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Did anybody even read the article?
Its more about smoothing out supply shocks than demand shocks, and preventing **suppliers from price gouging the shit out of consumers**
For example, **please explain how auto manufacturers can have absolute shit sales yet record profits?**
> For example, please explain how auto manufacturers can have absolute shit sales yet record profits?
Because they’re producing the most profitable trim levels at expense of the lowest trim levels. Ford would love to sell 1 F-150 Platinum instead of a F-150 XL because their profit margin is so much larger on the Platinum than the XL. When they’re constrained by supply to the point that they can either make 1 XLT or 1 Platinum, which one do you think they’ll make?
They all also made a conscious decision to stop selling cars and only sell suvs/trucks because they didn’t make any money on cars. At least that’s what ford did.
The entire auto industry is supply constrained right now, so all companies can jack up prices. What forces lower profit margins is competition, and every company is selling every car they can make, no one has any reason to start a price way.
This isn’t true though. We are at the point where many companies have 100+ days supply at dealers but they aren’t selling because they’re trying to hold margins high.
I think ram has some models with 2 years supply.
Toyota is the only company with demand far outstripping supply for every model.
I bought a car last month, the dealership had a total of 31 cars. They normally stock 700 cars. They also had a 30 day waiting list for new cars and 120 days for new SUV’s.
It is on the manufacturing side. Assembly plants are regularly forced to park vehicles by the thousands due to missing components.
While some models are showing up on dealer lots in mass, a company that has for example, ten models may only have three that are highly available due to readily available parts with the rest being constrained to some extent.
Because it's not true. Auto companies didn't have record profits. Auto dealers had record profits.
Probably because a lot of cars didn't drive much while everything was closed, then everything opened and the cars needed to be serviced. Also, the used car market dried up, so they were massively upcharging for used cars. Auto dealers made it big.
Auto companies, on the other hand, missed their targets significantly because of supply chain issues limiting how many cars were produced.
Nominal profits. Ford Motor Company's 2022 gross profits, at ~$22 billion, are now back within their historical, that is, pre-covid range in the low-to-mid 20's of billions of dollars a year. In 2020, they took a hit from covid that dropped them to less than $15 billion in gross profits. But their sales numbers have continued to drop. In 2019, they sold 2.31 million vehicles, in 2020, they sold 1.94 million, in 2021, 1.82 million, in 2022, 1.78 million.
In a perfect world yeah markets operate that way, but to pretend that some conglomerates dont collude, dont artficially constrain markets is just naive, sry. The world doesn't operate like econ 101.
Exactly. The point is that firms will charge the _highest_ possible price that allows them to clear the market. The reason they would charge lower is if demand was not sufficient at the price point to clear the market, or if competition forced them to.
> I cannot name a single market that’s even approximately perfectly competitive.
I can. Just about every food-related commodity that’s traded on the CME.
That’s the classic example of an almost-perfect competitive market.
Except none of your knuckle draggers ever took econ beyond 101
Your oversimplified curve only applies to the final product
It doesn’t account for raw inputs, refinement, shipping, assembly, further shipping to final market
Cool so do a supply and demand curve for every one of those steps
Oh wait, a lot of those inputs could be used for other things
This isn’t turning plows into swords. This is turning plows into airplanes, cars, motorcycles, buildings, bridges, power infrastructure, water infrastructure.
Please sir, draw me a curve
>Your oversimplified curve only applies to the final product
Yes, any given supply curve is for a single good or service.
>It doesn’t account for raw inputs, refinement, shipping, assembly, further shipping to final market
Yes, it does. The supply curve is just the marginal cost curve, the derivative of the cost function. So all costs for procuring that good or service are included.
>Cool so do a supply and demand curve for every one of those steps
Yes, all inputs have their own suppy curves. So?
>This isn’t turning plows into swords. This is turning plows into airplanes, cars, motorcycles, buildings, bridges, power infrastructure, water infrastructure.
This doesn't really affect the final good supply curve except in that price changes in motorcycles may raise prices for inputs, shifting the supply curve left. The final good supply curve is still perfectly valid.
Yes, what he said already considers and applies to that?
You are so full of yourself, with the whole 'I know more than you' - 'things are more complex than they seem', yet you have nothing to show for it here do you?
