I liked him when he was Clinton’s labor secretary, because of his labor-friendly policies and defense of working-class people, with whom I’ve identified since my youth.
Reich (bio here), a Dartmouth and Oxford-educated Rhodes Scholar and Yale Law School graduate, has been a professor at Brandeis and Berkeley, and a Harvard lecturer. That’s enough C.V. to sink a heavy cruiser, if not a battleship, by sheer weight.
Credentials mean something; those universities provide world-class-level education, and some of their graduates go on to become the intellectual, legal, and government elite because they can think, do complex analyses, and manage difficult problems.
But being very smart, very well educated, and very accomplished in the fields of academia, law, and government doesn’t automatically make someone right.
These days, Reich is also a political commentator and media columnist, which means he has to come up with material under deadline; and even if he can’t think of anything intelligent to say, he still has to say something. That’s what I suspect is happening when he talks about price controls.
The U.S. instituted wage and price controls during World War 2 when the government commandeered our nation’s resources, labor, and productive capacity for the war effort. It also imposed rationing at the same time to deal with shortages of nearly everything. You went to work, installed rivets on wing panels, got paid a government-controlled hourly wage for your toil, then went home and used your ration coupons to buy your weekly allotment of milk and eggs. That’s what life was like in a government-controlled economy.
I lived through the inflation of the 1970s and Nixon’s wage-price controls, which didn’t work to bring inflation down, because they didn’t address the root causes of inflation (e.g., financing Lyndon Johnson’s Great Society programs and the Vietnam War with deficit spending). Neither did Gerald Ford’s silly “Whip Inflation Now (WIN)” campaign. What broke that inflation was double-digit interest rates and a severe recession accompanied by double-digit unemployment. An iconic event resulting from Nixon’s price controls was the Great Toilet Paper Shortage, which demonstrated that if you order companies to sell TP at a loss, they won’t make TP, and when consumers sniff a shortage, they’ll hoard what there is.
Along comes Reich today (Sunday, September 25, 2022) bleating that “corporation greed, not wages, is behind inflation” (see article here). He’s right to criticize the Fed for attributing inflation to a tight labor market, correctly pointing out that wage increases aren’t keeping up with inflation, and it’s unreasonable to accuse workers of greed when their real incomes are shrinking.
But Reich also says the underlying economic problem is that profits are driving inflation. He says, “It’s caused by corporations raising their prices above their increasing costs,” and accuses them of using higher costs of materials, components, and labor as “excuses to increase their prices even higher, resulting in bigger profits. This is why corporate profits are close to levels not seen in over half a century.”
That’s a bit of a chimera, as corporate trend higher over time, because sales trend higher with an expanding population. When I look at a random sampling of major companies I don’t see an abrupt profit explosion; and Wall Street analysts are warning of a “profit recession” next year, which is partly why the stock market is imploding.
A basic law of free-market economics is that competition keeps prices in check. Reich says consolidation has weakened competition. He points to meat and poultry processing, where four companies control 85% of the market; pharmaceuticals, where he contends five companies are “causing drug prices to soar;” and airlines, which have gone from 12 major domestic carriers to just 4, “all rapidly raising ticket prices.” Same with banks, cable companies, and so on.
His suggestion? “Congress and the administration need to take direct action against profit-price inflation, rather than rely solely on the Fed to raise interest rates and put the burden of fighting inflation on average working people who are not responsible for it.” He wants bolder antitrust enforcement, a windfall profits tax, and limited price controls for now “as a backstop,” not higher interest rates on mortgages, car loans, and credit cards.
There are problems with these suggestions. Big companies are generally more efficient than small ones, which lowers costs of production and distribution, benefiting consumers with lower prices. This formula breaks down if competition is stifled by too much concentration, or illegal price-fixing, which is why we need regulatory oversight of the marketplace. Antitrust enforcement has been lax in recent years, but I don’t think this is a major factor in this bout of inflation.
Reich mentions “windfall profits,” but when is profit excessive? Looking at company reports, I don’t see monopoly profits. Most of the prices we pay go for expenses of producing goods and services, not to profit; for example, last year about 8% of Exxon’s revenues were profit before taxes; the year before, Exxon lost money. It’s strange he’s picking on airlines, a historically unprofitable industry characterized by frequent bankruptcies.
