[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
POWER AND PROFITEERING: HOW CERTAIN
INDUSTRIES HIKED PRICES, FLEECED
CONSUMERS, AND DROVE INFLATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC AND CONSUMER POLICY
of the
COMMITTEE ON OVERSIGHT
AND REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 22, 2022
__________
Serial No. 117-106
__________
Printed for the use of the Committee on Oversight and Reform
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available on: govinfo.gov
oversight.house.gov or
docs.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
48-803PDF WASHINGTON : 2022
COMMITTEE ON OVERSIGHT AND REFORM
CAROLYN B. MALONEY, New York, Chairwoman
Eleanor Holmes Norton, District of James Comer, Kentucky, Ranking
Columbia Minority Member
Stephen F. Lynch, Massachusetts Jim Jordan, Ohio
Jim Cooper, Tennessee Virginia Foxx, North Carolina
Gerald E. Connolly, Virginia Jody B. Hice, Georgia
Raja Krishnamoorthi, Illinois Glenn Grothman, Wisconsin
Jamie Raskin, Maryland Michael Cloud, Texas
Ro Khanna, California Bob Gibbs, Ohio
Kweisi Mfume, Maryland Clay Higgins, Louisiana
Alexandria Ocasio-Cortez, New York Ralph Norman, South Carolina
Rashida Tlaib, Michigan Pete Sessions, Texas
Katie Porter, California Fred Keller, Pennsylvania
Cori Bush, Missouri Andy Biggs, Arizona
Shontel M. Brown, Ohio Andrew Clyde, Georgia
Danny K. Davis, Illinois Nancy Mace, South Carolina
Debbie Wasserman Schultz, Florida Scott Franklin, Florida
Peter Welch, Vermont Jake LaTurner, Kansas
Henry C. ``Hank'' Johnson, Jr., Pat Fallon, Texas
Georgia Yvette Herrell, New Mexico
John P. Sarbanes, Maryland Byron Donalds, Florida
Jackie Speier, California Mike Flood, Nebraska
Robin L. Kelly, Illinois
Brenda L. Lawrence, Michigan
Mark DeSaulnier, California
Jimmy Gomez, California
Ayanna Pressley, Massachusetts
Russ Anello, Staff Director
Jonathan Misk, Subcommittee Staff Director
Amy Stratton, Deputy Chief Clerk
Contact Number: 202-225-5051
Mark Marin, Minority Staff Director
------
Subcommittee on Economic and Consumer Policy
Raja Krishnamoorthi, Illinois, Chairman
Katie Porter, California, Michael Cloud, Texas, Ranking
Cori Bush, Missouri Minority Member
Jackie Speier, California Fred Keller, Pennsylvania
Henry C. "Hank" Johnson, Jr., Scott Franklin, Florida
Georgia Andrew Clyde, Georgia
Mark DeSaulnier, California Byron Donalds, Florida
Ayanna Pressley, Massachussetts
Shontel M. Brown, Ohio
C O N T E N T S
----------
Page
Hearing held on September 22, 2022............................... 1
Witnesses
Mike Konczal, Director, Macroeconomic Analysis, Roosevelt
Institute
Oral Statement............................................... 5
Robert B. Reich, Carmel P. Friesen Professor of Public Policy,
The Goldman School of Public Policy University of California,
Berkeley
Oral Statement............................................... 7
Rakeen Mabud, Ph.D., Chief Economist and Managing Director of
Policy and Research, Groundwork Collaborative
Oral Statement............................................... 8
Tyler Goodspeed (Minority Witness), Kleinheinz Fellow Hoover
Institution
Oral Statement............................................... 10
Written opening statements and statements for the witnesses are
available on the U.S. House of Representatives Document
Repository at: docs.house.gov.
INDEX OF DOCUMENTS
----------
Documents entered into the record during this hearing and
Questions for the Record (QFR's) are available at:
docs.house.gov.
* Letter to Brian Deese, the Director, National Economic
Council; submitted by Rep. Cloud.
* CalPERS 2021 Annual Investment Report; submitted by Rep.
Keller.
* Pennsylvania State Employee Retirement System 2021 Detailed
Holdings; submitted by Rep. Keller.
* Pew Research Article on Inflation; submitted by Rep.
Krishnamoorthi.
* QFR: to Mr. Konczal; submitted by Rep. Krishnamoorthi.
* QFR: to Mr. Reich; submitted by Rep. Krishnamoorthi.
POWER AND PROFITEERING: HOW CERTAIN
INDUSTRIES HIKED PRICES, FLEECED
CONSUMERS, AND DROVE INFLATION
----------
Thursday, September 22, 2022
House of Representatives,
Committee on Oversight and Reform,
Subcommittee on Economic and Consumer Policy,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:08 a.m., in
room 2154, Rayburn House Office Building, and via Zoom; Hon.
Raja Krishnamoorthi (chairman of the subcommittee) presiding.
Present: Representatives Krishnamoorthi, Porter, Bush,
DeSaulnier, Brown, Cloud, Keller, Clyde, and Donalds.
Mr. Krishnamoorthi. The committee will come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time.
I welcome everyone to today's hearing, which explores the
important topic of excess corporate price hikes and their role
in helping to drive inflation.
I now recognize myself for an opening statement.
As CBS News reported earlier this year, Selina Flores, a
resident of southwest Florida, used to be able to provide her
family of four with balanced meals that included meat at most
dinners. But when grocery prices nearly doubled, the Flores'
diet then transitioned to meat only 2 or 3 days a week.
At the same time the Flores family was struggling to keep
up with record meat prices, America's four largest meat
processing companies saw their profits surge 134 percent from
nearly $4 billion in 2019 to nearly $9 billion in 2021.
In the first half of 2022 alone, their combined profits
totaled $2.5 billion, almost a 100 percent increase over the
first half of 2019.
Ms. Flores' story and the stories of others like her who
are struggling to feed their families, afford insulin, or
purchase gas is why we are here.
Since early 2021, Americans have been suffering from rising
prices caused primarily by global supply chain disruptions and
changing demand patterns due to the pandemic. Even combined
with traditional supply and demand factors, however, these
elements are insufficient to totally explain why inflation
remains elevated.
Some would have you believe the American Rescue Plan is the
primary factor driving inflation. Those critics, however,
cannot explain how the ARP somehow caused inflation to soar in
other countries around the world.
For example, the U.K. is currently experiencing 20 percent
more inflation than the United States, but the ARP did not
exist there. The EU is collectively experiencing 22 percent
more inflation than the United States, but the ARP did not
exist in any of the Eurozone countries. And Turkey is
experiencing over 900 percent more inflation than the U.S., but
the ARP did not exist there either.
Additionally, nonpartisan economists at Moody's Analytics
and elsewhere have credited the ARP with preventing another
recession that occurred during the Trump years and, instead,
created as many as 4 million jobs in 2021.
There are, however, other factors that contribute to
inflation that have not received enough attention. One of those
factors is extreme price hikes; in other words, companies
raising prices far more than required to offset higher costs,
even when accounting for shifts in supply and demand, resulting
in the highest profit margins we have ever seen in the last 70
years.
Americans outside the Halls of Congress recognize the
importance of this issue. In a poll that Navigator Research
released in late July, a whopping 80 percent majority of
Americans, including many Republicans, viewed corporations
raising prices to make record profits as a, quote, ``cause of
inflation.''
Although Democrats in Congress and President Biden have
adopted a long-term plan to fight inflation that will reduce
prescription drug prices and save the average family $500 per
year on energy costs, certain companies instead dramatically
hiked up their prices under the smokescreen of inflation.
That is why, under my chairmanship, this subcommittee
launched investigations this year into industries that
implemented price hikes far in excess of the cost increases,
all under the cover of inflation.
In January, we sent letters to meat processing giants. In
March, our subcommittee and the Select Subcommittee on COVID
jointly sent letters to three of the largest shipping companies
in the world. The shipping companies had 2021 profits 200 times
greater than in 2019--let me repeat that, 200 times greater
than in 2019--but their average operating costs only increased
by 18 percent. And across our entire economy, corporate net
profit margins continue to hover at historic highs.
We have convened this hearing so that our distinguished
panel of experts can help us understand how certain companies
are engaged in excessive price hikes, the economics behind
these practices, and their harmful effects on American
consumers.
We are not here today to vilify corporations. As a former
small businessman, I know that American innovation is the
backbone of our economy. And many corporate leaders deserve
praise for creating jobs and growth.
The Inflation Reduction Act is already drawing huge new
investments in American manufacturing, and the CHIPS and
Science Act has led to immediate plans for new semiconductor
plants.
We are also not here to suggest that excessive price hikes
are the sole cause of inflation, but we cannot ignore the
reality that American companies today are reporting higher
profit margins than ever, while increasing prices more than
necessary to cover costs, all at the expense of the American
consumer. And we must do everything in our power to shine a
light on these practices.
With that, I'd like to recognize my distinguished ranking
member, Mr. Cloud, for his opening statement.
Mr. Cloud. Thank you, Chairman.
First, inflation was because of Putin. Then it wasn't. Then
it was transitory. And then it wasn't. Then it was at zero
percent just a couple of days before jamming the Inflation
Reduction Act through Congress, which actually doesn't reduce
inflation, but it does hire 87,000 new IRS agents to go after
Americans.