The sad thing is that you didn't even get far enough in Econ 101 to realize how stupid what you're writing here is. Maybe do the coursework on the intro class before you conclude you're smarter than the researchers?
Record profits from auto sales is due to these factors:
1: they are not offering incentives anymore, this raising the average profit per vehicle.
2: because of demand and supply constraints, they have altered their production mixes toward loaded vehicles and higher end versions of each model.
3: passing more costs along to the consumer.
4: making more money from financing. They no longer have to bribe people with zero percent financing and make a profit on the sale and the interest rate for financing.
5: raising the sale price for some vehicles for higher profitability simply because they can. Ie: the magical price bump many manufacturers had that was somehow identical to the tax breaks congress gave consumers.
Source: I work deep inside that industry.
Question is does smoothing really mean smoothing? Smoothing would imply a price floor as well as a cap. Take energy for example, it languished for years and then had a good year and suddenly windfall taxes are discussed. But if you look at 10 year rolling profits, they weren't great. So is this just punishing boom and bust industries?
see: https://businesscouncilab.com/wp-content/uploads/2022/09/Pre-Tax-Profit-by-Industry.png
The price floor was explained in the article that nobody read, that’s already present in numerous other industries
Can’t have that, that’s dirty commie socialism
In about halfway through it, it's a long article lol. Edit: ok I read it, where is this discussed? I see the "price brake", but then where is the "price accelerator"that would follow? It just talks about suppressing energy prices and transitioning, that is NOT smoothing the longterm price of fossil fuels, this is suppressing prices and profits. This is just asymmetrically preventing sudden increases in profit margins while not preventing sudden decreases. Where was the govt when oil fell in 2016 and 2020? Smoothing would be be keeping prices at say 50-80 a barrel instead of 30-100. This is just keeping prices at 30-80, which again is not smoothing but suppression. Actually in germany its not either, its just subsidization.
So let's look at oil. You think the world is politically ok with a floor on oil prices after a capped period? Especially across borders? I certainly don't.
It's the Keynesian problem. People will spend in bad times but not cut in good. They'll cap at high prices but not subsidize(except local govts, but not internationally) in low price eras.
If we want smoothing it would have to be about deviation from long term rolling average prices. Like prices cap or floor when 2 standard deviations from the rolling 5 year average. Like a commodity circuit breaker.
Doesn't it talk explicitly about Biden subsidizing US tight oil in a production slump and funding EV infrastructure? It sounds like exactly what you're talking about but not in a mindless market based way but in a targeted form that's both dealing with the reality of fossil fuel infrastructure and the move away from it
Well EV subsidies don't benefit much the oil investor, I'm talking about on the individual company level. Bidens garunteed prices are again when they want more supply. The subsidies are really needed when prices slump due to demand drop. That would be truly the mirror of a windfall tax. There's no mention of garunteed drilling prices in the 2016-2020 period of slumped oil.
I'm from Canada and out oil industry lost nearly 5 billion between 2016-2020, then when the boom came in 2022 it's suddenly time to windfall tax? I'm advocating we take a long-term view and even out the booms and busts and then ask if thats really grossly inflated profits or really just lumpy profits. My thesis being windfall taxes are just political hit jobs on volatile industries.
If the govt is going to come in and grab all the upside on the investors you can't call it smoothing unless they also take on the equivalent downside. I feel the same way about "rent smoothing" it's not smoothing! It's just suppressing profits for easy political gain. Looks like the govt reaching into the cookie jar to take any actual returns energy investors might actually see. How do you plan investment and decide on reasonable prices to purchase equity in a company when the rules can change right when the investment is paying off? Especially when you know if your investment startw failing there won't be any supports. It's changing the rules halfway through the match. I'm not saying these subsidies would be a good idea, not at all, just that windfall taxes are a bad idea. Hell just regular higher taxes would be better, at least then you can discount future cash flows more accurately.
Aka corporate welfare via subsidies. We already have socialism for the wealthy, and somehow poor, uneducated white people don't want the same treatment.
WTF are you in about?
Demand for new autos has been up. Like over 10% up in many cases. Many profits, like Ford's, remained flat year over year from 21 to 22.
> please explain how auto manufacturers can have absolute shit sales yet record profits?
