A new paper was published Tuesday showing that U.S. corporate profit and price markups rose to their highest levels ever since the 1950s. This reinforces arguments for a tax on excess profits as a way of reining in sky-high inflation.
The Roosevelt Institute’s Mike Konczal, and Niko Lusiani authored the book. analysis finds that markups—the difference between the actual cost of a good or service and the selling price—”were both the highest level on record and the largest one-year increase” in 2021.
“Markups this high mean there is room for reversing them with little economic harm and likely societal benefit,” Konczal said in a statement. “To tackle inflation, we need an all-of-the-above administrative and legislative approach that includes demand, supply, and market power interventions.”
In their new brief, Konczal and Lusiani note that higher markups don’t always mean larger profits.
“But they did in 2021,” the researchers write, showing that the net profit margins of U.S. firms jumped from an annual average of 5.5% between 1960 and 1980 to 9.5% in 2021 as companies pushed up prices, citing inflationary pressuresThey are a part of the global economy and this is their justification.
“How high companies can increase their sales up and above their costs… matters for the economy more generally because these markups distribute economic gains from workers and consumers to firms and shareholders,” said Lusiani. “This is especially the case when almost 100% of these firms’ earnings derived from markups are distributed upward to shareholders rather than retained and reinvested.”
“Making corporations once again price-takers rather than price-makers,” Lusiani added, “will help bring down prices, and in time lead to a more equitable, innovative economy.”
The White House is struggling to find a coherent and effective solution to the inflation surge, which has become a serious economic problem and political problem, especially as the pivotal midterms in 2022 approach.
Survey data showsA majority of Americans, including those from key battleground states, want the Biden Administration to challenge corporate power. They also support a windfall profits taxes to counter the rising prices at gas stations and grocery stores.
Konczal and Lusiani’s brief makes the case for a new tax to combat excess profits that they say have become “widespread.” Such a tax, the researchers argue, would help redistribute “runaway economic gains while simultaneously eroding company incentives to increase their markups.”
Additionally, they write, “increasing competition and reducing market power” through antitrust action “would bring down inflation to some degree, no matter its cause.”
But influential U.S. economists — former Treasury Secretary Larry Summers chief among them — have argued that solving high inflation would require pushing down wagesThis could lead to millions of people losing their jobs.
“We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” Summers, who spoke with President Joe Biden by phone Monday morning, saidIn London, the next day.
Jerome Powell, Federal Reserve Chair, is leading an effort at reducing inflation by aggressively hiking interest rates, has also cited modest wage increases over the past two years as a factor behind rising inflation, expressing his desire to “get wages down” despite evidence that wage growth has slowedIn recent months.
Konczal and Lusiani contend in their paper that “while the idea that we are facing the threat of a wage-price spiral is becoming conventional wisdom, this brief and other research finds that changes to labor and worker compensation are not driving factors in recent markups.”
“If margins are unusually high, then there’s the possibility that profits and markups can decrease as either supply opens up or demand cools, removing pricing pressure,” they write. “Such a high profit margin also means that there’s room for wages to increase without necessarily raising prices — an important dynamic in a hot labor market.”