And so after trying to redefine what recession means with
an all-too-complicit media willing to carry their water, we
find out Sunday in a bizarre interview that the White House is
now measuring inflation in inches per month and that Biden
seems content with the inflation that Americans are dealing
with.
The problem for this administration is that, for all the
denials, the American people know that they're not being told
the truth.
What this administration doesn't seem to get is that most
families across America don't get their economic news from some
report or a White House press conference.
They get their economic news when they go to the grocery
store to find that ground beef prices have gone up 24 percent
and bacon prices have gone up 26 percent, chicken breast prices
have gone up 45 percent; or when they fill up at the pump to
find out that gas prices have almost doubled in the last two
years, in spite of Biden releasing, from our strategic oil
reserves, oil in an effort to drive down prices artificially in
the lead-up to an election.
Then, when the family arrives at home, they find the cost
to power their homes has risen 16 percent in electricity in the
last year, 33 percent for gas, and rent's gone up 25 percent
since Biden took office.
This is, of course, extremely difficult for the vast
majority of Americans, but especially for those in low-income
and those on a fixed income whose dollar doesn't make it
through the month anymore, those whose life savings isn't worth
what it used to be. For them, this is just completely
devastating.
The purchasing power for families in America is
diminishing. And for all practical purposes, because of
inflation, they've lost one month's income a year.
And I'm thankful that we're having a hearing today on
inflation. This is certainly better than our last hearing,
which was on dog collars. In some ways it's a recognition of
what the White House has been denying all along, that inflation
in this country is real and having a real impact on the
American people.
But I'm concerned that this hearing may be another effort
to shift blame from the policies of this administration and the
reckless spending of this Congress, which have been the major
contributors of inflation we're experiencing, and scapegoat
businesses with the blame.
In fact, today's panel of witnesses doesn't include any
officials from the Biden administration, a theme we've seen
throughout this term in this committee and the full committee.
For the purpose of this hearing, it was stated in the memo
to examine how certain industries have used their market power
to drive inflation. Nowhere in the memo does it discuss the
nearly $4 trillion we have spent since President Biden took
office.
The reality is that inflation spiked after the passage of
the new, nearly $2 trillion American Rescue Plan Act. Inflation
was at 2.6 percent in March 2021 when it was passed. And by May
2021, inflation had nearly doubled to five percent.
Even liberal economists warned the President that the
American Rescue Plan would overheat the economy on February 4
before it was passed.
Harvard Professor Larry Summers, a top economic adviser to
both President Clinton and President Obama, warned that the
almost $2 trillion stimulus plan was three times as large as
the projected shortfall. He said, quote, ``Policymakers need to
ensure that they have plans in place to address the possible
and quite serious problem of inflation.''
Instead of taking time to analyze the impact that
additional government spending might have on inflation, the
Biden administration continued to pump money into the economy
and inflation has continued to worsen.
On September 13 in 2022, when the August numbers were
released showing 8.3 percent inflation, Biden hosted a party to
celebrate the passage of a half trillion dollars of additional
spending, ironically called the Inflation Reduction Act, which,
as we've already mentioned, does not reduce inflation.
And just a few days later, on CBS, President Biden told the
American people that inflation was increased by just an inch.
And if the White House thinks that this is what is we need to
measure inflation by----
[Mr. Cloud holds up ruler.]
Mr. Cloud [continuing]. I can assure you the American
people are thinking that this is what we need to use to measure
inflation by.
[Mr. Cloud holds up tape measure.]
Mr. Cloud. President Biden's flippant attitude toward the
American people's suffering has been unacceptable. We are
working to conduct real oversight. And the House Republicans on
this committee, we've written multiple letters to the Biden
administration to request information on the plan to
acknowledge and address lower inflation.
Last year, June 2, 2021, we wrote to Brian Deese, the
Director of the National Economic Council, requesting
information on the administration's plan to combat inflation.
We have not received a response.
More recently, on August 24, 2022, we wrote to President
Biden requesting a briefing on his response to inflation and
received no response. Today we're sending another letter to
Brian Deese requesting a briefing on the solution to address
the economic crisis.
I hope, for the sake of the American people, the members of
this committee, that we can conduct real oversight into the
cause of this historic inflation and work to ensure that the
American people are better taken care of and get through this
crisis.
Thank you very much, and I yield back.
Mr. Krishnamoorthi. Thank you, Mr. Cloud.
I'd now like to introduce our witnesses.
Our first witness is Mr. Mike Konczal, director of
macroeconomic analysis at the Roosevelt Institute.
Our second witness is the Honorable Robert Reich, former
Secretary of Labor and current Carmel Friesen Professor of
Public Policy at the Goldman School of Public Policy at UC
Berkeley.
Our third witness is Ms. Rakeen Mabud, Ph.D., chief
economist and managing director of policy and research at
Groundwork Collaborative.
And, finally, the minority witness is Dr. Tyler Goodspeed,
Kleinheinz Fellow at the Hoover Institution.
The witnesses appearing remotely will be unmuted so that we
can swear everyone in.
I will now swear in the witnesses. Please raise your right
hands.
Do you swear or affirm that the testimony you're about to
give is the truth, the whole truth, and nothing but the truth,
so help you God?
Let the record show that the witnesses answered in the
affirmative. Thank you.
Without objection, each of your written statements will be
made part of the record.
With that, Mr. Konczal, you are now recognized to provide
your testimony.
STATEMENT OF MIKE KONCZAL, DIRECTOR, MACROECONOMIC ANALYSIS,
ROOSEVELT INSTITUTE
Mr. Konczal. Chairman Krishnamoorthi, Ranking Member Cloud,
and distinguished members of the committee, thank you for
inviting me to testify.
My name is Mike Konczal. I'm the director of macroeconomic
analysis at the Roosevelt Institute, an economic think tank.
This has been a remarkable recovery for workers. There are
now between 2.7 and 3 million more jobs, with unemployment 1.2
percent lower and labor force participation a third of a
percent higher than what the CBO projected without the American
Rescue Plan. Estimates of labor market dynamism, depressed for
decades before the COVID-19 pandemic, have skyrocketed,
enabling workers to move up the career ladder and quit their
jobs to seek better and more productive ones.
We are also recovering to the pre-COVID macroeconomic trend
for consumption, something we never did after the Great
Recession, which represented a loss of trillions of dollars.
Yet this recovery has also featured higher-than-expected
inflation. This has occurred alongside record high corporate
profit margins.
The relationship between these two trends has been one of
the central debates of this recovery. According to the national
accounts, corporate profit margins are at their highest rate
since 1950. And since 2020, 40 percent of the increases in
prices for nonfinancial corporate businesses is reflected in
higher corporate profits, compared to just 22 percent from
employee wages. This is in stark contrast to the previous 40
years where these values were 11 percent for corporate profits
and 62 percent for wages.
Researchers at the Federal Reserve Bank of New York have
found a connection between higher prices and gross profit
margins, a connection that's especially high in this recovery.
There's also a growing disconnect between the prices paid for
input to businesses and the comparatively larger increases in
prices of goods that consumers pay, especially for goods like
automobiles.
However, without firm-level data, it's difficult to
determine the exact relationship between the increases in
markups, the difference between revenues and the marginal costs
of production, and inflation.
Research I have conducted with my Roosevelt Institute
colleague Niko Lusiani was among the first since the pandemic
to explore the size and distribution of markups across 3,700
firms with public data operating in the United States in 2021
against 270,000 observations going back to 1955.
We reproduced the analysis of De Loecker, Eeckhout, and
Gabriel Unger, who found that markups have increased in a
steady and dramatic fashion from 1980 through the 2010's,
driven by firms from the top of the markup distribution.
Our paper updated this work through 2021, relying on
Compustat, the research standard for publicly traded firm-level
data, which pulls and standardizes publicly disclosed data from
a variety of sources.
We found that markups and profits skyrocketed in 2021 to
their highest recorded level since the 1950's. Further, firms
in the U.S. increased their markups and profits in 2021 at the
fastest annual pace since 1955.
This was also driven largely by firms at the very top of
the distribution. Markups increased the most at the very top.
More importantly, we found that markups from before the
pandemic were a strong predictor of the increasing markups
during 2021, suggesting that market power had a role in driving
inflation.
More specifically, a 10 percent higher level of size-
adjusted markups before the pandemic was associated with an
increase of markups between 1.6 and 2.7 percent in 2021.
Now, inflation has broadened since these 2021 results. In
2022, inflation is slightly more driven by services, especially
housing. Though goods inflation still remains high, it has also
not seen any real deflation back to prior prices.
If corporate power allows margins and goods inflation to
continue to be this elevated, then there's no real path back to
pre-pandemic levels of inflation without severely driving down
demand for services, harming our economy.
Now, inflation is a global phenomenon. It's true, even if
you look at core inflation, excluding volatile energy and food
prices. It's true that it's grown faster in other countries
than here toward the end of 2021, even before the invasion of
Ukraine by Russia.
But even though inflation's a global phenomenon, corporate
profits are just one reason it remains high. But since
corporate profit margins have become so unusually high, there
is room for reversing them with little economic harm and huge
societal benefit, including lower prices in the short term and
less inequality and more innovation in the medium term. This is
true no matter their origins.
Such high profit margin also means there's room for wages
to increase, not necessarily raising prices, an important
dynamic in the strong labor market that we have.