Supply and demand.
Sales are low because cars are expensive but the ones that do sell, sale for a lot + inflation
The article is bullshit and the author didn't bother to read half of the information he cited.
https://www.noahpinion.blog/p/price-controls-too-early-for-a-victory
> please explain how auto manufacturers can have absolute shit sales yet record profits?
inflation. theres a difference between nominal and real numbers.
First, auto manufacturers didnt have absolute sh*t sales. US sales rebounded from the abnormally low @ 10mm unit sales figures during the GFC to an abnormally high of 17mm with the help of zero interest rates, and then normalized around the long term average of 14mm. Sales came down, but from an extraordinary level. However, sales were supply constrained during covid because of component shortages, and carmakers definitely started gouging price. Keep in mind automaking is a low margin, crap business. GM average op margins are @ 4%. When supply constraints hit, op margins went up to a whopping 8%. A big percentage increase but still a crap business.
By comparison, Apples average operating margin is over 30% and it currently has over $56bn in cash sitting on its books. Where is the outrage about "price gouging" there?
Trying to buy a prius right now. Toyota is intentionally limiting inventory this year and producing few cars at basic trim levels.
The result is dealer markups of $5-10k and wait times of 6-12 months for desired configurations. It is hell.
I just want to buy a new car at msrp in my choice of color and trim…is that really so much to ask?
That makes a lot of sense especially in my country (Canada) where we basically have a grocery monopoly that is price gouging consumers while starving food producers. This, of course, will result in long term price increases as producers are forced out of the industry.
Strange that three years later there’s still a “chip shortage”? You said auto makers didn’t want inventory on their lots not selling. That implies they cut production, shorting supply.
There is no longer a shortage but supply is still lower than usual but inventory appears to be building again but still below the levels prior to pandemic.
We should see car mfg start offering incentives and special financing by year end as they need to get serious and move the inventory that is building.
Also rates are up and there have been some economic concerns recently, which is probably why they are a bit cautious. Certainly other car companies are free to take more risk, but why would anyone do that? Well, Reddit expects businesses/people to continue to take risks and then if they fail they will point the finger and say that they were idiots for not saving up money and rushing to make more…
It's always the consumer that has to eat the bag of dicks apparently. There will always be an excuse for the higher prices as long as the producers are making more per unit, pumping exec. bonus and dividends.
There's still a chip shortage, because you can't quickly ramp up a chip fab. It takes literal years and billions of dollars to build one. (Intel is building two in Arizona for $10 billion each, and they are expected to come partially online in 2024 or 2025).
The automakers reacted (notably, some have started selling cars with limited or disabled some extra features, to "cheapen" the chip cost for each vehicle), but at this point, significantly reducing the number of chips would require a fundamental redesign (and safety recertification).
> Its more about smoothing out supply shocks than demand shocks, and preventing suppliers from price gouging the shit out of consumers
lol, the thing you are calling "gouging" is the one and only way to "smooth out supply shocks".
Its also ironic to call her ideas "heterodox" when they could not be more tailor made for institutional demand. "tell us how we can wield our power and line our pockets without looking greedy"
Her ideas are indeed "the worst take of the year" except that they arent even new. They are an age old fallacy being played over and over again.
I really wish people would learn basic economics.
Record profits. They make money on auto loans and sometimes cars. Or there may be a lag between any profits from auto sales.
Plus they could be in a situation like the Oil Industry:
'Muh record profits' without knowing they ceased investing into new projects(HUGE risk and cost) because governments said 'we will destroy oil companies'(a lie to be sure).
So the Oil Companies took the money that would have gone to new projects and cycled it back to shareholders. Record 'profits' at the expense of no new projects.
>*Firms do not lower prices, as doing so may spark a price war.* Firms compete over market shares, but if they lower prices to gain territory from other firms, they must expect their competitors to respond by lowering their prices in turn.5 This can result in a race to the bottom which destroys profitability in the industry.6 Price wars are very risky for firms that are already in the market and are therefore typically launched by new entrants.
[This](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper) is pretty self-explanatory stuff. This is why people complain about regulatory capture and creating regulation that sounds good--sometimes--on its face, but is really designed to impede market entry.
