Biden’s Economic Policies, Not Corporate Profits, Are Driving Inflation

Bread line, image courtesy of Antonio Graceffo

In the first year of the Biden administration, inflation hit a 40-year high and has continued to climb steadily since then. However, he blames the problem on “evil corporations,” not his own misguided economic policies.

“Too many corporations raise prices to pad their profits, charging more and more for less and less,” said President Biden in his most recent State of the Union Address. His administration has driven the deficit, expanded the debt to historic levels, printed money, increased the money supply, and given away trillions of dollars to people who do not work and to foreign countries, but he blames corporations for inflation. And to “protect” the public from the evil capitalist system where everyone is free to buy, sell, trade, and earn as they wish, he has vowed to crack down on “price gouging.” Ostensibly, the White House will decide what the “correct” prices should be and which prices are being gouged, and the government will use its vast power to force corporations to return those prices to a federally determined level.

The Federal Reserve Bank of Kansas City blames inflation on corporate profits. Some reports claim that corporate profits accounted for as much as 53% of inflation. The reality, however, is that inflation is a monetary phenomenon caused by the reckless fiscal and monetary policies of the Biden administration.

Inflation, by definition, is the expansion of credit and the money supply. This causes the buying power of the dollar to decrease, which means you need more dollars to buy things. Most consumers see and are alarmed by rising prices, but this is not inflation; it is only the result of inflation. The real culprit is massive debt creation, deficit spending, loan forgiveness, foreign aid, and transfer payments made by the Biden administration.

Evidence used by the White House and other liberal pundits regarding inflation reference the fact that corporate profits are up, identifying this as a cause of inflation. However, corporate profits are up in nominal terms because the dollar is worth less and prices are rising. Corporations took in more dollars, but those dollars buy fewer raw materials and pay for less labor than they did before Biden took office. The same administration that blames corporations for rising prices is also demanding that the minimum wage be doubled. Labor accounts for between 20% and 40% of cost for most retail and fast food businesses. Forcing a doubling of the minimum wage will drive prices up.

A CNN article about inflation is typical of the error the White House and mainstream media are making, whether wittingly or unwittingly. The article talked about a small business owner who had trouble earning a profit despite rising prices. As prices were rising, so were his costs. To break even, he was forced to raise his prices even higher. The small business owner then blamed corporations for higher prices. His personal experience was that costs were rising and his profits were dwindling, yet he believed corporate greed was causing inflation.

In the same article where the Federal Reserve blamed inflation on corporate profits, they also stated that “although corporate profits and inflation do not have a direct accounting relationship, inflation is directly affected by growth in the markup, or the ratio between the price a firm charges and the firm’s current marginal cost of production.” The Fed is wrong in stating that inflation is affected by changes in prices. It is true, however, that when costs increase, companies have to raise prices to earn a profit. And even if the margin stays the same, say 3%-8% profit, the nominal size of the profit increases.

Here is a simple example. If, before the start of the Biden administration, your business earned a 6% profit equal to $1. That $1 is worth less today and may not be enough to cover the increase in your costs and still earn a profit. So, you have to raise your prices to get a $1.20 profit to still earn 6%. And that $1.20 buys the same quantity of goods as the $1 did pre-Biden. Just like the cost-of-living adjustment in your salary, you are absolutely no better off; you are just dealing with larger numbers.

Another point that many media reports and studies made was that corporations were evil because they based their price rises on future expectations. In fact, there is nothing evil about this; it is totally normal. If you believe prices will go up next year, you make purchases this year. In the case of corporations, they order from the factory three to six months before the product will go to market. If they expect the costs of manufacturing to rise during that period, they raise prices so that they will have money to cover the next batch of manufacturing, which will be at the higher price.

An absolutely spurious claim made by the Federal Reserve is: “Specifically, markups grew by 3.4 percent over the year, whereas inflation, as measured by the price index for Personal Consumption Expenditures, was 5.8 percent, suggesting that markups could account for more than half of 2021 inflation.” This statement recognizes that inflation was higher than the markup. What this should mean is that increases in prices are lagging inflation, not driving it.

And finally, proof that the Biden administration is the culprit: An argument made by the Groundwork Collaborative think tank and others who blame “the corporations” is that corporate profits as a percentage of GDP have increased, and therefore corporate profits must have increased and are the cause of inflation. This logic ignores the fact that Biden’s lockdowns prevented people from working during the pandemic, and even now, not everyone is back at work. So, obviously, wages as a percentage of GDP will be lower if people are not working. Ironically, even the graphs created by Groundwork Collaborative clearly show that salaries as a percentage of GDP decreased during the lockdown.

As the nation rolls toward the 2024 elections, the White House is looking for anyone to blame for inflation while attempting to buy votes by continuing to give away free money, which is driving inflation.

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