We believe the evidence presented by our analysis points to
tackling inflation with an all-of-government administrative,
regulatory, and legislative approach.
I look forward to taking your questions.
Mr. Krishnamoorthi. Thank you, Mr. Konczal.
Now I recognize Secretary Reich.
You may provide your testimony, sir.
STATEMENT OF ROBERT B. REICH, CARMEL P. FRIESEN PROFESSOR OF
PUBLIC POLICY, THE GOLDMAN SCHOOL OF PUBLIC POLICY, UNIVERSITY
OF CALIFORNIA, BERKELEY, FORMER U.S. SECRETARY OF LABOR
Mr. Reich. Mr. Chairman, members of the committee, my name
is Robert Reich.
Yesterday, Fed policymakers continued their battle against
inflation with a third straight supersized rate increase,
warning that they will continue to raise borrowing costs. They
assume that the underlying economic problem is a tight labor
market, causing wages to rise and prices to rise in response.
So, interest rates and interest rate increases are necessary to
slow wage growth.
With due respect, this assumption is wrong. Recent wage
hikes have not kept up with inflation. Most workers' paychecks
are shrinking in terms of real purchasing power. Rather than
causing inflation, wages are reducing inflationary pressures.
The underlying economic problem, in addition to global
problems, is not wage price inflation. It's profit price
inflation, that is, corporations raising their prices above
increases in their costs, using those cost increases as excuses
to raise their prices and profits.
Corporate profits are close to levels not seen in over a
half century. Corporations have the power to raise prices,
without losing customers, because they face so little
competition.
Since the 1980's, two-thirds of all American industries
have become more concentrated. Grocery prices are through the
roof, for example, largely because just four companies control
85 percent of meat and poultry processing and four giants
control 70 percent of grain. One corporation sets the price for
most of the Nation's seed corn. Two firms dominate consumer
staples. All are raising prices and increasing profits because
they can.
Meanwhile, Big Pharma is increasing drug prices like mad.
The airline industry has gone from 12 carriers in 1980 to just
four today, which are rapidly raising ticket prices. Wall
Street has consolidated into five giant banks, raking in record
profits of higher spreads. Broadband is dominated by three
giant cable companies that are raising their fees. And so on.
With inflation driven by these conglomerates raising prices
to increase their profit margins, the major effect of interest
rate hikes is just to depress wages and limit jobs. As the
economy slows, workers are even less likely to get wage
increases that keep up with inflation.
And unemployment is going to rise. The Fed now sees the
unemployment rate rising to 4.4 percent next year, up from 3.7
percent now. That would mean the loss of 1.2 million jobs.
I urge Congress and the administration to take direct
action against this profit price inflation, rather than rely
solely on the Fed to raise interest rates and put the burden of
fighting inflation on average working people who are not
responsible for it.
First, a windfall profits tax would help, a temporary tax
on price increases exceeding the Producer Price Index's costs
of producing customer goods. Congress should also direct the
Federal Trade Commission to investigate whether price increases
reflect added costs or opportunistic price gouging.
Second, bold antitrust enforcement is essential. Even the
credible threat of antitrust enforcement can deter corporations
from raising prices higher than their costs.
And third, as a backstop, price controls should be
considered.
Now, it's true they have many disadvantages in terms of
distorting markets. But the current inflation emerging from the
pandemic is analogous to the inflation that occurred right
after World War II when economists argued for temporary price
controls on important goods to buy time to overcome supply
bottlenecks and prevent corporate profiteering. They should be
considered now for the same reasons.
In sum, the inflation we are now experiencing is not due to
wage gains. It is due to increases in corporate profits. And
it's excessive profits, not wages, that need to be controlled.
Thank you.
Mr. Krishnamoorthi. Thank you, Secretary Reich. And I
appreciate you getting up so early to testify in California. So
thank you.
Next, I will recognize Dr. Mabud.
You may provide your testimony.
STATEMENT OF RAKEEN MABUD, PH.D., CHIEF ECONOMIST AND MANAGING
DIRECTOR OF POLICY AND RESEARCH, GROUNDWORK COLLABORATIVE
Ms. Mabud. Chairman Krishnamoorthi, Ranking Member Cloud,
thank you for inviting me to testify today.
My name is Rakeen Mabud, and I am the chief economist and
managing director of policy and research at the Groundwork
Collaborative.
My testimony today will focus on three key points.
First, mega-corporations are choosing to keep prices sky
high, even as input costs begin to come down.
Second, these price hikes are not falling evenly across the
economy. The most marginalized groups are paying the highest
price.
Finally, the inflation crisis we're facing today is due to
decades of deregulation and privatization, resulting in brittle
supply chains that can't handle shifts in our economy without
supply shortages and bottlenecks.
While families have struggled to navigate a deadly pandemic
and rising costs, corporations saw the highest quarterly profit
margins in over 70 years in Q2 2022. And we know why. For over
a year now, Groundwork has combed through hundreds of corporate
earnings calls to better understand how these mega-corporations
are taking advantage of recent crises to make record profits
for themselves and their shareholders.
Executives are forthright that these crises have been very
good for business. In fact, even as input costs come down,
corporate executives are gleefully reporting on how they plan
on keeping prices high.
On one recent earnings call, the car repair company
AutoZone said it had increased pricing due to inflation and
that, quote, ``Following periods of higher inflation, our
industry has historically not reduced pricing to reflect lower
ultimate costs,'' end quote.
H.B. Fuller, an adhesive manufacturing company, told
analysts in June that the company expected ``sizable margin
expansion'' as costs decline because of ``extremely sticky''
prices and said that the company would ``push harder'' on price
increases.
H.B. Fuller's CEO put it even more bluntly. Quote, ``We
don't reduce prices on the back end of these increases,'' end
quote. He even went as far to say, quote, ``A nice light
recession would be perfect for us,'' end quote, because it
would bring raw material costs down even more.
These mega-corporations are acutely aware of how their
market power affords them the ability to keep prices high, even
as their costs go down.
Procter & Gamble, a massive conglomerate that encompasses
major diaper brands such as Luvs and Pampers and detergent
brands Tide, Downy, Bounce, and Gain, said in July that they
plan to raise prices ``across most categories'' in the coming
months and despite paying shareholders $3.5 billion last
quarter.
Executives also told analysts that consumers were
responding well to price hikes, noting that they, quote,
unquote, ``don't deselect'' their ``daily use'' products.
In other words, big companies like Procter & Gamble know
that they can take advantage of consumers' basic needs because
they make necessities like diapers and laundry supplies. Even
if the price of these goods rises, people will continue to buy
them. And because of their significant market share, they know
consumers don't have a choice except to accept these price
increases because there are few, if any, available
alternatives.
And these price hikes are hitting the poorest families the
hardest because essentials like food and shelter, the major
drivers of higher costs right now, take up a bigger proportion
of household budgets.
However, the sway that these companies hold over pricing
was not inevitable. It is the result of decades of deregulation
and privatization and a ruthless pursuit of efficiency and
short-term profits that left us vulnerable to profiteering.
These choices hollowed out and nearly eliminated diversity
in our supply chains, leaving us without fail-safes to
withstand significant shifts in demand without shortages.
Without competition to undercut companies that are charging
excess prices, those companies with market power are able to
raise prices with impunity.
But it's not too late. We have many policy tools at our
disposal.
Congress should tax excess and windfall profits to
encourage productive investment instead of profiteering.
Congress should also strengthen the laws already on the
books to make markets more competitive and prevent collusion
and price-fixing.
Congress should pursue a Federal price-gouging standard to
protect against excessive price hikes during periods of
economic crisis.
And Congress should continue to make the long overdue
investments in our supply chain and tackle costs like
healthcare and housing that have too long put pressure on
family budgets.
Importantly, interest rate hikes, which slow inflation by
tamping down demand and making people poorer, will do nothing
to address the underlying causes, such as supply shortages, and
will do nothing to address profiteering.
Giant corporations' control over our supply chains has
supplanted the functioning resilient system we could have built
through robust public investment and free and fair competition.
Big corporations are getting away with pushing up prices to
fatten their profit margins, and families are quite literally
paying the price. It's time to rein them in.
Thank you, and I look forward to your questions.
Mr. Krishnamoorthi. Thank you, Dr. Mabud.
Now I'm like to recognize Dr. Goodspeed.
You may provide your testimony.
STATEMENT OF TYLER GOODSPEED, MINORITY WITNESS, KLEINHEINZ
FELLOW, HOOVER INSTITUTION
Mr. Goodspeed. Thank you, Chairman Krishnamoorthi, Ranking
Member Cloud, members of the subcommittee.
I am the Kleinheinz Fellow at Stanford University at the
Hoover Institution. And from 2017 to 2021, I was senior
economist, chief economist for macroeconomic policy, vice
chairman, and ultimately acting chairman of the Council of
Economic Advisers, in which capacity I advised the U.S.
Government on its response to the coronavirus pandemic.
Thank you for the opportunity to speak with you today about
a macroeconomic issue of utmost concern to the U.S. economy,
namely the fact that inflation in the United States has
recently hit levels not observed since 1981. And, indeed, if we
look at measures of core or underlying inflation, they suggest
that underlying inflationary pressure in the United States
today is higher than it was 3, 6, or even 12 months ago.
I submit to you today that the primary cause of the
inflation we have observed over the past 18 months cannot be a
factor that is global in nature--supply chain disruptions, port
closures, corporate profiteering--because the timing and the
magnitude of the initial surge in inflation in the United
States was so much earlier and greater than that observed in
other major economies.
