The War on Profit Margins

By: Robert Aro

It could be a coincidence, but probably not, that Joseph Stiglitz commented on corporate profit margins then the following week Federal Reserve Vice Chair Lael Brainard wrote about Bringing Inflation Down, where she too mentioned the problem with high profit margins.

In her own words, she found that:

Reductions in markups could also make an important contribution to reduced pricing pressures.

This is true. But a lot of things could reduce a firm’s cost structure such as outsourcing or mass layoffs. As for final prices, a company could also make inferior products and the market might pay less for this as well. Countless things can be done to change prices. Her comment doesn’t carry much weight.

It goes against common sense, that a for profit enterprise should simply reduce prices because a central planner asks them too. And it leads to questions such as “how” much should a company make, and does this universally apply to all companies or just the largest ones? Measurability is also a concern:

Using the available macroeconomic data, it is challenging to measure directly how much firms mark up their prices relative to their costs. That said, there is evidence at the sectoral level that margins remain high in areas such as motor vehicles and retail.

Contrast this to a truly unhampered free market, where no company would own a government granted monopoly or have support from a central bank. If one firm was making “too much profit,” then a new firm would eventually enter the marketplace and offer lower prices. Unfortunately, we live in a world very much removed from this.

She could only arrive at these conclusions by looking at data that showed average profit margins didn’t agree with her idea of what was fair or correct. Hence she says things like:

…overall retail margins—the difference between the price retailers charge for a good and the price retailers paid for that good—have risen significantly more than the average hourly wage that retailers pay workers to stock shelves and serve customers over the past year, suggesting that there may also be scope for reductions in retail margins.

It all seems very strange and unnecessary, leading back to the fact that the increase in the money supply and forced shutdown was caused by the central bank and government. Now, because prices have gotten out of line with the planners’ expectations, it behooves corporations to fix this by reducing margins to a more acceptable level.

Notice how they lack any “merit of a theory.” If bringing down inflation was so easy, then in countries across the world, from Venezuela to Zimbabwe, corporations could simply take less profit margins and help lower inflation. Of course it doesn’t work that way, and it isn’t as easy or even a viable solution. Yet these are the solutions being offered from some of America’s most highly decorated, and paid, economists.

Brainard ends by reminding us that it’s not over yet:

We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further. As of this month, the maximum monthly reduction in the balance sheet will be nearly double the level of the previous cycle. 

If anything she said is true, it’s that we are in this for the long haul. For better or for worse, but probably for worse, so long as everyone in charge continues to invent ad hoc economic theories while ignoring the root cause of “inflation.”

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