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HFSC Inflation Hearing

House Financial Services Committee

The Inflation Equation: Corporate Profiteering, Supply Chain Bottlenecks, and COVID-19

Tuesday, March 8, 2022

Topline

  • Democrats focused on highlighting the Biden Administration’s policies, specifically how these polices helped the economy rebuild quickly. They also highlighted how inflation impacts minority communities.
  • Republicans focused on pointing out how the excess of money pumped into the economy by the Biden Administration caused inflation. They also tried to debunk the narrative that corporate profiteering is the reason for inflation.

 

Witnesses

 

Opening Statements
Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters touted the February jobs report and attributed it to the American Rescue Plan. She also mentioned the increase in wages and salaries for workers in the last four decades. She also discussed the increased power large corporations have over inflation and the effect the invasion of Ukraine on oil prices. She then urged the Senate to confirm President Biden’s nominations for the Federal Reserve.

 

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry stated the massive spending by the Biden administration over the past year, specifically the American Resue Plan, caused inflation, adding that Americans are now paying the price for “free” money. Regarding corporate profiteering, McHenry stated that profit is not synonymous with greed and that as wages remain stagnant, Americans are finding it harder and harder to keep up. He also said that the bulk of our nation’s supply problems are the product of an overstimulated economy and that the U.S. must restore fiscal discipline and promote policies that support energy independence and long-term economic prosperity.

 

Testimony

Demond Drummer, Managing Director Equitable Economy, PolicyLink

In his testimony, Drummer focused on the importance of advancing policies to enable everyone to participate in an equitable economy. Drummer stated that wages for the lowest-paid workers have increased conservatively as the country transitions out of the immediate shocks of the pandemic, however, these improvements represent only a small and insufficient boost for a select group of workers in a select group of sectors. He also addressed the twin forces of a housing shortage —particularly affordable housing— and uneven wage growth creating a national crisis, further exacerbated by the economic impact of the pandemic. Drummer continued by stating that the rising cost of basic services such as water, electricity, and natural gas puts increased pressure on households, especially the 100 million people in America living in or near poverty. He concluded that the federal government must support wage growth for the lowest-income workers, rebalance Federal Reserve policy, enact a federal job guarantee, invest in housing infrastructure, and strengthen financial industry oversight.

 

Tyler Goodspeed, Kleinheinz Fellow, Hoover Institution

In his testimony, Goodspeed stated that the American Rescue Plan generated a surge in demand for goods, with personal consumption expenditures on goods rising as well, adding that the soaring demand for goods placed severe strain on the capacity of U.S. ports to process increased import volumes. Goodspeed said that despite port congestion being a major contributor to rising inflation, U.S. ports handled record import volumes in 2021, approximately 20% above 2019 volumes. Goodspeed concluded that a key factor in higher inflation in the United States was fiscal policy measures that stimulated aggregate demand to a historically unprecedented degree, while simultaneously exacerbating existing challenges to a recovery in the supply-side potential of the U.S. economy.

 

Rakeen Mabud, Chief Economist and Managing Director of Policy, Groundwork Collaborative

In her testimony, Mabud focused on three key points: corporate profiteering playing an important but underreported role in rising prices, investor demand for high profits, and the outsized power that

mega-corporations hold over supply chains and the economy more broadly. On corporate profiteering, Mabud stated corporate profit margins are soaring because of rampant price hikes on consumers across

sectors, and record profit margins are directly tied to corporate profiteering. She continued by saying mega corporations are taking advantage of this inflation crisis to pad their profits by passing along more pricing than justified by rising input costs alone. Regarding investor demands for high profits, Mabud explained that since the U.S. economy is deeply financialized, companies are incentivized to prioritize short-term returns for investors over productive investments and other stakeholders. Lastly, Mabud said mega-corporations have set up a “heads I win, tails you lose” system, resulting in a brittle supply chain and less resilient economy, adding that extreme concentration has created a brittle system unable to withstand shocks. Mabud concluded that Congress should encourage productive investment over profiteering by taxing excess profits, make long-overdue investments in our infrastructure, and beef up antitrust enforcement to create an economy that works for all.

