Democratic Senators’ Bad Excuse for Inflation
“Greedflation” is a convenient buzzword for politicians.
It gives them cover to spend as much as they want without worrying about the consequences, and then blame the resulting inflation on private businesses.
When legislation predicated on the “greedflation” narrative was introduced earlier this year, it was overwhelmingly backed by left-wing senators like Jacky Rosen (D-NV), Sherrod Brown (D-OH), Tammy Baldwin (D-WI) and Bob Casey (D-PA).
The justification? Casey’s website claims:
“Under the guise of inflation, corporations are raising prices on American families and raking in record profits to boot. From July 2020 through July 2022, inflation rose by 14 percent while corporate profits rose by more than 74 percent — nearly five times the rate of inflation.”
Casey and the other senators who signed onto the aforementioned legislation have rubber-stamped the big-spending policies of the Biden administration, so it’s no surprise that they’re eager to dodge the blame for inflation.
How does spending result in inflation?
The mechanism for how government spending results in price inflation is well understood by economists: The government’s checks don’t bounce. Any spending above tax revenue is likely to be paid for by creating new money.
Often, the government will take on debt to temporarily delay either inflation or taxation, but taking on debt isn’t free. That debt will eventually need to be paid for through taxes or money creation — with interest.
Once we realize that government spending beyond its means leads to the creation of new money, all we need to understand is one of the most fundamental principles in economics: the law of diminishing marginal utility.
Simply put: the more there is of something, the less each unit is worth. Dollars are no exception to this law.
If the government creates more money, the value of your dollar goes down.
This explanation seems self-evident. Of course rarer things are more valuable and more common things are less valuable.
Sounds simple, right?
But it’s not the explanation many politicians prefer. They prefer to blame “greed” for rising prices.
One problem with that theory is that greed is a consistent part of human nature. It’s difficult to see how a constant factor could be to blame for changing prices.
Are we to take it that businesses have suddenly become greedier? Does this imply that when prices were lower, businesses were somehow less greedy? More generous? It’s not clear.
But even if we overlook that issue with the “greedflation” theory and focus purely on the objective data, it simply doesn’t hold up to scrutiny.
Let’s look at the data
If consumer prices have risen due to greed, then we should expect to see the unprecedented profits that progressives claim businesses are making to go up.
However, a report by AFP’s economic policy expert, Kurt Couchman, found that corporate profits have been flat for at least a decade at roughly 10% of gross domestic product.
Casey needed to heavily manipulate the data to make it look like corporate profits are rising “nearly five times the rate of inflation.”
Among other problems, his numbers cherry-pick the start and end dates, and leave out key factors like capital consumption, inventory valuation changes and even taxes paid. When all is said and done, actual corporate profits have risen less than the rate of inflation and real economic growth.
If consumer goods prices have gone up simply because the value of the dollar is falling as the government prints money to cover their reckless spending, what should we expect to see then?
One thing to look for is whether the cost of providing goods has gone up as well. If the dollar falls in value, then it’s not just consumer goods that will rise in price. Businesses will need to pay more for the inputs needed to produce those goods and services.
It turns out, this is exactly what the data shows.
Harvard University economist Alberto Cavallo took to X (formerly Twitter) to explain the results of his recent study:
“Total markups faced by consumers (retail prices relative to production costs) were stable during the recent inflation surge. Contrary to claims of ‘greedflation,’ we do not see any discrete change in total markups, suggesting that the increase in retail prices for these goods mostly reflects increases in manufacturing costs.”
A “markup” is the difference between the cost of a retailer obtaining goods and the selling price. Put simply, the increase in retail prices weren’t accompanied by an increase in markups.
This means that sellers have increased prices about as much as was needed to cover rising costs.
Does that sound like “greedflation” to you?
If you want to learn more about what’s really causing the value of your dollar to plummet, visit https://www.greedflation.com.
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