So, of the 46 major economies tracked by the OECD to which
the chairman earlier referred, the increase in the average rate
of inflation in the United States in 2021 over its pre-pandemic
level was greater than in all 45 other countries, with the
exceptions of Brazil, Turkey, and the Kingdom of Saudi Arabia,
countries which I do not typically think of as paragons of
fiscal virtue.
If we look at the Euro area and take a harmonized index of
core customer prices, so that we are comparing apples to
apples, in the 12 months through February 2021, core inflation
in the Euro area was 1.1 percent versus 1.0 percent in the
United States.
In the 12 months since February 2021, which takes us right
up to the invasion of Ukraine by the Russian Federation, the
increase in the rate of inflation in the United States was four
times that in the Euro area.
What happened in March 2021? Well, 11 months into an
economic expansion we had a deficit-financed fiscal stimulus
equal to almost 10 percent of the entire annual output of the
U.S. economy. I repeat, a deficit-financed fiscal stimulus
equal to 10 percent of the annual output of the entire U.S.
economy.
The immediate impact of that was that demand for goods in
the United States surged 11 percent month over month. That is a
240 percent annualized rate of growth in demand for goods.
That's a lot. That is a lot.
And we poured this demand onto a supply side of the U.S.
economy that was still recovering from the pandemic, with 3.7
million Americans still reporting that they didn't look for
work in the past month because of the pandemic.
Worse than that, provisions in the American Rescue Plan in
March 2021 exacerbated that supply side recovery by raising
implicit marginal tax rates on the return to work.
So we have this big increase in demand, a further
impairment to the recovery and supply. That gap between supply
and demand has to go somewhere. And in 2021, it went into
prices.
And one of the lessons of the 1970's is that, once you get
a big inflation shock like we saw in 2021, it can quickly
become self-sustaining as households and businesses and workers
begin to incorporate that inflationary shock into their price
expectations.
Now, what we've heard here today is that this is, instead,
this four-decade high inflation is, instead, the result not of
supply and demand, but of what would appear to be unprecedented
corporate profiteering. For that hypothesis to be true, four
questions must be answered.
One, why did we only observe this in 2021 and 2022 and not
in the decade preceding?
Two, why until the invasion of Ukraine was this only
observed to such a level in the United States versus in the
Euro area, for example?
Three, why would this cause an increase in the overall
price level rather than an increase in relative prices in
specific, more concentrated sectors?
Four, why should corporate profiteering in 2021 have
resulted in an increase in inflation, the rate of change in
prices, rather than a one-off increase in the price level?
I have not heard answers to those four questions here
today.
Thank you.
Mr. Krishnamoorthi. Thank you, Dr. Goodspeed.
OK. First of all, let me recognize myself for five minutes
of questions. And I'd like to start with Dr. Mabud.
Dr. Mabud, one of the slides that you presented in your
work was the contribution of profits versus other costs to the
growth of prices.
Are you familiar with that?
Ms. Mabud. Yes.
Mr. Krishnamoorthi. And can you talk to us about the
factors that go into why there would be such a huge increase in
the contribution of profits to total prices versus the
contribution of profits to prices in the preceding decades?
As you can see here, from 1979 to 2019, profits accounted
for about 11.4 percent of the growth of unit prices, whereas in
just the last one year, it contributes to more than 55 percent.
Can you comment on that?
Ms. Mabud. Yes. Thank you for that question.
You know, every crime requires means, motive, and
opportunity, and that's exactly what we're seeing here.
Companies, because of endemic concentration in our economy,
have long had the means to push up prices or go for market
share. They've also long had a profit motive.
But what's changed in this current period is opportunity.
The cover of inflation, the cover----
Mr. Krishnamoorthi. What does that mean, cover of
inflation?
Ms. Mabud. Yes. When prices go up generally, companies are
able to raise prices without the consumers understanding how
much of that price increase is coming from factors that are
happening in the economy and how much of that price increase is
coming from them just gilding the lily.
And at Groundwork Collaborative we've combed through
hundreds of earnings calls, and what we see is, in sector after
sector, corporation after corporation, CEOs are very forthright
that these crises have been really, really good for business.
Mr. Krishnamoorthi. Mr. Konczal, Dr. Goodspeed presents an
analysis within his statement. He compares 2021 to 2019, but he
omits all of 2022. That looks like a rather odd analysis.
Why would someone omit all of 2022 in their analysis of the
comparison of an inflation? And how would that affect the
analysis?
Mr. Konczal. Well, one is that we see inflation, both
overall inflation but also core inflation, so excluding the
energy and food prices that we know are particularly volatile
in the aftermath of geopolitical events this year, inflation in
Europe catches up quite a bit and year-over-year inflation
starts to level out, which is not necessarily the best metric
for looking at inflation right now but it's the metric that's
being discussed here.
So, while U.S. inflation basically levels out in 2022 at a
very high and elevated rate, other countries catch up to us.
The other thing about looking at just 2021 is that we had a
really robust recovery. Our GDP growth is far above peer
nations. The upgrade to our estimates for GDP by such places as
the IMF were much higher. We had a much faster, stronger, and
robust recovery than peer nations.
So, it does not surprise me that it took a while for their
supply chains and their ability to address complicated global
problems didn't really catch up, because they had not yet
recovered to the extent we have.
Mr. Krishnamoorthi. So, Dr. Goodspeed, in your statement
you say, ``the magnitude of the increase in the rate of
inflation in 2021 was so much greater in the United States . .
. and coincided precisely with an unprecedented demand shock in
March 2021.''
Now, sir, I should just point out to you a couple things.
One, are you contending that the ARP stimulus package of $1.9
trillion was all spent in March 2021?
Mr. Goodspeed. I am contending that it was spent largely
throughout 2021.
Mr. Krishnamoorthi. But was it spent in March 2021?
Mr. Goodspeed. The vast majority of the checks went out in
March 2021.
Mr. Krishnamoorthi. That's incorrect. By April 19, 2021,
only $485 billion of the $1.9 trillion had been spent.
Mr. Goodspeed. The checks----
Mr. Krishnamoorthi. Instead, instead, by April 19, $686
billion of the Consolidated Appropriations Act had been spent,
$50 billion of the PPP program had been spent by April 19,
2021, and $10 billion of Families First Coronavirus Act was
spent in 2021.
However, you didn't mention any of those other potential
recovery programs. And it that appears that you cherry-picked
one program which only comprised a minority of the spending by
March 2021 in your analysis. So, that undermines the integrity
of your entire analysis.
Dr. Mabud, let me just point out a couple of the quotations
from AutoZone, as well as H.B. Fuller, that you had presented
to us. They're very disturbing.
You said, ``Following periods of higher inflation, our
industry has historically not reduced pricing to reflect lower
ultimate costs.''
What does that mean?
Ms. Mabud. It means that, even as prices, input prices,
start to come down, they're keeping prices high because they
know that they can.
Mr. Krishnamoorthi. Why?
Ms. Mabud. Because it's really, really good for business.
They're making record profits and issuing massive stock
buybacks to enrich their shareholders.
Mr. Krishnamoorthi. Thank you.
I'll now recognize Mr. Cloud for his questions.
Mr. Cloud. Thank you, Chairman.
First of all, would you like to finish what you were saying
before the chairman cut you off?
Mr. Goodspeed. Sure. I would just like to specify that the
economic impact payments were disbursed quickly in March and
April 2021, and that is the direct stimulus to personal
consumption expenditure on goods.
Mr. Cloud. OK. One of the major drivers right now is the
cost of energy, and that's U.S. energy policy affecting
international markets as well.
Could you speak to the connection of that and how that
affects the economy?
Mr. Goodspeed. Certainly. I mean, energy passes through to
prices throughout the economy. And in 2021, we did see a large
global shock to energy and that was--there was another leg up
in early 2021 with the Russian Federation invasion of Ukraine.
That disproportionately affected Europe, and that is why we
have seen convergence in inflation rates in 2022 between Europe
and the United States.
Mr. Cloud. Now, it seems to me that the supposition being
made is that a company makes a profit and that the solution
is--I think it was all-of-government approach, higher
regulations, higher business.
Does that actually help these major corporations, or does
that hurt these major corporations when there's a regulatory
burden put on, in contrast to other companies trying to enter
the market?
Mr. Goodspeed. Generally speaking, an increased regulatory
burden is going to raise barriers to entry and is also going to
raise the break-even rate of return on an investment project in
order for that to be viable.
Mr. Cloud. As a matter of fact, what we see up here in
Washington, DC, is, OK, there's a consolidation going on among
corporations. The corporations are actually usually the ones
writing the regulations, giving them to the government, getting
them passed through Congress, because they give them a
competitive advantage over smaller companies trying to enter
the market that would provide competition and to help drive
down prices. Is that----
Mr. Goodspeed. That observation would be consistent with an
observation going back all the way to Adam Smith.
Mr. Cloud. OK. That's kind of what I was thinking.
You mentioned in your testimony the two major drivers of
the economy: major government spending, supply chain
disruption. Could you speak a little more to that?
Mr. Goodspeed. Well, I think that a simple analysis in 2020
would have helped one to predict inflation quite accurately,
which would be to simply add up the productive potential of the
U.S. economy, the supply side components.
