More and more economists are predicting we are heading into a recession. At an Ethnic Media Services briefing, held July 8, experts – Chad Stone, Chief Economist of the Center for Budget and Policy Priorities; Alix Gould-Werth, Director of Family Economic Security Policy, Washington Center for Equitable Growth; Dr. Rakeen Mabud, Chief Economist and Managing Director of Policy and Research, Groundwork Collaborative – discussed how and why inflation can turn into a recession; what people can do to prepare for it; how strong the safety net is and why is this happening at a time when corporations report record margins of profit.

(Above, l-r): Chad Stone, Chief Economist of the Center for Budget and Policy Priorities; Alix Gould-Werth, Director of Family Economic Security Policy, Washington Center for Equitable Growth; Dr. Rakeen Mabud, Chief Economist and Managing Director of Policy and Research, Groundwork Collaborative. (EMS)

“I’m going to focus my comments on three main points – first, the ways in which mega corporations are using the cover of inflation to jack up prices on consumers; second, the long-running issues of concentration and consolidation that have riddled our supply chains facilitating the profiteering that we’re seeing today; and third, some of the key steps that we can take to address inflation as well as steps that we shouldn’t absolutely not be retaking to address inflation,” started Dr. Rakeen Mabud.

“There are a range of factors that have been driving inflation over the last year or so including, increased, and shifting demand, as well as supply chain disruptions, resulting in bottlenecks and supply shortages, and corporations across the economy are citing these challenges as the reasons for why their prices are going up.

“While increased demand could certainly be the 70-year record high in corporate profit margins despite rising input costs that would normally eat into margins shows us that mega corporations are taking advantage of this crisis to pad their profits by passing along more pricing than is justified by rising input costs alone.

“In other words, very real price increases are giving firms cover to pad their profits and raise prices on consumers even more than their input costs were justified.

“The Groundwork Collaborative has combed through hundreds of earnings calls over the last year or so to understand why it is that profit margins are at a record high, and in these calls executives tell their investors about the last quarter’s performance as well as what investors can expect in the coming quarters.

“Over and over, in sector after sector, the message from Corporate America is clear. CEOs are telling their investors that the current inflationary environment has created opportunities to extract more and more from consumers by raising prices.

“Constellation Brands, it’s a parent company of a popular beer brand, Modelo and Corona, on their Q3 earnings call in January, Constellation CFO said ‘as you know we’ve had a consumer set that skews a bit more Hispanic than some of our competitors and in times of economic downturn if you will or weakness they tend to get hit a little bit harder and recover a little bit slower, so we want to make sure that we’re not leaving any pricing on the table. We want to take as much as we can.’ In the exact same breath that they’re acknowledging that their consumers are hurting, Constellations executives are expressing excitement about exploitative and aggressive pricing to maximize their profit margins.

“Visa and MasterCard, a duopoly that controls over 70 percent of the market that they operate in, and they have no excuse, they can’t blame supply chain disruptions for profiteering because credit card companies make their money on a fixed percentage fee, off of each transaction. If the value of a transaction is increasing because of inflation, they’re automatically going to be earning more money, but these companies aren’t content to stop there. Both Visa and MasterCard reported this year that they’d be raising the fees themselves, so even that cut that they’re taking off the top, they’re just increasing that cut. In short Visa and MasterCard are using the power afforded through their control over this market to raise fees on small businesses and consumers who have nowhere else to go.

“Analysis from the Economic Policy Institute found that nearly 54 of recent inflation can be attributed to corporate profits, which is, in contrast to the 11.4 stake that corporate profits had in rising prices between 1979 to 2019.

“The Roosevelt Institute published a new report recently that finds that corporate profits hit record highs in 2021 and corporations increase prices at the fastest rate in decades but also detail that the corporations on average charge consumers 72 percent more than their input costs compared to 56 percent pre-pandemic.

“This is a widespread problem. It’s something that we’re seeing consistently across sectors and across different companies, and it hits small businesses because small businesses don’t have price setting capability. They can’t set prices the way big companies can.

“They have to swallow those costs and pass them off to their consumers and often, that results in them losing their market share because consumers abandoned them for the Walmart down the street that can negotiate better prices or can be first in line for goods in the supply chain.

“Mega corporations can get away with aggressive and extractive pricing because of the current inflationary environment. In part, that’s because there’s information asymmetry  – consumers know less; consumers know that prices are going up; and they know that maybe some of the input costs for a company are going up, but they don’t necessarily know how much of that price increases in that they’re experiencing at the store is because of infant cost rising and how much of that is corporations going in for another spoonful of sugar.

“The question remains, why is it that corporations have so much power to profiteer in a moment of a crisis, and the answer really starts well before the pandemic, decades in fact.

