Good morning from New Economy Brief.
Greedflation and corporate profiteering is high on the agenda for the next US presidential election campaign. Incumbent Joe Biden put it front and centre in last week’s State of the Union address, and this week the administration’s outlined how the government will “lower costs for the American people” in their final budget, targeting healthcare and childcare prices, housing and rents, expensive energy and water, education costs and student debt.
There is similar evidence on the contribution of corporate profiteering to UK inflation as similar as in the US, but why is it less salient on our political agenda? This week’s New Economy Brief rounds up the evidence on ‘greedflation’ in the US and UK and asks why the inflation debate is so different on each side of the Atlantic.
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President Biden puts ‘greedflation’ at the centre of his re-election campaign.
Ahead of last week’s State of the Union Address, the White House released a fact sheet explaining how the Biden Administration is taking action to address corporate price gouging. President Biden is making tackling ‘greedflation’ a central part of his re-election campaign, taking aim at the Republicans for having “no plan to lower costs for Americans” and charging them instead with “proposed giveaways to the wealthy, big corporations, and Big Pharma that will increase the cost of prescription drugs, utility bills, health insurance premiums, and student loan payments for millions.”
How the US has handled inflation is a crucial part of the election debate. These attacks are of course part of the political debate in the run-up to the US election in November, but they are also a central part of new economic discourse on how to tackle inflation. The US debate on how to accomplish a ‘soft landing’ from high inflation can be crudely simplified as an argument between those who think inflation was driven by supply-side shocks (supply bottlenecks following the Covid-19 pandemic and the energy and food price shocks following recent wars) and those who think it was driven by excess demand stimulus (government spending on pandemic income support and green industrial strategy, such as the Inflation Reduction Act).
Bucking the orthodoxy. When the Biden administration chose to pursue a large fiscal stimulus and target green growth as its central economic policy, it is fair to say that not everyone was impressed. Commentators on the right and from the economic mainstream argued that this programme would result in persistently high inflation, cause sky-rocketing interest-rates which would cost jobs and damage economic growth, and would make a ‘soft landing’ (where inflation falls without triggering widespread unemployment or a recession) impossible. Former Treasury Secretary Larry Summers described Biden’s economic policy as “the least responsible macroeconomic policy we have had in the last 40 years” and predicted mass unemployment. However, these warnings were wide of the mark. In fact, the US economy has been one of the global success stories during the recovery from the pandemic, with relatively high growth, low unemployment, and inflation falling back – making a soft landing look within reach. As economist Paul Krugman argues, “it’s starting to look as if Biden got it more or less right”.
The alternative explanation. The Biden administration’s story throughout the period of high inflation has been that prices were rising higher than they needed to because of price gouging by companies. This was given a theoretical framework by Isabella Weber’s “sellers’ inflation” theory and has been backed by research such as a report by The Groundwork Collaborative which found that corporate profits have driven more than half of the inflation seen in the US. Politically, this lets the Biden Administration shift the blame for inflation away from its own spending programmes and onto profiteering corporations, as well as enabling them to frame policies to combat corporate power and implement green industrial strategy as anti-inflationary.
Stopping price-gouging as an anti-inflationary policy. Now, Biden is taking aim at US corporations for ‘shrink-flation’; where businesses reduce the size of their products but keep charging the same price. Last month Senator Bobby Casey introduced a bill, the Shrinkflation Prevention Act, to “protect American families from greedflation by banning grossly excessive price increases and crack down on corporate price gouging”. The Act classifies shrinkflation as unfair or deceptive, and authorises the Federal Trade Commission (FTC) and state attorneys general to pursue civil actions against corporations who engage in it. (Since 2021 the FTC has been headed by Lina Khan - read our previous New Economy Brief on how US competition policy has evolved to focus on curtailing the power of monopolies to set higher prices since her appointment.)
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There is evidence of ‘greedflation’ in the UK.
But this debate about inflation and ‘greedflation’ is not limited to the US. The IMF has warned that rising corporate profits drove almost half the increase in EU inflation between 2021 and 2023, but is profiteering also fueling inflation in the UK? The answer seems to be yes. Andrea Coscelli, chief executive of the Competition and Markets Authority (CMA) has warned that corporate concentration in UK markets is driving up prices for lower-income households. The Bank of England found that companies that protected their margins by increasing prices, passing on higher costs to their customers, accounted for around 75% of UK inflation at the end of 2022. More recent research by IPPR and Common Wealth found that UK inflation has been higher than elsewhere due to the monopoly power of energy companies and food and commodities giants to set higher prices: “some stock market-listed firms not only protected their margins but also increased them, not only passing inflation on but further amplifying it.” If we are also suffering from ‘greedflation’, what solutions are available?
