The Greed Theory of Inflation

1 Sep 2024 | John Goodman, What's New

“Corporate greed” is the Democrats’ explanation for higher food prices. getty


 

The common perception among commentators and pundits was that the Democratic National Convention was devoid of any focus on issues. There was a lot of joy. But very little substance.

Except for one rather remarkable exception. As the Wall Street Journal put it, “At the convention, the delegates united in blaming corporate greed for high prices.”

“Prices are up because corporations are scheming to drive them up,” Sen. Bob Casey (D-PA) told the crowd. “Wall Street firms buy up millions of houses and apartments and then jack up the rents,” said Elizabeth Warren (D-MA). The Democratic Party “must take on Big Pharma, Big Oil, Big Ag, Big Tech and all other corporate monopolists whose greed is denying progress for working people,” said Bernie Sanders (D-VTVanguard Total World Stock ETF 0.0%). Corporate greed is “the one true enemy,” United Auto Workers president Shawn Fein proclaimed.

For her part, Kamala Harris left no doubt. Harris said, “So, believe me, as president, I will go after the bad actors. And I will work to pass the first-ever federal ban on price gouging on food. My plan will include new penalties for opportunistic companies that exploit crises and break the rules.”

Seeking someone to blame

As Washington Post columnist Catherine Rampell wrote last week, “Voters want to blame someone for high grocery bills, and the presidential candidates have apparently decided the choices are either the Biden administration or corporate greed. Harris has chosen the latter.”

There is just one problem. There is no such thing as an economic theory of inflation— including high grocery prices—that is based on greed. You won’t find any mainstream economist supporting the idea, and you won’t find it in any economics textbook.

Just to make sure I’m right about that, I picked up an introductory microeconomics textbook written by Nobel laureate and New York Times columnist Paul Krugman and his wife, Robin Wells. Among professional economists, no one matches Krugman when it comes to apologizing for the Democratic Party— no matter how looney their policies or pronouncements. I understand Wells is even more partisan than Krugman is.

So, what do these very left-wing economists have to say about the role of greed in price determination? Nothing. According to the index, in more than 600 pages of text the word “greed” does not appear even once.

If greed were the cause . . .

There is a reason for that. Economists assume that most people act in their own interest, but calling “self-interest” “greed” doesn’t improve our understanding of anything. Moreover, what economics is really about is understanding why people change their behavior. If greed is going to play a role, then we need to explain why greed surges in some periods and ameliorates in others.

Here is what a theory of greed must explain. In 2020, the average rate of inflation was 1.2%—well below the Federal Reserve target of 2%. Apparently, there was very little greed that year. But the following year there was a sudden surge of greed—almost quadrupling, as the average rate of inflation rose to 4.7%. The next year, the level of greed almost doubled again as the rate of inflation rose to 8.0%. But, then, in 2023, the level of greediness was cut in half, as the average rate of inflation fell to 4.1%.

Not only does no economist take this seriously, I don’t know any intelligent person who does.

What about grocery prices?

Grocery prices rose 1.1% in July on an annual basis, far below the overall inflation rate of 2.9%. And grocery price increases have been mostly in that range this whole year! Yes, the price of virtually everything at the grocery store is higher than when Harris and Biden took office – about 25% higher. But their rate of increase this year (which is how we measure inflation) is really quite low.

So, what does Harris have specifically in mind? The Harris campaign declines to say how price controls would work, when they would apply or what behaviors they would prohibit.

It is tempting to conclude that Harris doesn’t really understand inflation, or anything else about economics. At the convention, she mentioned rent control and the minimum wage. Clearly, she was speaking to people who believe that if government pushes one price up or another price down, nothing bad will happen. Perhaps they believe we don’t need economic theory at all.

“It’s hard to exaggerate how bad this policy is,” writes Rampell. “It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food.”


 

Read the original article on Forbes.com

 

 

 

John C. Goodman is President of the Goodman Institute and Senior Fellow at The Independent Institute. His books include the soon-to-be-published updated edition of Priceless: Curing the Healthcare Crisis, the widely acclaimed A Better Choice: Healthcare Solutions for America, and New Way to Care: Social Protections that Put Families First. The Wall Street Journal and National Journal, among other media, have called him the “Father of Health Savings Accounts.”

1 Comment

  1. A brief and yet superb rendition of the too often forgotten basic economic logic.

    Reply

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