 

Sandeep Vaheesan, Legal Director, Open Markets Institute

In his testimony, Vaheesan stated that the ongoing inflation problem in the United States is, in part, a story of corporate pricing power, adding that a lax approach to merger policy has enabled corporations in many markets to acquire substantial pricing power, having deleterious effects on the productive capacity of the United States. He concluded that by allowing virtually unchecked consolidation across the economy, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have permitted corporations to accumulate extraordinary pricing power and that strengthening anti-merger policy can serve as a useful anti-inflation tool going forward.

 

Mark Zandi, Chief Economist, Moody’s Analytics

In his testimony, Zandi stated that in order to understand where inflation is headed we must understand its increased acceleration over the past year, explaining that the acceleration in inflation experienced last spring and early summer was largely the result of the rapid normalization of consumer demand and that the invasion of Ukraine did not help decelerate the growth of inflation. He explained that the higher gas prices we are seeing are a premium that oil traders have added to compensate for the risk of there possibly being a disruption in the oil supply chain. Zandi began to end his testimony by stating that inflation will moderate as the pandemic winds down and as the crisis in Ukraine eases. He added that inflation leveling out depends on the Federal Reserve gracefully normalizing monetary policy. Zandi ended his testimony by reiterating that supply disruptions created by the pandemic have ignited painfully high inflation that the Russian invasion of Ukraine is sure to exacerbate and that whether the recovery evolves into a self-sustaining economic expansion depends on whether inflation soon moderates.

 

Question & Answer

Inflation

Reps. Frank Lucas (R-Okla.), Bill Huizenga (R-Mich.), and McHenry asked if the government’s increased spending caused an increase in inflation. Goodspeed said yes and that the excess in demand and the increased money supply in the economy have caused inflation. Reps. Lucas (R-Okla.), Emanual Cleaver (D-Mo.), Joyce Beatty (D-Ohio), and Huizenga (R-Mich.) asked how continued inflation will affect Americans. Goodspeed and Drummer stated that increased inflation affects lower income workers the most because lower-income workers do not have as much bargaining power as high-income workers, adding that things like rent, gas, and groceries tend to count for a higher share of their disposable income. Cleaver asked Zandi if inflation will remain high as long as the price of housing continues to rise. Zandi stated there is a severe shortage of affordable housing in America, one-third of inflation is housing, and as long as there is a shortage of affordable housing, inflation will continue to grow. Rep. Bill Posey (R-Fla.) asked if price gouging has an impact on inflation, and Goodspeed said there has been no serious academic study that has proven that. Reps. William Timmons (R- S.C.), Sylvia Garcia (R-Texas), and Beatty asked what Congress can do to address inflation. Mabud stated that filling the vacancies on the Federal Reserve Board would be helpful. Goodspeed stated that slowing the growth of federal spending, providing certainty among corporate income tax rates, and providing certainty among business tax rates would be beneficial. Zandi stated continued investment in American infrastructure would address inflation.

 

Corporate Profiteering 

Reps. Ted Budd (R-N.C.), Michael San Nicolas (D-Guam), Madeleine Dean (D-Pa.), and McHenry asked if corporate profiteering caused inflation and/or if there is any evidence of that. Goodspeed said market concentration has been rising globally for some time; however, there is no evidence that market collusion or corporate profiteering is the cause of inflation. Mabud added that corporate concentration has helped facilitate the price hikes we see today. Vaheesan stated that corporate profit margins were at a twelve year high in 2021, and the ongoing inflation has given corporations cover to exercise pricing power. Rep. Bill Foster (D-Ill.) asked if CEO compensation structuring has impacted inflation at all. Drummer said when CEOs are incentivized to meet quarterly goals, they extract all the work they can from the lowest paid workers. Rep. Rashida Tlaib (D-Mich.) asked what the trends are in regard to major corporations buying back stocks and if those buybacks are helping the economy. Zandi said even though we are seeing increased stock buybacks, it is hard to connect the dots between stock buybacks and the economy. Rep. Jesús “Chuy” García (D-Ill.) wanted to know if decades of corporate concentration could be reversed. Vaheesan said yes it could and that one industry Congress could begin looking at is the meat packing industry along with other large mergers. Reps. Alexandria Ocasio-Cortez (D-N.Y.) and Alma Adams (D-N.C.) asked if the average American now has to compete with major companies when they are in the market for a home. Zandi stated institutional investors and smaller investors account for one quarter of all home sales last year, and they do play a large role in the housing market.

