Taxes instead of interest?
Corporate greed drives prices up
By Hannes Vogel
06/13/2023, 4:10 p.m
Not only currency guardians and economists, but also professional investors see the reason for the high inflation in the excessive profit increases of many companies. On the other hand, according to some, it is not higher interest rates that will help, but higher taxes.
For decades, the famous sentence of Milton Friedman, winner of the Nobel Prize in Economics, was considered an irrefutable dogma in economics: “Inflation is always and everywhere a purely monetary phenomenon”. Accordingly, inflation must be combated exclusively by the central banks with their monetary policy tools such as interest rate hikes. However, with Russia’s attack on Ukraine at the latest, it has become clear that the mantra of the inflation pope does not apply so unrestrictedly to the current inflationary crisis. Because a large part of the problem has gone unnoticed for too long: the profit motive of companies that don’t raise prices because they have to, but because they can in this exceptional situation.
90 percent of respondents to a poll of hundreds of investors by finance agency Bloomberg believe companies in the US and Europe have raised prices above their own cost base since the pandemic began in 2020. The survey shows that financial market participants are also starting to see that the worst wave of inflation since the Second World War is not just due to tight supply chains, high government spending during the crisis or wage increases. But also the historically unique increase in corporate profits.
From the point of view of the survey participants, the retail sector in particular has stood out with particularly bold increases: 67 percent of those surveyed see a particularly opportunistic price strategy here during the pandemic. “The unique circumstances of the pandemic – severe supply restrictions followed by unprecedented government-driven demand – are the reason for the expansion in profit margins,” writes Bloomberg. According to figures from the US statistics agency BEA, the after-tax profits of US corporations in 2022 were more than 16 percent of gross value added – and thus at the highest level since the 1960s.
Price shocks as an excuse for greed
A small majority of those surveyed assume that corporate profits will fall back to pre-pandemic levels in the medium term. But more than half believe it will take up to two years for inflation to return to a stable level of 2%. The crucial question is what means are appropriate to achieve the goal when the reasons for this wave of inflation evidently go beyond standard economic theory.
Isabella Weber, an economist at the University of Massachusetts, Amherst, argues that many companies are using the shock of dramatic events such as the pandemic or Putin’s invasion of Ukraine as an excuse to reach into their customers’ pockets inappropriately. The interplay of overlapping crises and supply bottlenecks has given rise to temporary monopolies, which have led to dominant positions in key sectors for some companies, which then exploited them to raise prices. And many companies reacted to the price shock by raising their prices more than their costs rose.
In this situation, “the central banks’ usual toolbox, which essentially consists of interest rate hikes, is not the method of choice to combat the current inflation,” says Weber to ntv.de. Weber, an inventor of the gas price brake, thinks that similar price caps “may have been needed for food, for transport or for the price of grain”.
At least a quarter of those surveyed by “Bloomberg” are of the opinion that combating inflation should not be the sole task of central banks and their monetary policy. Instead of raising interest rates, they propose higher taxes and stricter competition rules as alternative solutions. Because once companies have discovered their pricing power, they are unlikely to relinquish it voluntarily. “Who is going to hand themselves a pay cut shortly after getting a raise?” writes Bloomberg. In some sectors where price excesses are clearly taking place, some respondents even consider radical excess profit taxes to be justified. A blunt recommendation: “Tax them unconscious.”