Corporate greed or just pandemic pricing? : The Indicator from Planet Money Some House Democrats continued to blame high inflation on greedy corporations this week. Today, we'll fact-check that claim.

Corporate greed or just pandemic pricing?

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This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods. There is a well-known saying that you don't want to see how the sausage gets made. And this is particularly true in the world of capitalism. It can be a pretty messy place. Businesses are jacking up prices everywhere, from gas stations to supermarkets. And we're seeing especially big jumps in the price of meat. So we thought, what better place to learn about the current state of price rises than a visit to a literal sausage factory?

SEAN SMITH: So we've got beef, pork, combined spices.

WOODS: Sean Smith is the director of sales and marketing at W.A. Bean & Sons. That's a meat purveyor based in Bangor, Maine.

SMITH: There you go. It's going to turn into more of a batter. It'll come from the grind and go right into the linker.

WOODS: The reason we wanted to speak to Sean is because prices are rising super fast. Inflation in the U.S. is a vertigo-inducing 7.9%, according to today's consumer price index. And over the last few months, Democratic politicians have been fueling a narrative blaming high inflation partly on greedy businesses in uncompetitive markets. In fact, President Joe Biden used the example of the meat industry in his State of the Union speech earlier this month.


PRESIDENT JOE BIDEN: Guess what? You got four basic meatpacking facilities. That's it. You play with them, or you don't get to play at all. And you pay a hell of a lot more - a hell of a lot more because there's only four.

WOODS: A hell of a lot more because there's only four. So we wanted to test this theory - is higher price inflation caused by corporate greed in uncompetitive industries in what's called concentrated markets with just a few players? Now, of course, the meat industry is only a tiny slice of the overall economy, but we thought, because the market is so dominated by these big players here, if we could find evidence of corporate greed driving inflation anywhere, it would be in the meat industry - in the sausage factory.


WOODS: More and more companies have tried to merge into bigger companies over the last couple of years. Corporate profits have hit 70-year highs, and inflation is at 40-year highs. So some people are pointing at all these trends and saying, this is all connected. Companies in uncompetitive markets are causing a lot of this inflation that we're seeing.


ELIZABETH WARREN: Prices are up at the pump, at the supermarket.

WOODS: Senator Elizabeth Warren is particularly vocal about this. Here she is speaking at a Senate subcommittee in December.


WARREN: One reason for this price gouging is that fewer and fewer markets in America are truly competitive.

WOODS: And economic theory shows that, yes, if you don't have a choice about who to buy from, when there's a monopoly, prices will be higher. And one industry where just four companies have a lot of monopoly power is the meat industry. Sean Smith's company, W.A. Bean & Sons, buys meat from these big suppliers at higher and higher prices.

SMITH: I mean, it's just skyrocketed. It's beating our heads against the desk every day now, you know, trying to get a good number out to our customers.

WOODS: So we thought Sean would be pretty well-placed to see what's happening. How much of rising prices, like in meat, is greed from monopolistic meat companies? Or is it just what you'd expect from the pandemic?

SMITH: Vendors being shut down, providers being shut down, not being able to get raw materials - you know, pandemic issues.

WOODS: And that included these really serious labor problems. Thousands of meatpacking workers got sick. Many died of COVID-19 early in the pandemic, and plants had to shut down. So these are very real pressures on the industry that, of course, led to higher prices. But Sean does also mention how the big meat suppliers do keep wholesale prices high for meat purveyors like his business.

SMITH: The big dogs in this industry have always kind of put a stranglehold on the little guys, and that's what's made it very difficult for, you know, a business like W.A. Bean & Sons to stay alive with rising costs across the board.

WOODS: But, I mean, that would have been a problem prior to the pandemic as well, right?

SMITH: Oh, God, yeah. This is nothing new - nothing new.

WOODS: And that brings us to a fundamental tension about this story of corporate greed causing inflation. Yes, businesses are often greedy. But does the sudden jump in inflation mean that corporations suddenly saw an uptick in greediness over the last two years?

FIONA SCOTT MORTON: The corporate greed piece is - economists don't use that terminology.

