There's a fundamental disconnect in how the economists in this paper view profit and how companies view profit. Essentially, their theory is that if we raise interest rates, this will subdue demand, and thus tame inflation as companies drop prices to compete for a smaller market share.
The problem is that the companies that control the core essentials - food, energy, and to a growing extent housing - are effectively monopolies. Markets that had hundreds of competitors in the past now only have a few dozen at best, and they actively use their vast power and influence to reduce the capacity of any smaller players to participate, let alone compete in the market.
You can't reduce demand on core essentials, because people can't do without. As a result, in a monopolistic market, an interest increase only harms the consumer when it comes to core essentials unless a company decides to reduce prices and subsequently their profit.
There is no publicly traded company on earth that will voluntarily decide to lower their profit. The only way they'll do it is if it's hurting their bottom line - aka through competition. With no competition to reduce market share, effectively the company can simply keep pace with interest rates by continuing to profiteer, especially when they're operating in markets without price controls. In those that do, the companies often engage in aggressive regulatory capture to ensure a steady profit margin well above cost, regardless of the market conditions.
In our current situation, interest rate increases will do little to nothing in the short term save to tighten lending and push home ownership out of reach of the middle class. We will not see drops in prices, only a leveling off from increases, as consumers have come to accept them as the new normal. Rate increases do nothing to address the core issue, which is that the extreme consolidation of wealth in a handful of companies has given them a power over our economy far greater than the central banks that claim to run it. If anything, those rate increases encourage the same consolidation of wealth and monopolistic markets that have led to our current economic state.
Sounds coherent. Would you say there are any effective tools to counter that problem? I wonder what the central banks can do at the moment, because it seems they are kind of in a deadlock regarding the control of inflation.
My personal opinion for the current situation would be to keep rates where they are to avoid further wage suppression. Let the PPP money and COVID impacts move through the economic system without increasing the cost of borrowing further. A statement by the IMF and/or Fed directly admitting that the current inflationary trend is due to corporate profiteering, not wage growth, could prompt stricter price controls and regulation across multiple governments. In a perfect world, this would result in criminal cases and prosecutions of the worst offenders (I'm looking at you, egg producers), but I think we all know that's not going to happen.
My feeling is that the economy really just needs some breathing room to be robust enough to deal with the next climate and/or political crisis. Raising rates feels like a self-inflicted wound meant to shore up the profits of those who made out like bandits during COVID at the expense of everyone else who was just barely making it through.
Agreed and well said. I remember a report in the past year that showed the more consolidated an industry, the greater the amount of profit driven inflation. I think that helps show your point that it's monopolistic power that's enabling these companies to do this and that is what needs to be addressed, not interest rates.
That graph is interesting. Wonder what exactly caused the sudden labor cost increase in 2020. I can imagine it either being the "great resignation" or some other pandemic effect, but it would be great if someone with more insight could say something.
Long period of underemployment and gradual employment gains following the credit fueled recession in 2009, is possibly one factor. In other words, the slack finally came out.
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