What is the potential output? And then what is the expected
increase in nominal demand, given a fiscal stimulus of the
magnitude we observed in 2021? What is the difference between
that increase in nominal demand and the potential output of the
United States economy? That difference is going to go into the
price level.
Mr. Cloud. Roger.
Increased prices for shelter, food, and medical care were
the largest and most relevant factors contributing to the
higher CPI in August. Do you think we'll continue to see those
indexes rise under the Biden administration's economic
policies?
Mr. Goodspeed. I do. Those tend to be what we call the more
inertial components of inflation, a lot of these services,
particularly shelter, rent, and owner-equivalent rent.
And rent right now, the cost of shelter, has risen thus far
this year at an annualized rate of 6.6 percent. It rose at an
annualized rate in August of 8.6 percent.
And insofar as one thinks that the inflation we're
observing is a consequence of collusion or corporate power,
then evidently 80 million homeowners are somehow colluding to
increase the implicit rent that they pay to themselves.
Mr. Cloud. Right. Now, historically, recession's been
defined as two consecutive quarters of negative GDP growth.
Have we had that?
Mr. Goodspeed. We have had two consecutive quarters of
negative GDP growth, yes.
Mr. Cloud. OK. So, are we in a recession? Or why is the
White House denying we're in a recession?
Mr. Goodspeed. Well, typically we think of three ``D's''
when it comes to defining a recession: depth, duration, and
diffusion.
So, we have the duration with two quarters.
We have depth. If you look at the depth of the contraction
in output in the first quarter, first half of this year, it was
deeper than the recession in the early 2000's. It was deeper
than the recession in 1969 and 1970. It was deeper than the
recession in the early 1960's.
And when you look at diffusion, we had a decline in
inventory investment. We had a decline in business investment.
We had a decline in nonresidential investment. We had a decline
in consumer spending on goods. The only thing that was positive
was customer spending on services.
Mr. Cloud. Now, one of the major things when I talk to
every single industry throughout my district, every single
business owner, the biggest issue that they're facing is the
employment market. They can't find people to fill positions.
And it's making it difficult for them to thrive and to grow
their companies right now.
Now, just a couple years ago we had the same issue, but it
was for very different reasons. We had a thriving economy.
Wages across every demographic were growing. It was amazing to
see what was happening really in our economy.
Could you speak to the labor issues and how they're
connected to what's going on, how our policies are driving the
labor crisis?
Mr. Goodspeed. Yes. I think when you have good, sound tax
and regulatory policy you see an economy such as we observed in
2018-2019, wherein three-quarters of the flows into employment
were people coming in from out of the labor force. We had
positive real wage growth, and we had declining wage, income,
and wealth inequality.
Mr. Cloud. Thank you.
Mr. Goodspeed. Thank you.
Mr. Cloud. Yield back.
Mr. Krishnamoorthi. Thank you.
And before I move to Mr. DeSaulnier, I ask unanimous
consent to enter into the record this June 14, 2022, Pew
Research Center study showing that the U.S. has had lower
comparative inflation, core inflation among OECD peers from Q1
2020 to Q1 2022. If we can enter that into the record.
Mr. Krishnamoorthi. Now I'd like to recognize Mr.
DeSaulnier for five minutes of questions.
Mr. Krishnamoorthi. I'm sorry. We're going to recognize
Congresswoman Brown for five minutes of questions.
Ms. Brown. Thank you, Chairman Krishnamoorthi and Ranking
Member Cloud, for holding this hearing.
This week, JBS, one of the largest meat producers in the
world, agreed to pay $20 million to settle a lawsuit with
consumers who have accused them of intentionally eliminating
competition to inflate the price of their pork products.
And this is not the first settlement of its kind. Meat
producers of all kinds have entered into settlements after
being accused of price fixing.
And, although these settlements are not an admission of
wrongdoing, they do open the conversation of how the
concentration of power at the top can trickle down to store
shelves across the country.
Dr. Mabud, can you explain how large-scale consolidation
within industries can drive up prices for consumers?
Mr. Mabud. Absolutely. I mean, to take beef, for example,
four companies in the meatpacking industry, Tyson, Cargill,
JBS, and National Beef Packing, control 85 percent of the
industry. That means two things.
One, if one of those companies goes down for any reason,
the whole supply chain for meat is disrupted, which drives up
prices.
It also means that they have an enormous amount of pricing
power because of the market share that they hold, and consumers
are paying really high prices at the checkout counter as a
result.
Ms. Brown. Thank you very much for that.
Following up on your response, it is important to
acknowledge that these price hikes do not land equally across
the country. Low-income and marginalized communities, like mine
in the 11th congressional District, seem to always be hit the
hardest.
So, Doctor, can you talk about how these disenfranchised
communities are uniquely affected when our economy is
struggling and what we can do here in Congress to reverse this?
Mr. Mabud. Yes. That's a really, really important question.
Low-income families, especially families of color, are
disproportionately impacted by higher prices, especially when
those higher prices are being driven by essentials, such as
food and shelter. Low-income families spend about 75 percent of
their income on necessities, such as food, gas, and shelter,
more than double the 31 percent for high-income households. So,
when these prices go up, it eats up family budgets, and their
dollar just doesn't go as far.
To address this, we have to address the rampant corporate
profiteering that is endemic in our economy. We've seen
examples. I've cited examples in my testimony earlier today. We
also must continue to invest in these working families who keep
our economy going.
Ms. Brown. Well, with that, I thank you for that response.
And it's clear that we need to have these conversations so that
we can fully understand the economic imbalance that affects our
working and middle-class families.
So, thank you again, Doctor.
And with that, I yield back. Thank you, Mr. Chairman.
Mr. Krishnamoorthi. Thank you, Congresswoman Brown.
I will use your remaining time.
So, I'm going to ask Dr. Reich this.
Dr. Reich, in Dr. Goodspeed's analysis he claims that $1.9
trillion ARP stimulus package is what caused a spike in
inflation in March 2021. However, it was a clear minority of
the spending that had happened by April 2021.
Why would you just focus on the ARP as opposed to the
Family First Act, the CARES Act, the Consolidated
Appropriations Act, which disbursed far more money than what
had happened with the ARP by April 2021?
Mr. Reich. Mr. Chairman, there is no reason to focus on the
ARP.
I want to add, though, and this is an important
consideration, the ARP did a lot of good. It kept Americans
afloat. It made sure that a lot of Americans did not fall into
poverty at one of the most critical and difficult periods of
time we have had in this country over the last century in terms
of a public health crisis. It did a lot of good.
And the other thing is that we've seen that, after all of
the CARES Act, the ARP, all of the other structures that we put
into place, a lot of that is now gone. A lot of American
families are now back to where they were before.
Although jobs are plentiful, note that employers are not
raising wages as high as inflation. Wages and wage gains
continue to trail inflation, which means that most families,
particularly low-income families, but even middle-class
families, are falling further and further behind.
Mr. Krishnamoorthi. Thank you, Dr. Reich.
Let me just direct a question to Dr. Mabud.
Constellation Brands, Dr. Mabud, said the following: ``We
continue to think that inflation is going to be a big factor
for us next year, and we still intend to take a significant
amount of pricing. We'll take as much pricing as we think the
consumer can absorb.'' That's what Constellation Brands said.
What does that mean, ``We'll take as much pricing as we
think the consumer can absorb''?
Mr. Mabud. It means that they'll keep prices as high as
they possibly can to rake in record profits, as long as they
don't start losing consumers.
Mr. Krishnamoorthi. Mr. Konczal, I want to go back to the
comparative inflation that we saw in other countries versus the
United States.
The Pew Research study shows that, again, America is,
quote/unquote, ``middle of the pack'' when it comes to the
comparative growth in inflation in 2022 versus 2020.
Axios said the same thing.
What is your comment on that?
Mr. Konczal. I'd have to see the specific analysis, but it
strikes me as broadly correct and accurate and concluded by
many other impartial analysts, such as the IMF.
I would also add that our employment recovery has been
significantly better than peers, and our growth recovery has
been way better than peers.
So, though we're all dealing with this challenge of
inflation, we have a lot of other things going for our country
that are very important.
Mr. Krishnamoorthi. Thank you.
I now recognize Mr. Keller for five minutes of questions.
Mr. Keller. Thank you.
I've just been listening to what's going on here. And I
just have a question.
Mr. Goodspeed, I'll just start out with this. I heard that
wages had not increased as much as inflation.
How would a person that's running a business know how much
inflation is going to be until we see what that is? Wouldn't
wages normally be increased after we see what the inflation
number is?
Mr. Goodspeed. Historically, wages have tended to lag
inflation, yes.
Mr. Keller. Yes, because you don't think, oh, my gosh,
President Biden is going to go and have an assault on American
energy and he's going to do all these things. Oh, my gosh, I
better raise my wages before gas prices go up.
I mean, usually the prices increase, and then the answer to
that is businesses, taking care of their employees, raise their
employees' wages. So, it would be a natural thing for wages to
increase after we see what the inflation numbers are.
Mr. Goodspeed. Yes. Also, wage contracts tend to be
negotiated at a lower frequency than a lot of price contracts.
Mr. Keller. OK. Thank you. Because I hear a lot of things
that my colleagues on the other side and some experts, that I
don't know whether they ever ran a business or not, have been
saying. And one of the things they're saying is, oh, we're less
worse than someone else.