“We spent 50 years allowing business executives and shareholders to really take control of our supply chains. They built a system that they called the ‘just-in-time’ system that shaved off any sort of fail-safe, any sort of cost, to maximize their short-term returns for their shareholders, over an effective system that delivers goods on time.

“When we have shocks like a pandemic, or a war, or other sort of economic crises, we experience bottlenecks and shortages that drive up prices. During moments of those crises big corporations can use their dominant market power to jack up prices beyond what we would expect, given their input costs, by hiding under the cover of inflation.

“Every crime needs a means, motive, and opportunity. Motive is clear. The profit motive has always been there. Market power is really the means. The dominance that they hold over markets gives them the means to jack up prices and gives them that pricing power, and then crises like the cover of inflation and a war, is giving these companies an opportunity to lay out this tactic.

“The ocean shipping industry is a good example of how endemic consolidation and concentration has made our economy ripe for profiteering. 95 percent of the East-West trade routes are controlled by three alliances. This is not a new phenomenon. Concentration of this market is because of decades of deregulation, especially during the 1980s and 1990s, which allowed for this oligopoly of ocean carriers to build power and to consolidate. This pattern of consolidation and deregulation, both in the shipping industry, has eliminated resiliency and fail-safe in our supply chain. It increased our reliance on precarious labor because one of those costs that these companies are always trying to cut, are labor costs.

They make these jobs ever more precarious. They pay them ever less. They break apart the relationship between employers and employees and make them independent contractors.

These policy choices have allowed corporations to keep costs really low for themselves and reap profits without any risk of being undercut by competition, at the expense of stability and reliability for consumers, and safety and quality jobs for workers.

“In Q1 of 2022, the global shipping oligopoly earned a record-breaking $59.3 billion in profits. They expect to earn four times that in the coming year. The world’s largest carrier recently enjoyed its largest profits in 117 years, and these companies raised spot rates for freight shipping from the U.S. to Asia export rates by over a thousand percent over the same period. This is a real problem, and it really shows how endemic concentration has facilitated this profiteering and allowed these companies to take advantage of a crisis.

“What is not recovering price – worker wages and investments in our economy like the ARP (American Rescue Plan). Basic research shows that those two things are not a factor in what is driving inflation right now. A recent analysis by Economic Policy Institute found that less than eight percent of inflation could be attributed to rising labor costs, and in July 8 Jobs Report, we saw that wage growth is starting to decelerate, which is bad news for workers. We want workers who have a low baseline of wages to experience higher wages.

“Unfortunately, rising wage growth does give fuel to the fire that somehow the FED needs to take care of this.

“Mark Zandy, chief economist of the ratings agency Moody’s found that government spending like the American Rescue Plan accounts for 0.1 percent of the 8.6 percent of inflation we’re seeing. Some economists have said that we need to aggressively raise interest rates, crush wage growth, and raise the unemployment rate to tamp down inflation, but this remedy for inflation would be worse than the disease itself,” said Mabud.

“Turning to the Fed to solve all of our inflation problems also reflects the fundamental misunderstanding of why we have rising prices, in the first place. The issue is not high demand. In fact, we should have a system that is able to be responsive to ebbs and flows of demand. Instead, our issue is that we have broken supply chains and bridled corporate power and pandemic profiteering. Constraining demand by making people poorer, which is exactly what aggressive interest rate hikes would do, is deeply flawed and dangerous to the economic well-being of marginalized workers.

“The good news is that there are a lot of tools in our toolbox that we can use to address these power dynamics and to take on the issues.

“Congress could reinstate a historic tax on excess profits to discourage profiteering by companies across sectors and incentivize them to increase productivity by making investments in the firm.

“Regulators could enforce laws on the books to reduce illegal activities like price fixing and collusion that could include a federal price gouging standard like one that exists in three quarters of U.S. states, the Department of Justice, and the Federal Trade Commission should be empowered to aggressively crack down on monopoly power. State Attorneys General also have a lot of power here.

“Investments are critical. We must invest in our supply chain. We should build a system that works. Making Investments that make life easier for people in health care and housing in a care infrastructure, in climate, enacting policies that strengthen labor standards and protection, all of those are an important role in building an economy that allows people to live a good life and that has to be seen as part of this toolbox that we have because right now, the inflation we’re facing, is a problem with deep roots, and there’s no surface,” concluded Mabud.

Are we in a recession? – Chad Stone, Chief Economist of the Center for Budget and Policy Priorities

“I don’t think that’s true. Recession is an economy that’s not performing the way you would like it to. Recession gets defined as two quarters of negative growth in GDP, which is not the official definition of a recession either. A small group of economists at the National Bureau of Economic Research have, for years, been the acknowledged arbiters of what recession is, and what a recovery is, and they define a recession as a decline in economic activity spread across the economy that lasts more than a few months.