 

Oil Prices

Rep. Cindy Axne (D-Iowa) asked why the production of oil is still so far below pre-pandemic levels. Mabud blamed cooperate profiteering. Rep. Andy Barr (R-Ky.) asked what caused the increase in gas prices. Goodspeed said the unresponsiveness to supply needs and increased regulations. Posey asked if the reversal of some of the Biden Administration’s policies could restore energy independence. Goodspeed said the more oil the U.S. produces, the more oil supply, which in return, makes the U.S. energy independent. Rep. David Kustoff (R-Tenn.) asked at what point the price of oil will begin affecting airline travel. Zandi stated that we may get to a point where airlines may increase ticket prices for flights or pull back some expansion plans, but we are not at the point where airlines will start parking their fleet due to oil pricing. Rep. Jake Auchincloss (D-Mass.) asked if a global embargo on Russian oil would cause oil prices to rise. Mabud said yes. Goodspeed added that increased production from the U.S. would compensate for those increased prices overtime.

 

Interest Rates

Waters asked what population of Americans will be affected the most by higher interest rates if they are raised too quickly. Drummer stated an increase in interest rates will hurt the lowest wage workers in our nation’s economy. Zandi added that the key is to avoid a recession, and to insure we do that, we must normalize interest rates. Mabud said interest rates hikes slowdown demand; however, raising rates will harm mostly people of color.

 

Government Regulation

Reps. Ann Wagner (R-Mo.) and Blaine Luetkemeyer (R-Mo.) asked how proposed Biden Administration policies will impact the economy and inflation. Goodspeed said the Build Back Better Act would exacerbate supply chain challenges and does not pay for itself. Goodspeed added that some of the Biden energy policies have impacted the prices Americans are paying for gas, electricity, and heating oil. Rep. Andy Barr (R-Ky.) asked how the American Rescue Plan strained the supply chain, specifically the labor force. Goodspeed stated the Act created a cumulative short fall in business investment and discouraged labor supply by expanding the child tax credit and extending the supplemental income benefit. Rep. Roger Williams (R-Texas) asked what effect higher taxes and increased regulations have on the price of consumer goods. Goodspeed said the 2017 tax law incentivized higher labor force participation and greater investment in domestic capital formation. Reps. David Scott (D-Ga.) and Dean asked how Congress should address inflation. Zandi said it is very important to have hearings on these problems and tighten up anti-trust laws. Drummond added that it is also important for Congress to tackle income inequality and occupational segregation. San Nicolas asked if the steps Congress and the Biden Administration have taken so far have been effective in preventing stagflation. Zandi said yes. Foster asked how the American Resue Plan contributed to the fast recovery of America’s economy. Zandi stated it played a very important role.

 

Wage Growth

Rep. Sean Casten (D-Ill.) asked what Congress and the Biden Administration have done to help drive wage growth. Drummer said wage growth is a reflection of expanded monetary policy, and Zandi added that the American Rescue Plan played a critical role in increasing wage growth. Rep. French Hill (R-Ark.) asked if additional regulations will make it harder to increase the labor force. Goodspeed said more regulations would create greater economic pressure.

 

Capitalism

Rep. Al Green (D-Texas) asked who suffers most when there is no competition in a capitalist society and specifically if minority people are mostly impacted by the reduction of competition in capitalism. Zandi stated competition is a key element in a well-functioning capitalist system, and in addition, having no competition in a capitalist society does have a greater impact on minorities. He added that if competition is impaired, it will result in higher prices for goods and services in a particular industry.

 

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