In America, that's not good. I don't measure that I'm less
worse than some other country's economy. We want to be the
best. I don't want to settle for second for anybody in America.
And I think it's really sad that we have people that try to
say, oh, we're not so bad off because we're less worse.
And my favorite President, the first President for which I
could vote, Ronald Reagan, said: ``Government's view of the
economy could be summed up in a few short phrases. If it moves,
tax it. If it keeps moving, regulate it. And if it stops
moving, subsidize it.''
You know, I've heard mention of all these corporations, and
some of them were from Dr. Mabud, AutoZone, Proctor & Gamble,
General Motors, and Ford. I hear all these corporations
mentioned in the testimony. And the title of our hearing is,
``Power and Profiteering: How Certain Industries Hiked Prices,
Fleeced Consumers, and Drove Inflation.''
So I don't know. It's these companies who have
shareholders, right, that have to be profitable. I mean, I
don't know when in America it became a bad thing to be
profitable. I mean, that's not the America I grew up in.
But let's talk about who owns these companies. And I would
like to submit for the record, with unanimous consent, to
submit for the record two reports, one from CalPERS, which is
California's retirement system, and one from the Pennsylvania
State Employees' Retirement System. I'd like to submit these
for the record, if I may.
Mr. Krishnamoorthi. Sure.
Mr. Keller. It proves that our teachers, our highway
workers, our police officers, our firefighters are the people
that own these companies right there. That's who it is. And the
company has a fiduciary responsibility, which means they're
supposed to look out for their shareholders. And if companies
aren't profitable, then we don't have retirement plans for all
these people. So, where are we going to get that money?
I think we probably--Mr. Goodspeed, if CalPERS can't
afford--doesn't have enough income on their retirement system,
they would probably have to raise taxes or something to make
those retirement payments, wouldn't they?
Mr. Goodspeed. Yes.
Mr. Keller. OK. And then who would pay for these taxes?
Mr. Goodspeed. The American tax base.
Mr. Keller. Yes. Yes. Exactly.
So, I don't know why we're having a hearing demonizing--of
course, that's the thing to do now, demonize Americans.
President Biden did it in front of Independence Hall and said
half of us are terrible people. And now we're having a hearing
saying that our factory workers and our highway workers and our
police officers are bad people because they own stocks in these
corporations to pay for their retirement. And all of a sudden
this is a bad thing.
You know what? Everybody talks about poor people. I grew up
poor. It's not fun OK? It is not fun. We lived in a shack for a
period of time with no running water, no electricity.
And in 1973, that summer, we moved into a tent. We walked
the highways picking up aluminum cans and soda bottles in
southern Arizona. It's not fun, but we did it.
And you know what? My dad could have taught us to be
envious. He never did. You respected the fact that in America,
if you worked hard, you could own things and you could do well
and you could succeed.
That's what all the people that own these retirement plans
want to do, and they want to have a better future for their
kids. They don't want to be taxed to death. They don't want to
be regulated to death.
American people care and have done more for humanity than
anybody around the world. And I think it is pretty pathetic
that Members of Congress are demonizing the American people
because they own shares in these companies and because they're
reacting to the policies of their government on energy, on
supply chain, and all the other things taking their dollars.
So, I just say that I think we need to realize who really
pays the bills around here. It's the people who get up to work
every day. I've done it, and I think some people in this room
have not. And if they did, they'd have a lot more respect for
the person that works every day and owns these funds.
I yield back.
Mr. Cloud. Mr. Chairman, I ask unanimous consent to submit
this letter for the record to Director Neese, Director of the
National Economic Council, again requesting information from
the Biden administration's plans to address the ongoing
economic crisis.
Mr. Krishnamoorthi. So entered.
Mr. Krishnamoorthi. And now, as I recognize Congresswoman
Porter for her questions, I'll just point out, in the first
year of Ronald Reagan's Presidency, inflation was 10.32
percent. I don't blame him for it, but it was 10.32 percent.
Mr. Keller. We were coming out of Jimmy Carter's disaster.
Mr. Krishnamoorthi. Congresswoman Katie Porter, please
begin your questions.
Ms. Porter. Good morning.
Mr. Konczal, you published a paper, ``Profits, Prices, and
Power: An Analysis of 2021 Firm-Level Markups.''
This is a chart from your paper. This chart is about
markups. What is a markup?
Mr. Konczal. A markup is the increase in sales over the
price of production, the marginal cost of production.
Ms. Porter. Over the price of production?
Mr. Konczal. Yes.
Ms. Porter. So, let's break down for people what this
means. If it costs $10 to make the item, the product, and you
sell it for $12, you have a $2 markup, right?
Mr. Konczal. Correct. A 20 percent markup.
Ms. Porter. So, this is showing that markups have gone up
beginning about 40 years ago. But what is this top gun kind of
trajectory that's basically vertical here? What is this?
Mr. Konczal. That is the level of markups in aggregate
across the publicly traded companies starting in 2020,
particularly in 2021, the highest increase--highest one-year
increase on record.
Ms. Porter. So, this is after they pay their expenses,
after they deal with supply chain, after they pay their labor.
This is what the corporation is adding to the cost of the
product in order to pad its bottom line.
Mr. Konczal. Absolutely. That is after the cost of goods
sold, which they record as part of their accounting.
Ms. Porter. So, this chart shows that corporations are
adding to the cost to boost their profits beyond their costs?
Mr. Konczal. Correct.
Ms. Porter. Mr. Konczal, did you also see in this period a
rise in corporate profit margins?
Mr. Konczal. Yes. Undoubtedly, that is at the highest level
since the 1950's.
Ms. Porter. OK. So, I want to show another one, another
chart.
All right. So, this is a really important point when we
talk about inflation, what consumers are experiencing. Prices
are not going up just because of supply chain or labor or some
other invisible market forces. They are going up because
powerful executives are making deliberate choices to maximize
their profits at the expense of the rest of us.
According to this chart, what is the biggest driver of
inflation during the pandemic? The blue is the--the dark blue
is the recent period.
Mr. Konczal. It would be corporate profits.
Ms. Porter. And what is that percentage?
Mr. Konczal. It is 54 percent. And that number does stay
that level of high if you update that number to more recent
numbers as well.
Ms. Porter. So, over half of the increased prices people
are paying are coming from increases in corporate profits.
Mr. Konczal. Yes. The unit price index is reflected in
corporate profits as opposed to other costs.
Ms. Porter. And how does that compare historically to other
periods of inflation or over other periods of economic time?
Mr. Konczal. As reflected there and in other analysis, it
is significantly higher in this recovery, 11.5 percent.
Ms. Porter. And what is it today?
Mr. Konczal. Fifty-three percent.
Ms. Porter. So, I want to make sure everyone in America
understands this chart.
What is a unit labor cost?
Mr. Konczal. Wages and associated worker costs.
Ms. Porter. So, we can adjust wages.
What is a nonlabor input cost?
Mr. Konczal. A variety of things, including maintenance and
investments.
Ms. Porter. OK. So, I have to buy the stuff to make the
widget. I have to have a factory. I have to keep the lights on.
I have to hire someone to make the widget. That's this stuff.
Mr. Konczal. Uh-huh.
Ms. Porter. And this is what I add on----
Mr. Konczal. Yes.
Ms. Porter [continuing]. On top.
Mr. Konczal. Yes.
Ms. Porter. So, your research shows that, in some
industries, this 50 percent, this more than half of inflation
driven by corporate profits, was driven by some industries that
increased significantly their prices during the pandemic, but
other industries didn't.
When you analyze the different industries, one of the
things you found that I thought was really interesting was that
the companies that have the highest profits, that are driving
those markups straight up, are the same companies that had the
highest profits before the pandemic.
Why?
Mr. Konczal. We believe those high markups from before the
pandemic reflected a severe market power problem that we had
even before COVID, and those companies were able to increase
their prices at an even higher pace as a result of the
reopening.
Ms. Porter. So, I want to be clear with my colleagues on
the other side of the aisle and the American people. It's not
bad for corporations to be profitable in a market economy, but
it is bad for markets to be anticompetitive.
And that, that anticompetitive nature of the market, is
what's permitting markups that are soaring upward, what's
permitting corporate profits to drive inflation rather than
unit costs and labor. That's what's permitting the price
gouging.
So, we need to pass my Competitive Prices Act to give
consumers the tools they need to create a competitive
marketplace and to hold corporations accountable when they
abuse market power to gouge Americans.
I yield back.
Mr. Krishnamoorthi. Thank you, Congresswoman.
Now I'd like to recognize Mr. Clyde for five minutes of
questions.
Mr. Clyde. Thank you, Chairman.
And I was elated to hear that our subcommittee, the
Subcommittee on Economic and Consumer Policy, was actually
holding a hearing on inflation. Thank you.
Today is September the 22nd, meaning that, after nearly
nine full months, this is only the second hearing that we have
had this calendar year. So, I am very glad that Democrats are
actually holding a hearing on a relevant topic. Let's not
forget that the only other hearing that this subcommittee has
had was on pet flea and tick collars.
This year, the United States has experienced the highest
inflation in decades, and it is deeply troubling to me that
Democrats on this committee seem to have decided to turn a
blind eye to the painful price hikes their policies have
inflicted on the American people.
