By Robert Reich
The biggest culprit for rising prices that’s not being talked about is the increasing economic concentration of the American economy in the hands of a relative few giant big corporations with the power to raise prices.
If markets were competitive, companies would seek to keep
their prices down in order to maintain customer loyalty and demand. When the
prices of their supplies rose, they’d cut their profits before they raised
prices to their customers, for fear that otherwise a competitor would grab
those customers away.
But strange enough, this isn’t happening. In fact, even in
the face of supply constraints, corporations are raking in record
profits. More than 80 percent of big (S&P 500) companies that have
reported results this season have topped analysts’ earnings forecasts,
according to Refinitiv.
Obviously, supply constraints have not eroded these profits.
Corporations are simply passing the added costs on to their customers. Many are
raising their prices even further, and pocketing even more.
How can this be? For a simple and obvious reason: Most don’t
have to worry about competitors grabbing their customers away. They have so
much market power they can relax and continue to rake in big money.
The underlying structural problem isn’t that government is
over-stimulating the economy. It’s that big corporations are under competitive.
Corporations are using the excuse of
inflation to raise prices and make fatter profits. The result is a transfer of
wealth from consumers to corporate executives and major investors.
This has nothing to do with inflation, folks. It has
everything to do with the concentration of market power in a relatively few
hands.
It’s called “oligopoly,” where two or three companies
roughly coordinate their prices and output.
Judd Legum provides some good examples in his newsletter. He points to two firms that are giants in household staples: Procter & Gamble and Kimberly Clark.
In April, Procter
& Gamble announced it would start charging more for everything from diapers
to toilet paper, citing “rising costs for raw materials, such as resin and
pulp, and higher expenses to transport goods.”
Baloney. P&G is raking in huge profits. In the quarter
ending September 30, after some of its price increases went into effect, it
reported a whopping 24.7% profit margin. Oh, and it spent $3 billion in the
quarter buying its own stock.
How can this be? Because P&G faces very little
competition. According to a report released this month from the Roosevelt
Institute, “The lion’s share of the market for diapers,” for example, “is
controlled by just two companies (P&G and Kimberly-Clark), limiting
competition for cheaper options.”
So it wasn’t exactly a coincidence that Kimberly-Clark announced similar price increases at the same time
as P&G. Both corporations are doing wonderfully well. But American
consumers are paying more.
Or consider another major consumer product oligopoly:
PepsiCo (the parent company of Frito-Lay, Gatorade, Quaker, Tropicana, and
other brands), and Coca Cola. In April, PepsiCo announced it was
increasing prices, blaming “higher costs for some ingredients, freight and labor."
Rubbish. The company recorded $3 billion in operating profits and increased its
projections for the rest of the year, and expects to send $5.8 billion in
dividends to shareholders in 2021.
If PepsiCo faced tough competition it could never have
gotten away with this. But it doesn’t. In fact, it appears to have colluded
with its chief competitor, Coca-Cola – which, oddly, announced price increases
at about the same time as PepsiCo, and has increased its profit margins to 28.9%.
And on it goes around the entire consumer sector of the
American economy.
You can see a similar pattern in energy prices. Once it
became clear that demand was growing, energy producers could have quickly
ramped up production to create more supply. But they didn’t.
Why not? Industry experts say oil and gas companies
(and their CEOs and major investors) saw bigger money in letting prices run higher before producing more
supply.
They can get away with this because big oil and gas
producers don’t face much competition. They’re powerful oligopolies.
Again, inflation isn’t driving most of these price
increases. Corporate power is driving them.
Since the 1980s, when the federal government all but
abandoned antitrust enforcement, two-thirds of all American industries have
become more concentrated.
Monsanto now sets the prices for most of the nation’s seed
corn.
The government green-lighted Wall Street’s consolidation
into five giant banks, of which JPMorgan is the largest.
It okayed airline mergers, bringing the total number of
American carriers down from twelve in 1980 to four today, which now control 80
percent of domestic seating capacity.
It let Boeing and McDonnell Douglas merge, leaving America
with just one major producer of civilian aircraft, Boeing.
Three giant cable companies dominate broadband [Comcast,
AT&T, Verizon].
A handful of drug companies control the pharmaceutical industry
[Pfizer, Eli Lilly, Johnson & Johnson, Bristol-Myers Squibb, Merck].
So what’s the appropriate response to the latest round of
inflation? The Federal Reserve has signaled it won’t raise interest rates for
the time being, believing that the inflation is being driven by temporary
supply bottlenecks.
Meanwhile, Biden Administration officials have been consulting with the oil industry in an
effort to stem rising gas prices, trying to make it simpler to issue commercial
driver’s licenses (to help reduce the shortage of truck drivers), and seeking
to unclog over-crowded container ports.
But none of this responds to the deeper structural issue –
of which price inflation is symptom: the increasing consolidation of the
economy in a relative handful of big corporations with enough power to raise
prices and increase profits.
This structural problem is amenable to only one thing: the
aggressive use of antitrust law.
Robert Reich's writes at
robertreich.substack.com. His latest book is "THE SYSTEM: Who Rigged It,
How To Fix It." He is Chancellor's Professor of Public Policy at the
University of California at Berkeley and Senior Fellow at the Blum Center. He
served as Secretary of Labor in the Clinton administration, for which Time
Magazine named him one of the 10 most effective cabinet secretaries of the
twentieth century. He has written 17 other books, including the best sellers
"Aftershock," "The Work of Nations," "Beyond
Outrage," and "The Common Good." He is a founding editor of the
American Prospect magazine, founder of Inequality Media, a member of the
American Academy of Arts and Sciences, and co-creator of the award-winning documentaries
"Inequality For All," streaming on YouTube, and "Saving
Capitalism," now streaming on Netflix.
