In early February, U.S. Representative Jan Schakowsky and U.S. Senator Elizabeth Warren proposed a bill aiming to introduce the Price Gouging Prevention Act of 2024. The purpose of this bill, as stated by Representative Schakowsky in her press release, is to "protect consumers and prohibit corporate price gouging." The bill itself outlines measures aimed at safeguarding consumers from price gouging.
The key takeaways from the bill are significant: Firstly, it empowers the Federal Trade Commission and state attorneys to prosecute corporations that charge excessive prices, thereby enhancing enforcement against price gouging practices. Additionally, the bill imposes comprehensive reporting requirements, compelling corporations to disclose key aspects of their pricing strategies. Moreover, the legislation introduces an affirmative defense for small firms earning less than $100 million in gross revenue. Conversely, it establishes a presumption of guilt for any firm found to have unfair leverage, targeting larger corporations that may exploit market conditions for profit gains.
This legislation proposal comes after policymaker have accused big corporations of using the Covid-19 pandemic to increase profits more than their input cost increases require. For instance, Congresswoman Schakowsky, in her press release, cites the fact that while consumer prices have risen by 3.4% over the past year, producer prices have only risen by 1%. Moreover, there is evidence that goods whose prices have been rising, like diapers, have had a decline in the cost of their main input, in this case, wood pulp.
Although inflation is a genuine problem facing the average American, anti-price gouging legislation is a terrible solution to that problem. The flawed reasoning employed by Democratic lawmakers can be attributed to two key issues. Firstly, there is conceptual confusion among policymakers regarding the nature of profits, prices, and inflation. Secondly, even if their insights on inflation were accurate, implementing price controls would represent a classic case of the cure being worse than the disease.
When reflecting on the nature of prices, profits, and inflation, these policymakers have concluded that the greedflation hypothesis adequately explains the cause of inflation. In their view, the fact that input costs are rising slower than prices is robust evidence in favour of the hypothesis. Another argument in favor of the hypothesis is the Groundwork report cited in Congresswoman Schakowsky press release. In that report it highlights in bold print that corporate profits were responsible for 53% of the rise in prices during the second and third quarter of 2023.
The primary issue with these arguments is that this data relies on the unwarranted assumption that any changes in prices that cannot be attributed to some changes in cost is greed induced inflation. Simple economic wisdom suggests that increases in inflation could be due other factors such as a newfound necessity for a good or government monetary policy resulting in demand side increases. Additionally, even assuming the validity of the methodology of the study, the 53% figure for the Groundwork report is very misleading. The figure includes deflation in the data, which has a significant impact on the analysis. Specifically, since non-labor contribution deflated by 27%, profit contribution can be 53% and still not constitute the majority, with labor contribution at 73% in this case. While the initial number might have suggested that profits were the primary driver of the increase, a closer examination revealed that labor contribution was, in fact, the largest factor. Another issue with the report is that when we consider a longer period, such as inflation since 2019, the profit contribution falls to 34%. Even more damning to the greedflation hypothesis is the Fed report by Berardino Palazzo, where he explains that when accounting for direct government intervention to support small and medium-sized businesses, as well as the reduction of net interest rates due to government monetary policy, profit margins are not very notable.
The examination of the arguments put forth by policymakers supporting the greedflation hypothesis reveals significant flaws. Part 1 of this analysis effectively refutes the notion that corporate profits are the primary driver of inflation, displaying the complexity of factors influencing price increases. Moving forward, Part 2 will delve deeper into the inherent problems with implementing price controls as a solution to inflation. By scrutinizing the implications of such measures, including their potential to exacerbate rather than alleviate economic challenges, we can better understand why anti-price gouging legislation may not be the most effective or prudent response to addressing the concerns surrounding inflation.