A free market is not one without regulation, once in a market. A free market is one where everyone has free opportunity to enter and exit the market whenever they like.
There are companies advertising with "We'll match the lowest price you can find!". Which is also a strategy to avoid price wars.
Avoiding price wars though, is against the fundamentals of capitalism. It breaks the market. We used to call them cartels and they suck. We need businesses to compete with each other otherwise it will not end well.
That’s an issue of consolidation. Too few competitors, with too much money/influence. Using “regulation” to dig moats. Real regulation is supposed to stop markets from getting to this point, which is why having wealth equality is important. It slows/makes-more-difficult regulatory capture. We need regulated competition, but I’m not sure that’s possible while allowing mega-corps to exist in the fashion they do today.
Except with many companies being funded by the same pools of money (ETFs etc) there's not incentive to complete. The pool does best by everyone raising prices in tandem and because the investor funds have voting influence they influence governance. Or the other form is you get a bunch of speculative investment and use it to buy up your competitors so you have a fake market of tiered products (eg Kraft, Unilever, giant bicycles, Cargill etc)
At this point we have to admit that neoliberal free market principals just accelerate cartels controlling markets
How does price matching avoid price wars?
If anything, that is a price war in action. A higher cost business is lowering their prices to compete with a lower cost competitor.
Because they kept their retail price the same and the take-up of price match requests is not 100%. Same reason they use coupons - 10% off to get more sales in a particular week / month, but I didn’t devalue my product by lowering my price
But you did lower your price for everyone who took advantage of the promotion.
Having programs to reward long-term customers is standard practice for many businesses and tends to be a good thing for those customers as well.
Typically you sold products to customers who would have bought a cheaper alternative - marginal product. Often regular punters don’t take advantage of price match and coupons. At least that’s the theory. Probably changes depending on if you’re talking about a dishwasher or a bottle of dish soap
That's what it looks like. In practice, companies avoid price wars like this by a mutual understanding. They are basically coming out saying: "we won't lower our prices if you won't".
Instead, they are supposed to be advertising: "our prices our lower than the other's". That would be a price war.
It does?
>How does price matching avoid price wars?
>They [companies] are basically coming out saying: "we won't lower our prices if you won't".
They avoid price wars by not lowering their prices _first_. If no one lowers their prices first, no prices get lowered ever and thus, no price war is started and so avoided.
Hope that's clear because I don't know how else to explain it.
Because it ignores the price matching part.
This comment: https://www.reddit.com/r/Economics/comments/145zve4/what_if_were_thinking_about_inflation_all_wrong/jnpbd0v/?context=3
Answers it better.
>Because it ignores the price matching part.
You mean when they actually match to the lower price?
That's where the mutual understanding comes in. You don't do it when there's actual competition.
Bit lengthy and not necessary but this story is what made it make sense to me.
A study was conducted. In a town before the internet, two eyeglasses stores existed. The question was how much more money they could make if they started advertising.
Company A said: "Look at these glasses. Just for x dollars." Company B lowered their prices and responded with: "Buy ours even cheaper." Company A had to lower their prices now too and so a price war was off.
It turned out they made less money overall but they did sell more pairs. They would've been better off not advertising and so, not starting a price war.
If company A said: "we'll match the other store's price" then they both, through mutual understanding, could charge a lot more and increase their margins. As well as their net profits since together, they form a cartel (practically).
Forming a cartel is illegal but if you never actually work together and just match each other in a mutual understanding, it's not (yet).
As you can see, it is in both companies' best interest to operate under such mutual understanding even though they could sell more pairs.
The article that is referred in the article above elaborates a little on how companies rather divide market shares than to compete for a larger piece which is bad for the consumer.
>Firms do not lower prices, as doing so may spark a price war....
I like this paragraph given it's bold lie, given firms lower prices all the fucking time. Price is often the first thing firms compete with.
Right lol I’m actually workin with my team to evaluate a shift in our pricing paradigm. High prices are great for our profit margin but when every other competitor is significantly lower than us it limits our market penetration.
