets of workers and families. They can address corporate consolidation through antitrust legislation and put power back in the hands of consumers. And they can make the badly needed investments to address supply chain challenges and put more money into the pockets of families who need it most.
Our economy is at a critical juncture. We can choose to put people first and build an economy that is more resilient and just – or we can take misguided actions that will send unemployment skyrocketing and trigger a completely unnecessary recession without achieving its intended goal to bring down prices. Let’s hope policymakers make the right choice.