“It’s something that they don’t reach a decision about when that happened until long after the recession is over because they look at a bunch of data so they’re not going to be any help in telling us whether we’re in a recession or not, coming up and even their definition doesn’t really work that well because the last recession we had, lasted only two months, that was April and May of 2020.

“Did excess unemployment last much longer than that – yes it did, but the definition of the recession formally is a decline in economic activity –you go from peak of activity to the trough, and everything after the trough, is the expansion.

“We’ve had a good, long, strong recovery, aided by government measures, including the American Rescue Plan, which is getting blamed for inflation.

“The supply chains are another important part of the story. This is an economy that’s the pandemic economy, is much its own thing. It’s not like any recessions we’ve seen in the past. We also have these supply chain shocks, like oil price shocks.

“We have supply and demand bumping up against each other where supply is artificially restricted, and you don’t to be cutting way back on demand because that does throw you into a bad recession.

“It’s hard on vulnerable groups when you have a recession. Today’s Jobs Report showed that the unemployment rate is still at 3.6 percent overall, which is two-tenths of a percent higher than the highest weight, all the way back to 1999. It also shows that the black unemployment rate has come down to below where it was at the start of the pandemic recession in February of 2020, but it’s at 6.8 percent, which is low by historical standards for the black unemployment rate, but is incredibly high relative to the white unemployment, and the Hispanic or Latino unemployment rate is in between, but also elevated.

“If you focus exclusively on getting inflation down as quick as you can, and slam on the brakes and go into recession, people get hurt.

“With inflation, came supply shocks, and at the same time demand increase from the American Rescue Plan. The American Rescue Plan did a lot of good. We would have had a little less inflation without the ARP but we would have had a lot more hardship, and we would have had inflation anyway from the supply shock side

“It’s a mistake to assume that if ARP was not there, everything would be great. The economy had slowed in late 2020, job creation had slowed, and we had negative job growth in December 2020.The end of the year package of relief measures in 2020 and the American Rescue Plan gave juice to the recovery, and we’ve had a long stream of positive job numbers and substantial reductions in hardship.

“The forecasters are raising the probability of a recession because what the Fed is trying to do, is thread a needle. There are lots of downside risks from too much tightening that are probably stronger than not tightening fast enough. There’s a debate about what happens with inflation expectations in the future and that complicates the analysis. The risk of a recession is heightened because of the inflation that we’re fighting, and I am skeptical that we have a lot of good policies for addressing inflation. In the short run, we need to make it look like inflation is coming down so that people believe that policy is working,” said Stone.

What will happen if a recession does hit? – Alix Gould-Werth, Director of Family Economic Security Policy, Washington Center for Equitable Growth

“The bottom line is that recessions harm members of disadvantaged demographic groups the most. Each recession is slightly different from all the other recessions that precede it. The coveted recession was very different from the Great Recession, the recessions of the 90s and 80s. The coveted recession was the first to especially impact the service sector and to especially impact women, but generally across recessions, we see a pattern where workers of color, low-educated and low-income workers are the first to experience job and income loss, and really bear the brunt,” said Alix Gould-Werth.

“In the United States, the income support system that is in place, is weak. It is composed of programs like temporary assistance for needing families which is the cash welfare program that serves families, kids supplemental nutrition assistance program.

It’s also important to note that while workers who are members of disadvantaged demographic groups are the most likely to feel the pain of a recession, they’re also the least likely to apply for and to access unemployment insurance.

“Our system of income support and our unemployment insurance in particular is broken. In general, we rely on Band-Aid solutions.

“We can’t keep counting on those. During the Great Recession, Congress increased the unemployment insurance benefit duration in these one-off extensions and then during the coveted recession Congress made radical one-time changes to the system of income supports. It increased unemployment insurance amount and duration, expanded its eligibility criteria. It offered economic impact payments. It enhanced the child tax credit. The political will to make these changes unique and it was spurred by an unprecedented health crisis.

“When the political will shifted, and the provisions expired, families suffered. When public supports fail, when these one-off extensions end, disadvantaged families are going to have few options to make ends meet.

“Households using credit cards and loans to make ends meet, is a dangerous strategy for family economic security. As the temporary pandemic programs ended, families increasingly relied on this dangerous strategy likely because they had no other options. There’s no guarantee that Congress is going to implement Band-Aid solutions if another recession hits and our permanent system of income supports is not up to the task.

“We’re not prepared for the next crisis and it’s families that are going to feel the pain which will ultimately undermine our ability to recover from the next recession.

“We should improve unemployment insurance funding, strengthen the safety net permanently, and develop programs that trigger on automatically when economic conditions worsen, and that way we can protect families and ameliorate recessions,” concluded Gould-Werth.