Me: “Mr. President, can you tell me that you know nothing of economics without telling me that you know nothing of economics?”
Joe Biden: “Happy to oblige: Corporate greed is the cause of inflation.”
Me: “Excellent. Do you have another?
Biden: “Sure: People with low incomes have a higher tax rate than do rich people.”
Me: “Well done.”
Biden: “Need any more? I got a million of ‘em.”
Me: “I’m sure you do, sir; I’m sure you do.”
Inflation in the U.S. has fluctuated widely over the last 60 years. Inflation was below 2% in the early 1960s, rose to above 10% in the 1970s, fell back to below 2% in the mid-1980s, rose above 5% in the early 1990s, was 3%-4% from the mid-1990s to the mid-2000s, and was below 2% from 2012 to 2019. Then COVID hit and monthly inflation rose to a peak of greater than 9% in mid-2022 before falling to about 3% in recent months.
Does corporate greed explain inflation, as Biden, Sen. Bob Casey, and many other Democrats want us to believe? Were corporations very greedy in the 1970s, but quite altruistic from 2012 to 2019, only kind of greedy in the early 1990s, and then very greedy again in the last three years?
The idea that inflation rises and falls as a result of fluctuations in corporate greed is preposterous on the face of it.
In Economics 101, we explain that inflation is caused by changes in aggregate supply and aggregate demand. Aggregate supply was whacked as COVID disrupted world trade. Aggregate demand soared past Jupiter as Donald Trump and Biden increased federal spending by $7 trillion — easily the largest increase in U.S. history.
Federal Reserve Chair Jerome Powell joined the party by running a very expansionary monetary policy for more than a year after inflation had begun to rise. In other words, it was the effects of COVID on supply chains combined with what Harvard economist Lawrence Summers — a former adviser to Presidents Bill Clinton and Barack Obama — called “the least responsible macroeconomic policies we’ve had in the last 40 years” that caused the highest inflation rates in the U.S. since the early 1980s.
Also, if corporate greed were causing the inflation of the past few years, wouldn’t we see a surge in corporate profits? At the end of 2019, just before COVID hit, after-tax corporate profits were 8% of U.S. gross domestic income. Wages and salaries were 44%. (The rest of GDI is made up of the profits of small businesses, rent, interest and so forth.)
At the end of 2023, greedflation caused corporate profits to soar all the way up to … actually, they were still 8% of total income. And greedflation has pummeled the working masses, pushing wages and salaries all the way down to … actually, they were still 44% of total income.
The greedflation story gets wrong how a market system works. The price of a Big Mac or an iPhone has nothing to do with how greedy or altruistic the managers of those companies are. McDonald’s would love to charge $50 for a Big Mac and Apple $10,000 for an iPhone. It’s not altruism that keeps them from doing so, it’s competition.
Over time, competition polices firms more thoroughly than any government regulator ever could. Competition forces firms to sell us the goods and services we want at the lowest prices production costs will allow, wiping out profit as it does so. A firm can continue to earn a profit only by staying one step ahead of the competition — something very few firms have managed in the long run.
In addition to the greedflation fairy tale, Biden loves the whopper that rich people pay taxes at a lower rate than do people with low incomes.
A look at the federal income tax tables shows the opposite: The rate for high incomes is 37%, whereas the bottom rate is only 10%. But, you may think, rich people exploit loopholes in the tax code and don’t really pay that rate.
In fact, the 1% of taxpayers with the highest incomes earn 16.2% of all income, but pay 36% of all individual federal income taxes and have a tax rate for all federal taxes paid of 31.4%.
The lowest 20% of income earners pay minus-1.6% of all individual federal income taxes. Their share of individual income taxes is negative because they receive more in government tax credits than they pay in taxes. Their tax rate for all federal taxes paid is 3.7%. In other words, those with the highest incomes have a tax rate eight times higher than those with the lowest incomes.
If Biden would like to brush up on his economics, I’d be happy to send him a copy of my textbook.
Anthony O’Brien is a professor emeritus of economics at Lehigh University. Views expressed are of the author, not the university.