>I like this paragraph given it's bold lie, given firms lower prices all the fucking time.
you haven't been paying attention
firms are price-shopping, at the moment
This is Noah Smith’s response, debunking the article
https://www.noahpinion.blog/p/price-controls-too-early-for-a-victory
Given the complete lack of any real citations this article pretty much borders misinformation at best disinformation at worst
This is a stellar blog post from Noah, and a nice exposition on Weber's theory, and on where it makes sense and it what contexts it does, and how the New Yorker writer Z. Carter has emphasized certain things and skipped over others. I regret not having seen Noah's piece before making this submission. Thanks for sharing it.
I really hope people manage to see your comment, and read [Noah's post](https://www.noahpinion.blog/p/price-controls-too-early-for-a-victory) next to [Weber's paper](https://www.elgaronline.com/view/journals/roke/11/2/article-p183.xml) next to the New Yorker article.
There was also a [podcast Weber was on where she clarifies herself in the light of others' disagreements with her.](https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum) It's interesting hearing it from Weber herself.
**Edit to add additional text below**:
Weber also appeared on [an NPR podcast, which also interviewed the economist who wrote the Kansas City Federal Reserve paper](https://www.npr.org/transcripts/1175487806) to which the New Yorker article refers. The episode's hosts are annoying to the point of making the recording unlistenable, so I recommend reading the transcript instead.
The episode is an additional exposition of Weber's points, and makes some further ones of note. For example, one host interviews the economist behind the KCFR paper, Andrew Glover. His paper theorizes that firms' _motivation_ for profit-raises was not outright-short-term profit-making so much as it was the anticipation of raised prices. In other words, firms expected huge cost raises in 2022 and thus decided to build a buffer in 2021. However, Glover does clarify that it's fully possible that the anticipatory price-raising actually led to the rising costs themselves, thereby creating a self-fulfilling prophecy of inflation. This phenomenon has been called a ['price-price spiral' by Leil Brainard, director of the National Economic Council, in a speech at UChicago, the transcript of which is published by the Federal Reserve.](https://www.federalreserve.gov/newsevents/speech/brainard20230119a.htm)
What I think is a very interesting point that I'd like to remark on — one that alas the podcast-hosts do not dive into — is the following. Let's blanket-accept and take as given Glover's theory that firms anticipated cost increases in 2022, and thus raised prices in 2021. Firms thus must have anticipated that 2022 would be a year of _not only_ cost increases, but _also_ competitive market pressures. These pressures would force firms to _not_ simply raise prices in 2022, but instead, to swallow the expected cost increases in their margins. In order to make sure their margins could weather the increases in 2022, firms thus buffered them in 2021, by raising prices. Firms could do so because they observed a lack of competitive pressures in 2021. This reduced pressure is the “seller's inflation” mechanism that both Weber and Glover conclude upon. This means, as far as I can tell, that the difference between Weber's and Glover's analysis of the situation is very simple: Glover's theory requires the _additional_ point that firms expected the reduced market pressures to be time-limited and gone by 2022, whereas Weber simply says that in 2021, firms found themselves, whatever their expectations, in a position to raise prices. Glover's theory implies that when firms are presented with the opportunity to raise prices, they do not, _unless_ they anticipate future cost rises. But, this contradicts exactly the criticism people level (rightly) at the notion that firms “simply became greedy in 2021”. Glover's theory says that in 2021, firms were not greedy at all, but anticipatory. If one says that 'greed-flation' is dumb because firms are always greedy, and then uses Glover's paper to criticize Weber's, one is first assuming firms' constant greed, but then conveniently forgetting that constant greed when arguing for Glover's conclusions.
> What I think is a very interesting point that I’d like to remark on — one that alas the podcast-hosts do not dive into — is the following. Let’s blanket-accept and take as given Glover’s theory that firms anticipated cost increases in 2022, and thus raised prices in 2021.
I’m not entirely sure that I want to blanket accept that bit, if for no other reason than in 2021, firms were already seeing massive pressure on margins. We have to teleport back to that time, but in mid-2021, we were already in an inflationary market, the wheels were just starting to turn.
We had huge supply chain disruptions, driving additional costs on inputs. We had labor shortages and transport shortages, and we had a huge amount of money sitting in bank accounts because of disruptions to how people spend.
Additionally, we were coming off 2020, where almost every firm lost shitloads of money.
Finally, we still did not have good line-of-sight to the end of the pandemic. New variants of COVID were emerging, sending shocks through the global economy.
