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In These Times - May 3, 2022

The bottom line, as Bivens shows, is that profits have increased rapidly, while labor costs have not. The profit increase reflects the ability of firms to exploit kinks in the supply chain. Most of these price increases have gone to profits, not to labor.

When the history of the 2020s is written, the current inflation panic could very well rival the ​“but her emails” canard surrounding Hillary Clinton in 2016: The impacts on U.S. politics have been profound, and decidedly negative from any progressive standpoint.

I have to admit that I previously understated the persistence of the price increases that started showing up last fall. As Yogi Berra is credited with saying, ​“Prediction is hard, especially about the future.” Still, the fact remains that the most popular explanations for inflation reflect malign political-economic motivations.

First and foremost, we hear that inflation is due to excessive economic stimulus, especially from the eternal enemies of economic stimulus. Hence the outsized political role of Sen. Joe Manchin (D‑W.V.) — the self-styled economic genius who constantly worries about inflation — and the endless nattering of budget hawks. According to this outlook, the federal government (under Trump as well as Biden) gave people too much money, and, as everybody knows, inflation is the result of ​“too many dollars chasing too few goods.” As usual, what ​“everybody knows” serves as an inadequate guide.

The dollars chasing goods are reflected in what economists call consumption expenditures. If there are too many dollars, so to speak, then consumption spending would outrun the normal growth of GDP. As economist Dean Baker notes, this has not been the case during the ongoing panic, either in the United States nor in the nations of the European Union, where inflation has been similarly elevated.

Another pandemic effect cited by Baker is the shift within consumer spending from services to goods: less travel and eating out, more staycations and ordering in. Here again, goods producers can adjust, but that takes some time.

This takes us from the demand side — consumer spending — to the supply side. Here the problems are obvious. The pandemic disrupted ​“supply chains,” i.e. the transactions among firms within industries.

As Josh Bivens of the Economic Policy Institute notes, if one producer is temporarily sidelined, or otherwise forced to cut back production, this provides opportunities for competitors that are not as hampered to jump in with price increases. This dynamic is not a matter of the long-running growth of monopolies, in tech or elsewhere, but a case of temporary market disruptions. Pandemic lockdowns in China — the world’s manufacturing colossus — have been significant, resulting in downstream impacts.

The bottom line, as Bivens shows, is that profits have increased rapidly, while labor costs have not. The profit increase reflects the ability of firms to exploit kinks in the supply chain. Most of these price increases have gone to profits, not to labor.

As Bivens writes, ​“The historically high profit margins in the economic recovery from the pandemic sit very uneasily with explanations of recent inflation based purely on macroeconomic overheating.” ...
Read the full report at In These Times