I hope President Biden doesn’t show up for his State of the Union address on Thursday with a Snickers bar. Politico reported last month that Biden abruptly asked people at a dinner whether they had “seen that article about the Snickers bars,” an apparent reference to this guest essay in The Times about why voters are so upset about inflation.
Biden is obsessed with high prices because voters are, and he knows that to beat Donald Trump in November he needs to make a strong case that he’s wrestling inflation to the ground. I get that.
But there are good ways and bad ways to fight inflation. One of the bad ways, I think, is to put the blame on price gouging and corporate greed, as Biden has done on numerous occasions.
Gouging refers to abrupt, extreme price increases to take advantage of temporary scarcity, often accompanied by hoarding. The classic example is a lumber yard that jacks up the price of plywood when people need to board up their windows before a hurricane. There are laws against that.
Gouging isn’t a good umbrella term for price increases of all kinds. You actually want the price of something to go up when there’s a long-term imbalance of supply and demand. The high price signals to suppliers that they should produce more of the thing and to buyers that they should consume less of it. Over time, in a competitive market, those two adjustments will bring the price back down. As the saying goes, the best cure for high prices is high prices.
As for corporate greed — well, corporations didn’t suddenly change personalities. They have always sought to maximize profits. So it’s not a good diagnosis of what ails America now. For that reason, Isabella Weber, an economist at the University of Massachusetts at Amherst, prefers the term “sellers’ inflation,” which is the ability of big companies to raise prices when they expect their competitors to do the same.
Corporate profits rose sharply in the pandemic partly because companies took advantage of shortages to raise prices. Also, stimulus payments to consumers boosted corporate profits because they flowed through from the consumers to the companies they bought stuff from. But most of that is over now. “Once we adjust for fiscal and monetary interventions, the behavior of aggregate profit margins appears much less notable, and by the end of 2022 they are essentially back at their prepandemic levels,” Dino Palazzo, a principal economist for the Federal Reserve in Washington, wrote in a research note last year.
“Although corporate profits indeed contributed to inflation in 2021, their contribution fell in 2022,” according to an economic bulletin by the Federal Reserve Bank of Kansas City last year. An update last year by the lead author, Andrew Glover, found that changes in profits actually subtracted from the rate of inflation in the second and third quarters of 2023.
Consumers don’t see it that way, of course. Between January 2022 and January 2024, the share who said “corporations being greedy and raising prices to make record profits” was a major cause of inflation rose to 59 percent from 44 percent, according to a survey by Navigator Research.
Biden can’t afford to blow off public opinion, so he’s amping up the populism. Which, again, I understand. He has made a big deal of shrinkflation, which is shrinking a product while keeping the price the same. He did a whole indignant video on shrinkflation timed for the Super Bowl.
Biden has also clamped down on “junk fees,” which burden consumers. His administration put a price cap on insulin for Medicare recipients. He formed a council on supply-chain resilience to prevent shortages and price spikes. For the first time, because of legislation sought by the White House, Medicare is negotiating the prices it will pay for some prescription drugs. A rule this week from the Biden administration caps most credit card late fees at $8. The White House on Tuesday announced a cross-agency Strike Force on Unfair and Illegal Pricing focusing on “prescription drugs and health care, food and grocery, housing, financial services, and more.” And so on.
A lot of these problems would solve themselves if the industries were more competitive. For example, companies wouldn’t be able to get away with charging lots of junk fees if it were easy for consumers to switch to competitors that didn’t charge such fees. The Biden administration is intervening through word and deed precisely because markets aren’t working the way they should.
But regulation, especially regulation that’s done with an eye toward politics, can be ham-handed and counterproductive. For example, the Information Technology & Innovation Foundation argues that excessive price controls on pharmaceuticals could cause U.S.-based biopharma companies to lose their lead over fast-rising Chinese rivals. (Not saying I agree with that 100 percent.)
“The more heavy-handed tools, such as directly commenting on firms’ pricing behavior, and perhaps even fixing prices and using taxes that influence pricing decisions, we want to use sparingly and in crisis situations,” Carsten Jung, a senior economist at the Institute for Public Policy Research, a British think tank, told me.
So I hope that in the State of the Union address, Biden will devote time to what his administration is doing to increase competition, which is the best way to scour out excessive profits and prices. He signed an executive order promoting competition in the American economy in July 2021. He also appointed people to the Federal Trade Commission and the antitrust division of the Justice Department who are turning back the clock on antitrust to a more activist era.
I wrote last week about the Federal Trade Commission’s effort to block the merger of two supermarket chains, Kroger and Albertsons. Mergers aren’t always bad, but the agencies are right to make sure that they don’t lead to higher prices and reduced choices for consumers and lower pay for employees.
What about between now and the election? The end of pandemic-related supply-chain glitches is having two opposite effects on corporate profits. Profit margins are going down to the extent that companies can no longer charge a premium for scarce goods. But they are going up to the extent that companies can buy the inputs they need — including labor — more cheaply. Those two effects are roughly offsetting each other, according to a report to clients by Goldman Sachs & Company this week.
Profit margins are likely to remain above average this year, but inflation should continue to subside, the Goldman report said. Those two outcomes “are not necessarily incompatible,” David Mericle, Goldman’s chief U.S. economist, told me.
I understand why Biden doesn’t want to wait around and see if that happens. Voters feel pressured by high prices right now, and many sense they’re being ripped off. “In politics, perceived fairness almost always trumps efficiency — and politicians understand that,” Alan Blinder, a Princeton economist who served on the Fed Board of Governors and in the White House, said in a speech last year.
Please, though, Mr. President: No Snickers bars.
Elsewhere: Walmart Customers Cut Back
Walmart customers in the United States spent 2 percent less per trip in 2023 than in 2022, a possible sign of stress among middle-class consumers. The numbers come from Numerator, a market research company that has a panel of 150,000 consumers who share their shopping data. Walmart customers spent 5 percent more in 2023 than in 2022 per good sold, reflecting inflation, but bought 8 percent fewer goods on each trip, Numerator said. A Walmart spokeswoman told me the company had no comment on the Numerator data.
Quote of the Day
“A mortgage is so commonplace that it is hard to fully appreciate it. A home buyer can suddenly conjure up a fortune he or she does not have. Where did this great power come from?”
— William N. Goetzmann, “Money Changes Everything: How Finance Made Civilization Possible” (2016)