Welcome Back to Professor C.'s Big Comfy Economics Armchair!

[cincinnatus_c]

There's a thing people I otherwise generally like and respect on the left keep saying that bugs me, which goes like this: "Food prices are too high because grocery chains are taking too much profit." It doesn't bug me if it's said in contrast to something like "food prices are high because supply-chain issues have raised costs for grocers"--in that context, it's correct, and a good point (and maybe a corrective to my tending to think that doing things like escalating trade wars with China is going to lead to a lot more inflation[1]). It bugs me when it's said (more or less implicitly, because the more explicitly it's said the more apparently nonsensical it is) in contrast to the idea that inflation generally and food inflation in particular is caused by people having too much money to spend, and the way to remedy that is to indirectly take money out of people's pockets, mainly by raising interest rates (which will theoretically, among other consequences, increase unemployment). It bugs me in that case because it boils down to saying that what's causing high food prices is not that people are paying grocers too much for their groceries but that grocers are being paid too much by people for their groceries.

For corporations (which are always seeking to maximize profits!--"corporate greed" is a feature of capitalism; treating it as a special character flaw is nonsense, and moralizing about it is, in principle, silly, even if it's not generally good for business if your customers are mad at you) to make their "excess profits", two things need to be the case. (1) People have to have the money to fund those profits. If people actually couldn't afford groceries, prices would come down, especially since the high profit margins mean there's room for grocers to lower prices and still make a profit (i.e., grocers are not currently close to being faced with a dilemma between selling at a loss and not selling at all). (2) There isn't enough competition among grocers to force profit margins down. Thinking through this part of it I realize that the trouble is that competition has to be artificially created because the effect of competition is to lower profits overall; companies merge (there are deceptively many grocery store brands, as opposed to companies, in Canada, and it strikes me now that part of the appeal for companies of maintaining multiple brands must be that it fosters an illusion of competition) in part because they're more profitable when they're not competing against each other. And while it's relatively easy for governments to mandate the continuation of currently existing competition (see, currently: telecom providers in Canada, book publishers in the US), it's very difficult (after the great break-up of the state-owned or state-protected monopolies around the 1980s) to mandate the creation of new competition (see: telecom providers in Canada). Under neoliberal conditions governments will only try to do so indirectly by removing barriers to new competitors entering the market, which may or may not be effective in the short term and any effectiveness of which will fade over time unless governments actively prevent the merger of new competitors with the companies with which they compete. Anyway, there's only so much removing barriers you can do before you're out of significant barriers to remove (never mind that there might be good policy reasons for some barriers).

A much less crude, much more direct, maybe more effective way, I'd imagine with fewer unintended consequences, of achieving the desired effect of controlling inflation by reducing the money supply would be tax increases. From a policy perspective the ideal thing would be to target tax increases at relatively wealthy over-spenders who can more easily afford to take the hit. In practice, finding a nimble way to pull off the targeting might be impossible, but the reason it just isn't done at all, targeted or otherwise, is that deliberately making people poorer is not very good for your prospects of remaining in government (in fact, speaking generally, nobody thinks they can afford to take any hit; you don't have to read any paper or whatever for very long to notice that lots of people making well into six figures feel like they're barely scraping by); if you're in government, especially a democratic government, you'd better offload that job to the supposedly apolitical central bank (although the supposition that central banks are apolitical has been under attack from the left since at least the '80s, and now since Trump is also under attack from the right (such that centre-lefties now have to be careful to criticize central banks without undermining them altogether such that national currencies are replaced with bitcoin or whatever and governments are put right out of the economics business)). But if you're the kind of lefty who won't go so far as to advocate tearing capitalism right down, all you can really do is make that political non-starter of an argument--which is different from the argument that you need to tax the wealthy more heavily in order to fund whatever social goods, or even to rebalance economic power so that the very wealthy can't control the means of political discourse etc.: the argument you need to make with regard to inflation is that you need to tax the relatively wealthy (including a very large number of relatively politically active people who very much do not regard themselves as wealthy) simply so that they have less money to spend--or else just, more or less uselessly [2], moralize about it.

[1] This is obviously a major problem, though, and may indirectly contribute to food inflation: if there are Chinese-made things you would have bought except they're either unaffordably priced or unavailable because we're having a trade war with China, then you now have the money you would have spent on those things available to spend on other things, such as groceries. Actually the more I think about this the less obvious it is that any correction is needed to my tendency to blame inflation mainly on supply pressures due to the breakdown of globalization (which I have mixed feeling about for a variety of reasons (though trying to grow my own food has done a lot to beat my localist prejudices out of me)).

[2] Again with the caveat that it's not generally good for business if your customers are mad at you, though if they still want what you're selling, can't get it from anyone they're not also mad at, and would rather pay what you're charging than not have it, how much difference is it going to make?

--
Currently under my porch: 0.7. Currently at Belmont Lake: 1.1. High there today: 1.3. Supposed to get our first real cold of the winter tomorrow night, but then back to slop again next week... looking like we might get through January without touching -20.

Comments

[meanwright]

Although taxation might reduce inflation, it seems to me that it would highly depend upon what the government did with the money. Certainly, if the money was taxed and no additional money was spent, the economy would slow down considerably -- but this is something no democratic government could ever do. So, it depends upon how efficient the money is then spent. If the money is spent wisely, so that it does the most good for the most people, then it should have a multiplier larger than 1.0, in which case it should fuel inflation. The only thing that would help is the delay between receipts and legislators seeing a budget surplus to distribute. But if the money is wasted on WPA-like programs of paying one group of people to dig holes and another to fill them back in, then it might be more efficient at destroying money.

Some economists say that many government programs have a multiplier greater than 1.0, but I don't know if I believe them.

But fractional reserve banking might be a faster, and less visible, way to achieve the same ends: if you increase the reserve requirement, you decrease the multiplier. This will almost instantly reduce the money supply, thereby reducing inflation -- almost through the same mechanism as taxation.

And reasonable people, who by dint of being reasonable are afraid of things like "fractional reserve banking" and "multipliers," will be none the wiser.

There will be no immediate political impact, and it is likely that when there is an impact, it won't be directed at the perpetrators.

[kest]

I am not entirely certain I have parsed all of this correctly, but I am just going to throw out some random objections. First of all, people gotta eat, so there's some issues with the idea that prices would come down if people can't afford groceries. We can't afford housing and prices rarely come down, we just get more homeless people. If you can't afford groceries you end up at the food bank. Mostly, though, maybe we buy more of some things and less of others, and more of our paycheck goes into groceries and less of it into restaurants or buying new electronics or whatever, which impacts those other things but the grocery stores don't notice. Also, I don't know about up there, but it is definitely true down here that we are beginning to have a serious grocery store monopoly issue. Within a few miles of me I have 5 large grocery stores (three Safeways, an Albertsons, and a Haggen) that are all owned by the same company, and two more (two Fred Meyers) that are about to merge with that same company. We have some others - Costco, Target, Walmart, Trader Joe's, the local food co-op, the tiny Asian market...but for my everyday staples, its mostly an illusion of choice. And of course those staples themselves are owned by about 5 large companies.