What he’s doing is cherry-picking one year of elevated profits some companies are making as we exist the pandemic, while not mentioning that nearly all companies experienced profit declines or outright losses during the two years of the pandemic. Meanwhile, Wall Street analysts are warning of a profit recession next year, which partly explains why the stock market is in a bear market this year; and looking farther ahead, these analysts foresee several years of low returns for investors. That’s not a situation that calls for intervention against “windfall profits.” Meanwhile, workers are in a stronger bargaining position than in many decades, and Reich is complaining about too much corporate power just when things are reversing in favor of labor? C’mon.
Price controls disrupt the normal functioning of businesses and markets, and typically lead to shortages like the Great Toilet Paper Shortage. If you freeze prices, you usually also have to freeze wages, and may have to implement rationing to manage the shortages. These are wartime measures, to be used when you’re sending factory output to battlefields instead of malls and big box stores.
This inflation was caused by an expansion of money supply and buildup of household savings that coincided with a contraction of the supply of goods and services to spend it on caused by the pandemic. It’s basically too many people trying to spend too much money at the same time. This is temporary and will resolve itself, if the Fed acts intelligently about money supply.
The Fed’s role is to stop pumping money into the economy and keeping interest rates low, which encourages borrowing that leads to more spending than the economy’s productive engines can support right now. I read in Barrons magazine this weekend that a Wall Street economist predicts inflation will return to 2% within 18 months. This is plausible, because the dominant forces in the economy are deflationary, and will remains so (because of long-term structural factors like demographics); that’s why the Fed resorted to monetary stimulus in the first place. The trouble came from not easing off the throttle quickly enough when the pandemic constricted the economy, which threw demand out of balance with supply.
You can’t fix that with price controls. You have to fix it with Fed policies that pull the excess money out of the financial system. The Fed is doing that now, but didn’t start soon enough, or do it fast enough, so now they have to make up for lost time — and arguably are still going too slowly. Thus, it might take 2 or 3 years instead of 18 months to normalize inflation. But even in that event, you don’t need price controls, and they won’t help alleviate the causes of inflation, they’ll only discourage production and worsen the shortages.
I agree with Reich that workers shouldn’t pay an inflation tax, and sacrifice should come from the corporate side. Wages were repressed for years while investors and the wealthy prospered, so it’s obvious who should give up a little. But while workers are falling behind right now, what matters is how things average out over the long run. For example, inflation was 7% in 2021, is estimated at 8.3% this year (see chart here), and as a thought experiment let’s assume it drops to 4.7% next year and 3% in 2024, for a total of 23% over 4 years. If a given set of workers get raises and bonuses of 5% last year, 6% this year, and 6% each of the following 2 years, totaling 23% over 4 years, they’ll be made whole. They’re not making more money, but they’re not making less, either.
This could happen under some of the wage agreements being negotiated now if inflation comes down quickly, as it might do. And if workers come out even, why do we need price controls? That could reignite inflation by suppressing supply at the same time wage hikes are encouraging more spending.
I wouldn’t enact Reich’s economic prescriptions at this point, especially price controls. They’re not necessary or justified, and would be counterproductive. Instead, I would press the Federal Reserve to continue tightening money supply.
With deficits coming down (see chart here), I also don’t see a need to pay heed to Republican demands for near-term spending cuts. Their proposed cuts are always selective and target programs they don’t like; they’ll spend freely on things they want such as a border wall. Longer term, deficit projections more than a couple years out depend on assumptions about economic growth that could be overly conservative; and in any case, a better way to deal with an aging population placing growing demands on Social Security and Medicare is to reverse some of the Republican tax cuts for billionaires and corporations — and boosting IRS enforcement to make them pay what they owe under existing rules.
Even if you think corporate profits are too generous in the short term, you should look past any short-term spike at the long-term picture. There, growing wage pressures from a more favorable outlook for workers likely will do the job of bringing “excessive” profits down.
The general rule of thumb is to let markets operate on their own unless some extraordinary event, or too much concentration of corporate or labor union power, necessitates intervention to correct imbalances that aren’t self-correcting. Regulated capitalism will always be better than laissez-faire capitalism; but if it ain’t broke, don’t fix it. You don’t want to overdo regulation or throw wrenches into market mechanisms. Antitrust intervention should be enough but not too much, and price controls rarely if ever do anything but jam the gears, and should be seen as only a wartime-type emergency measure. We’re not in that kind of emergency.