Wayne O'Leary

Dollars and Sense

The pandemic-driven inflation ravaging American consumers is continuing into 2022 unabated, threatening a death spiral for the overall economy and placing Democratic hopes for the midterms in serious jeopardy.

As of January, nationwide food and apparel prices were rising at an annual rate of 6%, household furnishings at 14%, new cars and trucks at 12%, and used vehicles at 37%. Topping the list were piped natural gas for heating, up 24%, and fuel oil and gasoline, surging at an astounding 50% or more in the past year. Altogether, the general level of yearly US inflation has reached 7%, the most in four decades.

The accepted explanation for this state of affairs is supply-chain disruptions, a side effect of economic globalization, exacerbated by the pandemic’s destructive impact. That’s only part of the story, however. To some extent, the supply-chain woes, which are real enough, provide a ready excuse for business to do what business loves to do: raise prices.

This has not gone unobserved or unremarked upon. Progressive officeholders, notably Senators Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), are pointing the finger at corporate opportunism as a major culprit. Credit-rating service Standard & Poor’s has reported that profit margins reached 13.7% in mid-2021, a record high, with some of the largest US companies raking in more than $3 million in profits for the year, according to Senate Banking Committee Chairman Brown. Large corporations, particularly those in concentrated industries like meat processing, are behaving especially greedily; the four big firms controlling the beef market, for example, jacked up the price of their product by 20% last year.

Respected market analyst Edward Yardeni has pointed out that some of the biggest corporate players have raised prices by more than their costs have risen. It’s become culturally acceptable, he observes, to boost prices unnecessarily without a sense of guilt and to push increasing costs onto customers with no fear of selling less. The Biden administration, however, accepts the conventional wisdom that the executive branch of government has limited power over corporate pricing policies other than jawboning, leaving it to the Federal Reserve to address inflation through its delegated authority to adjust interest rates.

That’s the traditional capitalist approach, but so far, it’s not working. Price hikes that averaged around 2% annually for years have suddenly been cut loose from their moorings. So, with government stimulus money coming to an end and the prevailing antiunion zeitgeist continuing to hold down wage increases, anxious consumers are left without a hedge against the price surge and are growing restive. As a result, their votes will be in play in November.

One ironic aspect of the unravelling situation is that while Senate investigators Warren and Brown are lambasting the corporate sector for excess profits, and even administration officials are calling for an examination of price-setting, one powerful member of the Democratic contingent in Washington with vested interests at stake is remaining mum and avoiding recriminations — at least for the time being. West Virginia’s Joe Manchin, who is holding the entire Biden economic program hostage, is gaining immensely from inflated prices, especially energy prices, which are leading the surge that’s crushing consumers.

Manchin has no apparent qualms about fuel oil, gasoline and natural gas having variously risen in cost between one-quarter and one-half in the past year; he benefits more in campaign contributions from the fossil-fuel industries than any other senator and owns millions in energy stocks that paid him close to $500,000 in dividends last year.

So-called public servants like Manchin, who bemoan the supposed inflationary effects of government spending, are looking the other way as petroleum-product prices, the prime factor in today’s inflation, reach their highest level since 2014, spurred on by a strategy of pleasing investors by drilling less, thereby restraining supply and permitting prices to rise.

This has had a predictable result beyond increasing the cost of gasoline at the pump to a dollar more per gallon than a year ago. Oil company stockholders are now in deep clover. ExxonMobil, the largest US oil firm, has announced its highest earnings in seven years ($23 billion for 2021), enough to permit resumption of stock buybacks. Company shares, meanwhile, are up 6%, and shareholders can expect a tidy influx of cash in the coming year.

The question is, Can anything be done to rein in behemoths like Exxon and curb their pricing power, or must Americans either like it or lump it? There is, in fact, an alternative to the present impasse, but it requires us to travel, in effect, back to the future. At least twice in the not-too-distant past, similar situations were addressed by the solution that dare not speak its name: price controls. The occasions were World War II and the Vietnam War, when attempts to have both “guns and butter” led to shortages and price spikes. Today’s hyperinflation is similar in origin, since the pandemic constitutes nothing less than a non-shooting war.

Although polling suggests a majority of US economists currently resist the notion of price controls, a sizeable minority, perhaps 40% (mostly on the left), are open to the idea. The latter include James K. Galbraith of the University of Texas, whose father, John Kenneth Galbraith, was the architect of the successful World War II program. The Galbraithian price controls, implemented through the Office of Price Administration (OPA), were in effect from 1942 to 1946 and held overall price inflation for the entire wartime period to 28% (just 1.5% from mid-1943 to mid-1945). That was in impressive contrast to World War I, when the uncontrolled market prevailed and prices roughly doubled.

The World War II price controls, though never overwhelmingly popular, were accepted as a necessity by the public, with the exception of special interests seeking opportunities to profiteer and congressional Republicans anxious to carve out exclusions for domestic manufacturers and distributors. On balance, the controls worked. Richard Nixon’s Vietnam era price controls of 1971-74 were somewhat less successful, but that was largely because they were removed too precipitantly. Nevertheless, they initially cut inflation in half during the early 1970s.

Perhaps the final word should go to John Kenneth Galbraith, in reference to controlling the power of large modern corporations able to arbitrarily set their own prices independent of the market. “It is relatively easy,” he said, “to fix prices that are already fixed.”

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, April 1, 2022

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