WOODS: This is Fiona Scott Morton, an economist focused on competition and antitrust at Yale University.

SCOTT MORTON: We say that firms are maximizing profit. Now, is that the same thing? Close - it means they're going to take every dollar that they can under the law. Did the profit-maximizing behavior of firms suddenly take a jump up in 2021? I don't have any evidence that that's the case. I haven't seen anyone argue that or model that. It doesn't seem very logical to me.

WOODS: Fiona pours cold water over the idea that these major leaps in inflation that we're seeing all across the economy are largely caused by uncompetitive markets.

SCOTT MORTON: When we think about the underlying causes of inflation, the big one is going to be the money supply, along with really unusual conditions such as a shortage of semiconductors that raises the price of cars.

WOODS: In other words, those really low interest rates, the government spending and also the supply chain issues that have been gumming up the economy for the last couple of years - those are the core underlying causes. Fiona says that monopolistic companies being greedy is not a large driver of inflation throughout the economy right now. And yet, Fiona is very clear that she does not agree with the opposite conclusion that uncompetitive markets had nothing to do with big price rises recently.

SCOTT MORTON: If somebody were to say the price increase in meat, because of the pandemic, has nothing to do with the market structure of meat, I actually think that's very unlikely to be true. I think the market structure of meat is for sure affecting how shocks are passed through.

WOODS: Fiona says there are theoretical arguments that could be made. Like, take industries that are more concentrated that have fewer players in them, like the meat industry. They might jack up prices higher than competitive industries during a pandemic.

SCOTT MORTON: In a concentrated market, one firm could announce it's going to raise prices because of inflation, and its rivals might look at that and say, oh, this is a good excuse to raise prices. They're raising prices, so we should match, and we should announce we're raising prices, also. We call this tacit collusion. And in a setting like this one, where inflation might be giving firms permission to raise prices and then they follow each other, that could cause price increases.

WOODS: The standard definition of collusion involves businesspeople conspiring in the shadows, agreeing to keep prices high so that they don't have to compete with each other, and that is clearly illegal. But tacit collusion doesn't involve any actual conversations between companies, so it is much harder to prove and to prosecute.

SCOTT MORTON: So that's one possibility. I have not studied this. I don't have any sense of what the empirical evidence is, but that's a theory that I have seen out there.

WOODS: Now, Fiona raises a second point. Supply chains where there's just a few players may end up with bigger disruptions during a disaster, which could lead to higher prices sometimes. It's not about greed, per se. It's about resilience. So take the meat industry again. If you have one larger slaughterhouse instead of five small ones, then a single COVID outbreak might cause all meat production to stop in that one large slaughterhouse. But with more slaughterhouses, that risk is spread out.

SCOTT MORTON: So for those kinds of reasons, we think that competitive markets are generally more robust and stable and might do a better job at handling unforeseen shocks like COVID.

WOODS: So bottom line - Fiona does not think that companies with monopoly power are a big cause of the inflation that we're seeing right now. That said, she does think that cracking down on monopolies generally is worthwhile, just as good matter of public policy. That means scrutinizing mergers, investigating possible collusion, splitting companies, if needed.

SCOTT MORTON: Is it a good idea to do? Absolutely, because it brings down prices in general because markups are lower when there's more competition. It raises quality. It raises innovation. It increases productivity. It increases the efficiency of the economy. So there's many, many ways in which antitrust enforcement and competitive markets benefit consumers. More vigorous antitrust enforcement is a long-run project. It's not going to change prices in 2022.

WOODS: As for Sean Smith at the meat purveyors, he says, yeah, he will always root for the underdog, but he doesn't begrudge the big meat suppliers.

SMITH: They have put themselves in a position, and they feed a lot of people, and they employ a lot of people. And I respect the heck out of that. Trust me, I'm not a hater of capitalism by any stretch of the imagination (laughter).


WOODS: This episode was produced by Nicky Ouellet and engineered by Isaac Rodrigues. It was fact-checked by Corey Bridges. Our senior producer is Viet Le, and our editor is Kate Concannon. THE INDICATOR is a production of NPR.


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