As the prices of goods rise, there has been debate about how much control consumers have at the cash register.
Some economists, like Rakeen Mabud of the Groundwork Collaborative, an economic policy think tank, argue that not much attention is paid to the companies that charge these prices.
Mabud sat down with ABC News’ “START HERE” to discuss the role of business in the current economic climate.
START HERE: I think the usual way this economic story is told is that the economy is, you know, it’s worse for everyone. Everyone takes a hit, but you said that’s not necessarily the case. Why is that?
MABUD: If you look at the data, we see that corporate profits are at 70-year highs. So while consumers are struggling to send their kids to school, get gas in the tank, and put food on the table, some people are making a lot of money out of this crisis.
Essentially what happens is that big business uses inflation hedging to raise their prices beyond what their input costs would justify and reap those benefits, and consumers pay the price. Some of the most egregious examples are credit card companies. Visa and MasterCard, for example, form a massive duopoly in their space and therefore hold a huge market share. And what we have seen is that these companies make money by taking a fixed percentage from each transaction. So with inflation, as prices go up, they’re inherently going to pull in more money, and yet these companies are also increasing those transaction fees.
If you go from 10% of the price of an apple to 15% of the price of an apple, you will earn more money. And mostly, I think a lot of companies blamed supply chain issues. Visa and MasterCard don’t have that excuse. There are no supply chain issues to be seen here. This is pure and simple commercial exploitation.
START HERE: But if people were being charged very unfairly for some, as some sort of consumable item and not a necessity, when do they stop spending money? Isn’t the problem that people have more money to spend? You’ve heard conservative economists say, “Well, duh, we sent people big stimulus checks for just going through a pandemic.” Wages have increased. And so, when things get more expensive, people keep paying for them. We haven’t seen in the data much reluctance on the part of people to completely change their spending habits just because of inflation. So isn’t that the problem yeah people have more money they should be spending more money. They got it.
MABUD: Yeah. A lot of research and evidence suggests that two things don’t drive prices up. Increase wages for workers and money in people’s pockets. I think the key thing to remember here is that we are coming out of tough times in our economy. We just went through a pandemic, [an] a kind of unprecedented economic forces and disruptions. At Groundwork Collaborative, where I work, we often like to say that we are the economy. It’s this idea that when everyone is doing well, that’s when the economy is doing well.
And that’s really what these stimulus payments and our care for workers and families have given us throughout this crisis. This allowed us a rather healthy recovery. I think the other takeaway here is that companies are making a lot of money and they also have a lot more information about where the price increases are coming from. So if you think about it, if you’re a CEO, you have a good idea of how much of a price increase you’re passing on to a consumer because of the actual increase in input costs. Some, something you use in their manufacturing process.
START HERE: Like supply chain issues like this. This creates a real need to increase costs, perhaps.
MABUD: Absolutely. For instance. If you are a bicycle producer and the cost of steel increases, the price of this bicycle will increase a little. And, as CEO, you can also gild the lily a little more. Take another spoonful of sugar and the consumer has no idea. So I think we really see leaders exploiting this information asymmetry.
And the bottom line here is that we’ve listened to hundreds and hundreds of earnings calls. These are the calls where CEOs and corporate executives tell their investors what happened last quarter and what to expect in the quarters to come. And they say the quiet part out loud. So ultimately I think the easiest way to figure out what’s going on here is to follow the money. What we are seeing is consumers increasingly paying out of pocket, shareholders getting richer and corporate profits increasing.
We have dozens of CEO quotes on these earnings calls that basically say, “Hey, is the right strategy for us to raise prices for consumers right now?” And so, just as an example, the CEO of 3M, which makes masks and medical equipment, bragged about the company’s first-quarter 2022 earnings call that the team, “has does an amazing job pushing prices up,” which “more than offset the amount of inflation.”
3M also said they were already working on higher prices to further increase their profit margins. The CEO of Constellation Brands, which produces Modelo and Corona, said in an earnings call that we want to take as much price as possible.
These CEOs are not shy about doing what they do and the data backs it up. So, recent research shows that corporate profits comprise most of the inflation that we see in the price increases that we see. I think that probably changes a bit, but there’s no denying that it’s outside of historical standards.
START HERE: But what are you doing to combat any of these issues? Because you have publicly stated that the Fed raised interest rates in an attempt to control inflation. You said they shouldn’t do that. Continuing to raise interest rates will actually hurt ordinary people more as they try to live their lives. So what are the other options? Is it like you just ask these companies to volunteer to bill last year? Do you want to have laws that dictate how companies can make and spend their money? What are you doing?
MABUD: The way to deal with current price increases is not to impoverish people and take their jobs away. Because when we talk about the Fed raising interest rates, what we’re talking about is an increase in unemployment.
The way to solve the supply issues we face is really to expand our toolbox, which means making big investments and working supply chains. It means tackling the profit of the pandemic when we see it happening. Three-quarters of states have predatory pricing legislation. We could do it at the federal level. This means taxing businesses, [and] diminishing the incentives to increase profits to dizzyingly astronomical levels.
There are many tools in our toolbox. And I think once we start to really unpack where some of these current price increases are coming from, those tools become much more available to us.