Bread line, image courtesy of Antonio Graceffo
In the first year of the Biden administration, inflation reached the highest level in 40 years and continued to rise steadily thereafter. However, he blames the problem on 'evil companies' rather than his flawed economic policies.
“Too many companies are raising prices to make profits, charging more and more for less,” President Biden said in his recent State of the Union address. His administration has driven down deficits, expanded debt to historic levels, printed money, increased the money supply and donated trillions of dollars to out-of-work people and foreign countries, but he blames corporations for inflation. And to ‘protect’ the public from an evil capitalist system where everyone is free to buy, sell, trade and make money as they please, he vowed to crack down on ‘price gouging’. Ostensibly, the White House would decide what the “correct” prices are and which prices are being manipulated, and the government would use its enormous power to force companies to return those prices to federally determined levels.
The Federal Reserve Bank of Kansas City blames corporate profits for inflation. Some reports claim that corporate profits account for as much as 53% of inflation. However, the reality is that inflation is a monetary phenomenon caused by the Biden administration's reckless fiscal and monetary policies.
Inflation is, by definition, an expansion of the credit and money supply. This reduces the purchasing power of the dollar, meaning you need more dollars to buy things. Most consumers are surprised to see rising prices, but this is not inflation. It's just a result of inflation. The real culprit is the Biden administration's massive debt creation, deficit spending, loan forgiveness, foreign aid, and transfer payments.
When it comes to inflation, the evidence used by the White House and other liberal pundits points to increased corporate profits and identifies this as a cause of inflation. However, because the dollar depreciates and prices rise, corporate profits increase nominally. Businesses are taking home more dollars, but those dollars are buying fewer raw materials and paying less for labor than they did before Biden took office. The government, which blames corporations for rising prices, is also demanding that the minimum wage be doubled. For most retail and fast food businesses, labor costs account for 20 to 40 percent of costs. Doubling the minimum wage will cause prices to rise.
The CNN article on inflation is a classic error that the White House and mainstream media are making, either intentionally or unknowingly. The article contained the story of a small business owner who was unable to make a profit despite rising prices. As prices rose, so did costs. To break even, he had to raise prices even further. Then, the small business owner blamed the company for the price increase. His personal experience was that costs were rising and profits were falling, but he believed corporate greed was causing inflation.
In the same article that blamed inflation on corporate profits, the Fed stated that “there is no direct accounting relationship between corporate profits and inflation, but inflation is directly affected by markup increases, or the ratio between corporate prices.” cost and the company’s current marginal cost of production.” The Fed is incorrect in saying that inflation is affected by price changes. However, it is true that when costs increase, companies will have to increase prices to make a profit. And even if the margin remains the same (e.g. 3-8% profit), the nominal size of the profit increases.
Here is a simple example: If your business earned a 6% profit on $1 before the Biden administration began. A dollar is now worth less and may not be enough to cover increased costs and still make a profit. So to get a 6% return, you would have to increase your price to get a $1.20 return. And that $1.20 buys the same amount of goods as $1 did before Biden. As with any cost-of-living adjustment of your salary, your situation will not improve at all. You're dealing with larger numbers.
Another point made in many media reports and studies is that companies are evil because they decide to raise prices based on future expectations. Actually, there is nothing bad about this. That's completely normal. If you think prices will rise next year, buy this year. In the case of companies, orders are placed with the factory 3 to 6 months before the product is released. If manufacturing costs are expected to rise during that period, we raise prices to free up money to cover the next manufacturing batch, which will be at a higher price.
Here are the completely false claims made by the Federal Reserve: “Specifically, the increase increased by 3.4% compared to the previous year, while inflation as measured by the personal consumption expenditure price index was 5.8%, suggesting that the increase could account for more than half. Inflation in 2021.” This statement acknowledges that inflation was higher than the markup. What this means is that rising prices retard inflation rather than fuel it.
And finally, this is evidence that the Biden administration is the culprit. The argument from the Groundwork Collaborative think tank and others who criticize “corporations” is that corporate profits must have increased because corporate profits relative to GDP have increased. Causes of inflation. This logic ignores the fact that Biden's lockdowns have prevented people from working during the pandemic, and not everyone is returning to work now. So if people don't work, the wage-to-GDP ratio will naturally go down. Ironically, even the graph created by Groundwork Collaborative clearly shows a decline in wages as a percentage of GDP during the lockdown.
As the 2024 election approaches, the White House is looking for someone to blame for inflation while attempting to buy votes by continuing to hand out free money that drives inflation.