Now Democrats are desperately trying to deflect the blame,
largely toward capitalism and so-called corporate greed, rather
than admitting that their runaway spending and big government
socialist agenda has caused and continues to fuel the inflation
crisis.
Last week, the CPI report revealed that, during the month
of August, inflation hit a whopping 8.3 percent, exceeding all
expectations. The average price of gas is still 25 percent
higher than last year, and groceries have surged almost 14
percent.
Groceries, the price of groceries continues to rise,
hitting the lowest-income Americans the hardest. Eggs are up
nearly 40 percent compared to August 2021. Milk is up 17
percent, chicken is up 17 percent, and bread is up over 16
percent.
Now Americans are struggling to buy groceries and to afford
gas, and it simply did not have to be like this.
Mr. Reich, I believe you served in the Clinton
Administration. Is that correct?
Mr. Reich. That's correct, Congressman.
Mr. Clyde. All right. I believe Mr. Larry Summers, who
served as the 71st United States Treasury Secretary, also
served in the Clinton Administration. Is that correct?
Mr. Reich. Yes. I was there. We overlapped, same time.
Mr. Clyde. OK. Great.
Do you think he is a qualified and knowledgeable
individual?
Mr. Reich. I do. He's a friend, and I respect him.
Mr. Clyde. Thank you.
Well, Harvard professor Mr. Larry Summers was a top
economic adviser to both President Clinton and President Obama,
and I think that's pretty impressive. And, yet the Biden
administration seems to have refused to heed economists'
warnings of growing inflation.
On February 4, 2021, Professor Summers, who, again, served
in both the Clinton and the Obama Administrations, warned that
President Biden's almost 2 trillion, quote, ``stimulus plan,''
known as the American Rescue Plan, was three times as large as
the output shortfall and that, quote, ``Policymakers need to
ensure that they have plans in place to address the possible
and quite serious problem of inflation.''
And I want to point out that I voted against this
disastrous piece of Democrat legislation last year.
Yet again, on May the 18th of this year, Mr. Summers
reiterated his concern, but the concern apparently, again, fell
on deaf ears. He said that Democrat policymakers are--and I
quote--``taking very substantial risks on the inflation side.''
Given that even top Democrat economic advisers, economists,
like Mr. Summers, warned of this inflation because of the
left's policies, it seems hypocritical that now Democrats are
blaming companies for rising prices.
Dr. Mabud, I would like to ask you a pretty simple
question. A ``yes'' or ``no'' will suffice.
Are the Biden administration and congressional Democrats to
blame at all for the crippling inflation burdening hardworking
American families?
Mr. Mabud. The critical investments the administration and
Congress made over the course of the pandemic is the reason
that we're in the middle of a jobful recovery rather than a
jobless recovery.
Mr. Clyde. I didn't ask you about that. I asked you about
inflation. Could you please answer the question?
Mr. Mabud. It's really important to address the fact that
working people are the people who keep this economy going.
Mr. Clyde. OK. So, you're not going to answer the question.
You're not going to answer whether or not Democrats and the
Biden administration are to blame at all for crippling
inflation burdening hardworking families.
Mr. Mabud. You know, I'm here today to talk about corporate
profiteering, which has been hiking prices for American
families.
Mr. Clyde. OK. All right. So, we're not going to get
anywhere here.
Over the weekend, President Biden stated in a ``60
Minutes'' interview that inflation had hardly risen. Quote,
``The inflation rate month-to-month was just--just an inch,
hardly at all.''
So, Mr. Goodspeed, is inflation just up an inch, hardly at
all?
Mr. Goodspeed. No. You can look at the year-over-year
figure, which is 8.3 percent headline. You can look at the core
or underlying measures of inflation, median inflation, to which
everyone was pointing a year ago saying: This is evidence that
we don't have an inflation problem.
In August, that rose at an annualized rate of 9.2 percent.
Mr. Clyde. So, we have a problem with inflation.
Mr. Goodspeed. Yes.
Mr. Clyde. Thank you. Do you----
Mr. Krishnamoorthi. Thank you, Mr. Clyde. Your time has
expired. And Democrats aren't the ones blaming corporations.
Eighty percent of Americans, including many Republicans, are.
I'd like to now recognize Congresswoman Bush.
Mr. Clyde. I believe it's excess Federal spending there,
Mr. Chairman.
Mr. Krishnamoorthi. Congresswoman Bush, you are recognized
for questions.
Ms. Bush. Thank you. And thank you, Chairman
Krishnamoorthi, for convening this deeply important and timely
hearing.
The unprecedented severity of corporate profiteering and
its negative impact on workers, consumers, and our small
businesses within communities cannot be overstated.
In my hometown of St. Louis and every corner of this
country, rising costs of rent, food, healthcare,
transportation, and childcare means more people are working
harder than ever, but coming home with less money to show for
it.
The gap between depressed wages and increased worker
productivity leaves family scrambling to afford basic goods and
services, despite producing more profit than ever for these
same corporations.
Consumers are forced to rely on banks to extend lines of
credit when their paychecks aren't enough, racking up billions
in credit card debt, auto loans, student loans, and medical
debt.
We have over 40 years of data that proves Reagan-era
policies encouraged monopolies and concentrated markets into
increasingly fewer hands. When one company controls daily
essentials, such as Proctor & Gamble, consumers are forced to
accept prices set by one corporation with no competitors.
The price for basic human needs, like toothpaste,
detergent, toilet paper, continues to rise well above previous
profit margins, with no end in sight.
The power and influence of corporations has increased
exponentially while labor union participation has significantly
declined. Unionization was responsible for historic gains, such
as wage increases, eight-hour days, sick leave, paid time off,
child labor laws, and more.
Without strong unions, lawmakers and regulators are the
last line of defense for workers in the bitter fight between
labor and big business. It's time for us to reconsider the
tremendous influence a select few corporations have over our
economic and political systems.
Do 150 million Americans have to live paycheck to paycheck
so a group of 500 CEOs can get richer? Shouldn't we champion
monetary policies that encourage unemployment to rise so that
markets can thrive? These questions are equal parts economic,
political, and moral, and they deserve our careful
consideration.
So, Secretary Reich, it's been nearly a decade since you
released the documentary ``Inequality for All,'' in which you
sounded the alarm about harmful corporate practices.
How has the relationship between worker productivity and
wages changed since then?
Mr. Reich. So, Congresswoman, I wish I could say that there
was a dramatic difference in the relationship. But actually
we've seen that worker productivity has continued to rise, but
wages have continued to stay relatively flat adjusted for
inflation.
In fact, what we've seen recently is that, even though
inflation continues to rise, those worker wages are
relatively--are still relatively flat.
Employers are complaining they can't find workers. Well,
there is a way to find the workers: raise pay. They won't do
it. They'll raise the prices of their goods, but they're not
raising their wages.
Ms. Bush. So, as a followup, Secretary Reich, given the
historical disparities between Black and White unemployment
levels, can you estimate how the Federal Reserve's policies
will impact Black workers?
Mr. Reich. Yes. Undoubtedly, the Fed's continuing rate
increases are not only flirting with a recession, but they are
making it harder for workers, particularly Black workers who
are disproportionately low-wage, to get income increases, to
get wage increases.
And one of my biggest fears is, because Black workers are
disproportionately low wage, they are also disproportionately
going to be the first fired when we head into an economic
slowdown.
This is a problem for Black workers. It's a problem for the
working poor. It's a problem for the lower middle class. These
are the people who are drafted into the fight against inflation
when we rely solely on the Fed and on interest rate hikes to
control inflation.
Ms. Bush. Thank you for your explanation and for being so
clear and concise in speaking the truth.
While we are here to discuss corporate accountability, I
must also emphasize lawmakers set the rules of engagement. If
corporations are acting in bad faith, it is incumbent upon
regulators to close legal loopholes before consumers and
workers are negatively impacted. It's time to change the rules
that implement price gaps, strengthen antitrust laws, increase
minimum wage, bolster the power of our unions, and reinvest in
people, not profits.
Thank you, and I yield back.
Mr. Krishnamoorthi. Thank you.
I'll use that to ask Dr. Mabud, are we demonizing
shareholders, are we demonizing someone else, or are we
questioning the judgment of executives when they raise prices
far beyond costs?
Mr. Mabud. We live in a system where corporate executives
are really beholden to their shareholders, and what we're
seeing is that shareholders are demanding higher and higher
profits.
This is essentially a story of a financialized economy.
When it's really effective for a company to raise prices and
that company can offer its shareholders a lot of money, those
shareholders go to other sectors in the economy and demand
higher prices there, too.
Mr. Krishnamoorthi. OK. Thank you.
Mr. Donalds, you are recognized for five minutes.
Mr. Donalds. Thank you, Mr. Chairman.
Couple things. Let's level set here for a moment.
We are in a recession. We have had two quarters of negative
GDP growth. I don't know in what world we decided we wanted to
change the definition that not only government, but financial
markets have been using for 80 years now. We've called two
negative quarters of GDP growth a recession.
Why are we trying to change language now? Because of the
economic policies by Joe Biden and Democrats in Congress that
have brought forward a couple of things.
No. 1, an artificial labor shortage coming out of the
pandemic. Doctor--I don't want to mispronounce your name since
I wasn't here for the opening remarks, Mabud, is that correct?
Dr. Mabud. Mabud
Donalds. My apologies. Dr. Mabud, why was there a labor
shortage coming out of the COVID-19 pandemic?