Stress-testing inflationary sectors. A recent paper by authors including Isabella Weber, an economist at the University of Massachusetts, proposed that governments should stress test industries that can unleash inflation spikes, just as they do with too-big-to-fail banks. They identified eight strategically important sectors which drove the second round effects of inflation after the pandemic and invasion of Ukraine, and argued that a wider set of policy tools is needed to prevent price gouging and sticky inflation.
Excess profits = windfall tax? IPPR’s Carys Roberts proposed the government should levy excess profit taxes on other sectors of the economy which have made windfalls (beyond oil and gas) and use the money to support households and build more resilient supply chains for key commodities, helping tackle external causes of inflation. This could reduce inflationary pressure by discouraging profiteering, as other research by IPPR and Common Wealth has observed. The former’s George Dibb proposed exploring excess profit taxes to discourage rent-seeking, and suggested that “the UK’s CMA should launch pre-emptive investigations into the potential for excess profits in the most concentrated sectors of the economy.” Former IMF Chief Economist Olivier Blanchard explained how the state can fight inflation without resorting to harmful monetary policy, for instance by subsidising the cost of energy using money raised with excess profit taxes). Positive Money calculated that annual bank profits are four times higher than they were in 2020 and a windfall tax on UK banks could raise between £3.5bn - £14bn this year depending upon its ambition.
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The leap across the Atlantic.
Given the outsized influence of American culture and politics in the UK, the differences between the national debates on inflation are striking. The US economic success in combining falling inflation with good growth and job creation has barely registered in British economic discussions, and the focus on ‘greedflation’ and taxing the profits of corporations and wealthy individuals in Biden’s State of the Union address are well beyond anything heard from the mainstream parties in the UK. This is not for lack of evidence. In fact, the Bank of England Monetary Policy Committee member Catherine Mann recently made a speech arguing that one reason why inflation has fallen so slowly is that the spending habits of the wealthiest are effectively insulated from the impact of higher interest rates. Yet, this has not sparked a national debate on the taxation of wealth.
Political debate vs economic evidence. A lot of this points to the poorer quality of debate in the UK media and politics compared to the US, where civil society is much better funded and more able to ensure commentators and politicians are more informed by valuable analysis and campaignable information. Perhaps partly as a result of the volatile politics around Liz Truss’ premiership, the UK debate has been characterised by its parochialism and deference to established thinking about inflation. As President Biden continues to put this issue at the heart of his reelection bid, it will be interesting to see if any of his State of the Union themes are picked up by UK parties.
Escaping the doom loop. To emerge from the “current doom loop of slow, stagnant growth”, the next government will have to rethink fiscal rules, argues University of Bath economist Phil Tomlinson. He also argues that the budget was a “missed opportunity” for green investment which could stimulate growth and reduce dependency on overseas energy.
Forecasting errors and the OBR’s methodology. The Trades Union Congress (TUC) has made a submission to the House of Lords Economic Affairs Committee’s Inquiry about the Sustainability of the UK’s National Debt. They argue that the OBR's assumptions on how government spending affects debt and GDP - known as 'fiscal multipliers' - are ”exceptionally low” and “oblige further austerity” as the damage spending cuts does to economic growth has been systematically underestimated, while the positive effects of spending cuts in terms of reducing public debt have been overestimated.
War footing. Former prime minister Gordon Brown has said that Britain needs to be put on an economic “war footing” if it is to escape the cycle of low growth. Brown has called for a new National Economic Council which would be jointly staffed by the Treasury and the Cabinet Office, working alongside representatives from the nations and councils of the UK, and have the task of hitting a 3% growth target.
The Welsh basic income pilot. In 2022, the Welsh Government launched a trial of basic income for care leavers which will run until 2025. Think tank Autonomy has published a briefing on the pilot’s first interim report, highlighting emerging themes such as young people’s reduced reliance on social services and increased opportunities to engage with training and other activities.
Falling behind. Economist Mariana Mazzucato and former Secretary of State for Business, Energy and Industrial Strategy Greg Clark have warned that the UK is a “laggard” when it comes to investing in green industry and that “floundering” on net-zero industrial strategy is “bad for both the planet and the economy”. They argued that “Conservatives and Labour must act to ensure investors' confidence in the stability of UK policy, so that projects with a life of decades are not vulnerable to uncertainty.”
Rethinking economics. Mainstream economics is in “disarray” and requires a rethink, according to Nobel Prize winner Angus Deaton. In an extraordinary blog, published on the IMF website, Deaton lists several areas in which he has changed his mind about economics. The whole blog is worth reading; Deaton argues that modern mainstream economics has failed to analyse who has power in the economy and that power’s impact on inequality, has “valorized” efficiency above other ends, and has “largely stopped thinking about ethics”. Deaton goes on to argue that “corporate lobbyists” have too much sway in policy decisions, and unions too little.
