How companies use inflation to take your money
Inflation is a hedge that companies are using to squeeze more money out of you. But as I will explain, there are five things we can do to fight back.
Companies use inflation as an excuse to raise prices, harming workers and consumers while enjoying record profits.
Prices are rising, but let’s be clear: companies are not raising prices simply because of rising costs of supplies and labor. They could easily absorb these higher costs, but instead they are passing them on to consumers and even raising the higher prices of such cost increases.
Companies are doing well because they face little or no competition.
If markets were competitive, companies would keep their prices low to prevent competitors from grabbing customers. But in a market with few competitors who can coordinate prices, consumers don’t have a real choice.
As a result, companies are reaping the highest profits of the past 70 years. Are they using these record profits to raise their workers’ real wages? No. They are handing out meager wage increases to attract or retain workers with one hand, but effectively eliminating those wage increases by raising prices with the other.
Wages have grown by 5.6% in the last year, but prices have increased by 8.5%. This means that, adjusted for inflation, workers actually got a 2.9% pay cut.
So what are companies doing with their record profits? Using them to raise stock prices by repurchasing a record amount of own stock. Goldman Sachs expects buybacks to reach $ 1 trillion this year, an all-time high.
This amounts to a direct upward transfer of wealth from the portfolios of average workers to the pockets of CEOs and shareholders.
Just look: Billionaires got at least $ 1.7 trillion richer during the pandemic, while CEO pay (based mostly on stock values) is now at a record 350 times a typical worker pay.
The Federal Reserve wants to curb inflation by continuing to raise interest rates. That would be a big mistake, because it doesn’t address corporate concentration and it will slow down employment and wage growth. The labor market is not “unhealthily rigid”, as Fed Chairman Jerome Powell puts it. Corporations are unhealthy fat.
So what’s the real solution?
First, a stricter application of antitrust to address the growing concentration of the economy in the hands of a few large companies. Since the 1980s, more than two-thirds of American industries have become concentrated, allowing companies to coordinate price increases.
Next, a temporary tax on windfall profits that takes companies’ record profits and redistributes them as direct payments to everyday Americans struggling to cover the price surge.
Third, the ban on repurchasing company shares. Buybacks were illegal before Ronald Reagan’s SEC legalized them in 1982 – and they should be made illegal again.
Fourth, higher taxes on the rich and on corporations. Corporate tax rates are at an all-time low, even though corporate profits are at near-record highs. And much of the billionaires’ pandemic earnings have escaped taxes altogether.
Finally, stronger unions. As corporate power has grown, union membership has decreased and economic inequality has increased, which is why most workers don’t see a real increase in 40 years. All workers deserve the right to bargain collectively for higher wages and better benefits.
In short, the real problem is not inflation, but the increase in corporate power and the decline in workers’ power over the past 40 years.
Unless we address this growing imbalance, corporations will continue to divert the economy’s earnings into the pockets of their CEOs and shareholders, while everyday Americans get screwed.