Mr. Mabud. We're actually back to----
Mr. Donalds. No, no. Dr. Mabud, there was a labor shortage
that was coming out of the COVID-19 pandemic. Do you
acknowledge that?
Mr. Mabud. I don't think we had a labor shortage. I think
we had a shortage of good jobs.
Mr. Donalds. Mr. Goodspeed, did we have a labor shortage
coming out of the COVID-19 pandemic?
Mr. Goodspeed. Yes. We had 1.5 million early retirements,
we had 3.7 million Americans indicating that they didn't look
for work for the past month because of the pandemic, and we had
an extension of--expansion of the child tax credit and an
extension of Federal supplemental unemployment insurance
benefits that exacerbated the labor supply shortage
Mr. Donalds. Dr. Mabud, let's get out of the statistical
world. Let's go into real world America.
You buy goods and services like any other American does.
I'm quite sure you went to stores where the signs were in the
windows about how they were basically paying people to come for
an interview, let alone for the job itself.
Do you acknowledge that to be a reality of what was
happening?
Mr. Mabud. Yes. I also want to acknowledge that low job
quality and low wages are a huge liability in our economy. I
mean, last week's recently averted rail strike is an example of
this, right? When you don't have workers who can come to work
because they literally can't take a routine doctor's
appointment, that's not the fault of that worker. That's the
fault of the company that is driving down the job market.
Mr. Donalds. Dr. Mabud, do you acknowledge that, if
somebody is giving dollars, if they're given revenue, if
they're given cash, and they don't have to exchange their labor
for money in order to pay for goods and services, that that
lowers the productivity or the desire to actually go get
working hours at a company or firm or shop or whatever the case
may be?
Mr. Mabud. I believe that people should be treated with
dignity at work.
Mr. Donalds. Oh, I believe everybody should be treated with
dignity, but that's not what we're talking about. When it comes
to labor shortages, what we're trying to surmise is that, if
you go down the pathway of providing dollars to people and they
don't have to exchange labor, which is the way our economy
functions, for money to pay for their goods and services, do
you think that leads to a labor shortage? Yes or no?
Mr. Mabud. Like I said, I believe we are experiencing a
shortage of good jobs, not a shortage of labor. And I think
it's really critical not to blame working people for higher
prices.
Mr. Donalds. I'm not blaming working people. What I would
say is I'm blaming government policy, because if you're given
money without having to exchange it with labor, having to take
your talents and abilities, and you're getting money as a
result, it depends on the industriousness of the individual at
that point. I'm not blaming anybody.
If you're giving out free money, shoot, OK, cool. Most
people are just going to go ahead and take it. We know this.
But if have you a legitimate economic choice to make at
your kitchen table--I can go work 40 hours, or I can go work 20
hours, and our living does not change--people have their own
decision to make about what they're going to do.
The point I'm making is that labor shortage, which was
created by the, quote/unquote, American Rescue Plan, led to a
labor shortage, and that labor shortage has led to price
increases because you had people who had the revenue and the
disposable cash-flow to buy goods, but not enough goods in
circulation to purchase.
Mr. Goodspeed, is that an accurate assessment of what's
happened in America since Joe Biden became President of the
United States?
Mr. Goodspeed. Yes, I think that's a fair description.
Mr. Donalds. So, let's establish a couple things.
Are prices up? Yes, they are. Electricity prices are up.
Good prices are up. The only reason why fuel--gasoline prices
are down is because the President's been basically buying down
the price with releases from the Strategic Petroleum Reserve--
which, by the way, that's coming to an end as well. We are in a
recession. I think we've covered a lot here.
Look, I understand the majority party's desire to try to
put this on corporate America for raising prices. But if you do
not have enough workers working, there is not enough goods
produced. If there is not enough goods produced but everybody
still has money to go buy goods, the price of each unit
actually goes up. That's how inflation is always created. More
policies of the same is only going to lead us further down the
road to perdition, which we are already on.
With that, I yield back
Mr. Krishnamoorthi. Thank you, Mr. Donalds.
Now I'd like to recognize Ranking Member Cloud for a
closing.
Mr. Cloud. Thank you, Chairman.
I appreciate the fact that we've been able to have a robust
discussion. Certainly the economy is something that affects so
many people. We've discussed that today.
Families are suffering because of the policies of this
administration. We've seen energy prices go through the roof.
They're causing fertilizer prices to go up. They're causing
pesticide prices to go down. That's making our yields be lower
while our food prices are going higher. The cost of goods are
going up. We have a work force that's not incentivized to
return to work, causing the supplies to go down, leading to
rising prices.
And the solution that's being presented today is more
government intervention, which intervention by the government
has only, in the past, worked to create--and, as a matter of
fact, in the last couple of years, what we've seen.
You know, just a few years ago, we had an economy that was
thriving. Virtually every single demographic, wages were
rising, and people were flourishing, families were flourishing.
And now what we have is a massive wage shortage--or
employment shortage--and an economy that's struggling to keep
going. And the solution of more government intervention being
the solution is just not what's going to work.
What that will continue to do is to create the disparity
that we see happening now between the rich and the poor. Where
we had a thriving middle class that was beginning to grow and
that gap diminishing just 2 and 3 years ago, now that gap is
extremely growing.
As those who are well connected and people who can come
here and have access to help write these regulations toward
their favor, create a less competitive environment, that means
prices go up, versus what needs to happen in the reverse, where
we create a more competitive environment to lead prices to go
down.
And so we have a lot of work to do to return our economy to
a thriving economy where families can flourish in all
demographics. And I appreciate the conversation today. We
certainly have to go back to sound fiscal policy.
Thank you. I yield back.
Mr. Krishnamoorthi. Thank you, Mr. Cloud.
Thank you all. Thank you to all the witnesses for coming in
today. Thank you to the audience for tuning in. Thank you to
Dr. Reich for--I finally see some sunlight coming through that
window, so it's starting to get later in the morning there.
I think that this hearing is really not about denying that
supply chain disruptions occurred or that there were changing
patterns in demand, but rather to acknowledge something that
the American people themselves have been saying very strongly,
which is that 80 percent of Americans say corporations raising
prices to make record profits is a cause of inflation. That's
it. Eighty percent of Americans.
We're not talking about just Democrats. We're talking about
a large majority of Americans know in their bones something
that we are finally acknowledging here in this hearing, which,
unfortunately, some of my colleagues on the other side do not
want to acknowledge.
What we've heard from the testimony of our witnesses is
that we're seeing record profits. But more than that, record
profit margins, huge increases in those profit margins year
over year, unprecedented level of market concentration, and
corporations even stating that they are increasing prices and
don't intend to let them fall even as their costs fall.
So that is a problem. And when we see corporations--and not
all corporations, but certain corporations--do this, especially
in the meat-processing industry, which we've talked about,
which affects average, ordinary people every day, where they
saw their profits surge 134 percent from nearly $4 billion in
2019 to nearly $9 billion in 2021, it has real effects. People
cannot eat meat. People cannot do the things that they would
ordinarily do to feed their families. And that, unfortunately,
has repeated itself in other industries as well.
Now, some of my colleagues on the other side say that
Democrats are blaming corporations or Democrats are blaming
shareholders. No. What we're saying is that corporations
raising profits excessively is a cause of inflation. It may not
be necessarily illegal, but it's probably, in some cases,
unethical. And to say that increasing wages is the cause of
inflation when they could have reduced profits to allow for
lower prices is also disingenuous
Now, Dr. Goodspeed presents an analysis whose integrity has
been undermined. He says that the ARP is what caused the sudden
rise in inflation because of a, quote/unquote, ``unprecedented
demand shock in March 2021.''
But when he was asked does he believe that $1.9 trillion
went out in April--sorry, March 2021--he says the majority did,
when actually a small sliver of that $1.9 trillion went out in
March 2021.
That is a problem with his analysis, and it has not been
rebutted even once during this hearing.
And so I just want to say thank you for everyone's
participation. Thank you for your interest in this very
important topic.
And in closing, I express my gratitude again----
Mr. Cloud. Mr. Chairman?
Mr. Krishnamoorthi [continuing]. For the witnesses who
testified----
Mr. Cloud. Mr. Chairman, if you're going to challenge
someone's integrity in your closing statement, you should give
him a chance to respond.
Mr. Krishnamoorthi. That was up to you guys to ask him the
question about his analysis, and you failed to do so.
Mr. Cloud. You are disparaging a man's integrity----
Mr. Krishnamoorthi. I did not----
Mr. Cloud [continuing]. In your closing argument----
Mr. Krishnamoorthi. No.
Mr. Cloud. It's a very cowardly thing to do----
Mr. Krishnamoorthi. No.
Mr. Cloud [continuing]. Not to give him a chance to
respond.
Mr. Krishnamoorthi. I actually criticized the integrity of
the analysis, Mr. Cloud.
Mr. Cloud. You mentioned his integrity.
Mr. Krishnamoorthi. No. I said the integrity of the
analysis. And I think that's a very desperate move to try to
hold up the analysis in the last seconds of this hearing.
All members will have five legislative days within which to
submit additional written questions to the chair for the
witnesses, including any of the witnesses present today. These
questions will be forwarded to the respective individual for
his or her response.
I ask our witnesses to please respond as promptly as you
are able.
The hearing is now adjourned.
[Whereupon, at 10:36 a.m., the subcommittee was adjourned.]