Fed Rate Hikes Won't Tackle the Corporate Profiteering Behind Inflation, Experts Tell Congress

One day after the U.S. Federal Reserve imposed yet another interest rate hike, a trio of progressive political economists on Thursday told members of the House Committee on Oversight and Reform that the best way to curb rising prices--without further punishing workers by deliberately plunging the nation into a recession--is to confront the corporate profiteering fueling inflation.

During his opening statement, Rep. Raja Krishnamoorthi (D-Ill.), chair of the Subcommittee on Economic and Consumer Policy, said that "we cannot ignore the reality that American corporations 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."

The hearing was titled "Power and Profiteering: How Certain Industries Hiked Prices, Fleeced Consumers, and Drove Inflation."

Rakeen Mabud, chief economist and managing director of policy and research at the Groundwork Collaborative, was among the experts who provided written and oral testimony.

Mabud made three key points in her remarks to lawmakers.

First, "even as input costs come down, corporate executives are gleefully reporting how they plan on keeping prices high," she noted, citing Groundwork's exhaustive research on earnings calls, which reveals how "megacorporations are taking advantage of recent crises to make record profits for themselves and their shareholders." Big companies "are acutely aware of how their market power affords them the ability to keep prices high, even as the costs of expenses go down."

"Interest rate hikes... will not address any of the underlying causes of our supply shortages and do nothing to address profiteering."

Second, price gouging is "hitting the poorest families the hardest because essentials like food and shelter--major drivers of higher costs right now--take up a bigger proportion of their household budgets," Mabud pointed out.

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," she continued. "A ruthless pursuit of efficiency and short-term profits... left us vulnerable to profiteering and price increases."

"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," said Mabud. "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."

Mabud's analysis was echoed by Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, whose written testimony summarizes his co-authored paper on the positive relationship between concentrated market power and inflation.

In short, Konczal and his colleague Niko Lusiani "found that markups and profits skyrocketed in 2021 to their highest recorded level since the 1950s" and that "firms in the U.S. increased their markups and profits in 2021 at the fastest annual pace since 1955."

When subcommittee member Rep. Katie Porter (D-Calif.) asked Konczal to identify the biggest driver of inflation during the pandemic, he verified that it has been "corporate profits."

Porter also highlighted Konczal and Lusiani's research on the record-breaking surge in price markups in 2021, which underscores how corporations have increased costs for consumers to boost their profits.

"Since corporate profit margins have become so unusually high," said Konczal, "there is room for reversing them with little economic harm and huge societal benefit, including lower prices in the short term."

Like Mabud and Konczal, former U.S. Labor Secretary Robert Reich, now a professor of public policy at the University of California, Berkeley, told lawmakers in writing and over video conference that "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," he added.

Stressing that the Fed's only inflation-fighting tool--interest rate hikes--cannot solve what he calls "profit-price inflation," Reich urged Congress and the Biden administration to address corporate profiteering directly through a windfall profits tax of the sort introduced months ago by Sen. Bernie Sanders (I-Vt.), stronger antitrust enforcement, and temporary price controls.

According to Reich: "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."

Reich is far from alone in advocating for robust government intervention in the economy to improve working-class well-being.

In a Chicago Tribune opinion piece, Carl Rosen, general president of the United Electrical, Radio, and Machine Workers of America, wrote earlier this week:

Rather than throwing our country into a recession with interest rate hikes, our federal government should take other measures to alleviate the pain being felt by working people, especially those on fixed incomes. Increasing Social Security payments, reinstituting child tax credit payments, and providing inflation rebates to working people, which can all be paid for by taxing corporate profits and the rich, would put more money in working people's pockets, allowing them to cope with higher prices.

Our government can also take steps to directly control prices, such as those contained in the Emergency Price Stabilization Act introduced by U.S. Rep. Jamaal Bowman (D-N.Y.) in August. This legislation would allow the government to investigate corporate profiteering and issue appropriate controls and regulations to stabilize prices. It would also engage and mobilize the public in a manner modeled on the successful and popular Office of Price Administration that kept basic goods affordable during World War II.

Furthermore, Congress should strengthen workers' ability to negotiate higher wages by immediately passing the Protecting the Right to Organize, or PRO, Act, which would make it easier for workers to form unions, and by fully funding the National Labor Relations Board to make sure it has the resources to enforce the existing labor law.

Economic Policy Institute research director Josh Bivens did not participate in Thursday's hearing but wrote in a blog post that "protecting low-wage workers from inflation means raising the minimum wage."

During her testimony, Mabud also provided lawmakers with a roadmap to overcome the cost-of-living crisis:

• Congress should tax excess and windfall profits to encourage productive investment instead of profiteering;
• Regulators should 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 transition; and
• Congress should continue to make long-overdue investments in our supply chain and tackle costs like healthcare and housing, that have long dominated family budgets.

"Importantly," she added, "interest rate hikes, which slow inflation by tamping down demand and making people poorer, will not address any of the underlying causes of our supply shortages and do nothing to address profiteering."