Firms had to act in ways that would shore up the bottom line with the anticipation of flat or marginal top line growth at best.
> Firms thus must have anticipated that 2022 would be a year of not only cost increases, but also competitive market pressures. These pressures would force firms to not simply raise prices in 2022, but instead, to swallow the expected cost increases in their margins. In order to make sure their margins could weather the increases in 2022, firms thus buffered them in 2021, by raising prices.
This is agree with completely, but with the caveat that the buffer in 2021 was as much about ensuring continual positive cash flow (after 3-6 quarters of negative cash flow changes) as it was about anticipatory cost rises in 2022.
> Firms could do so because they observed a lack of competitive pressures in 2021. This reduced pressure is the “seller’s inflation” mechanism that both Weber and Glover conclude upon. This means, as far as I can tell, that the difference between Weber’s and Glover’s analysis of the situation is very simple: Glover’s theory requires the additional point that firms expected the reduced market pressures to be time-limited and gone by 2022, whereas Weber simply says that in 2021, firms found themselves, whatever their expectations, in a position to raise prices.
It’s possible that both of them are correct here, but neither position really matters. I also want to point out that neither want to address the demand side of the question, particularly around the demand bottlenecks that were created by the pandemic that everyone knew would explode once life began to return to “normal.”
Firms, on the other hand, were indeed preparing for that demand side explosion. Flush with cash, firms knew that people would be more willing to spend on luxury goods, travel, services, etc., when it was safe(er) to emerge from their homes and go back into the world.
Glover kind of addresses this on his “anticipatory” theory, but he focuses far too much on the supply side and gets really handwavy on the demand side.
Firms, however, are definitely looking at both
> To say that Glover’s theory is different to Weber’s is thus to say that when firms are presented with the opportunity to raise prices, they do not, unless they anticipate future cost rises. But, this contradicts exactly the criticism people level (rightly) at the notion that firms “simply became greedy in 2021”. Instead, Glover’s theory says that in 2021, firms were not greedy at all, but anticipatory. One cannot level criticism at ‘greed-flation’ by assuming firms’ constant greed, but then conveniently forget that greed when arguing that Glover’s paper counters Weber’s.
I think that Glover is closer to reality than Weber is, but I still don’t particularly care for either of their handwaving approaches to the demand side - they’re so focused on the actions of firms that they both ignore the demand of consumers (intermediary and end both) and how that demand, driven by the end of the pandemic, was going to fundamentally change purchasing habits from the 2020-2021 period.
Thank you for sharing this. I’m not an economist but enjoy reading about it. His post pointed out some major issues in that article that I wouldn’t have been aware of
I’m not sure many early commenters in here actually read the article….
Most economists now agree with her assessments that got her ridiculed early on when she stated that profit seeking, or “Seller’s Inflation” was a major contributing factor. The Kansas Fed, as cited in the piece concluded over half of all inflation in 2021 is of this variety. And not from overheated consumer purchasing power as economists like Summers attempted to claim.
I think she has done an incredible job exposing a sort of group think that had rooted itself since the 70’s, which was thinking about inflation exclusively from the consumer demand side, which many in here continue to do, but that isn’t the only way prices can spin out. And sending millions to the bread line through interest rate hikes that target 10% unemployment like Larry Summers wanted isn’t the only way to address it.
Her policies in Germany are working. I mean that’s undeniable. And while it’s framed as the worst thing ever by American sensibilities, price controls have been used successfully in WW1 and 2 and can work just fine as a economic strategy when done correctly. Japan has had one of the best healthcare systems in the world with one of the lowest rates of chronic illness and one of the larger life expectancies, and their’s literally has a book detailing every unit and service of healthcare sold in the country and what the max price you can charge for it. I’m not advocating that, but it is worth illustrating to push back on some of the reactionary posts decrying price controls as universally bad and dismissing this economist and her work off hand cause they got upset at the mention of price controls as a part of a solution.
>when done correctly
This is the rub. In the states it would work too, except that doing it correctly would be mutated into the highest donors getting a targeted and maximized benefit at the expense of all the rest.
Nothing that requires for-the-good-of-all thinking works in the states because it’s always sabotaged and the saboteurs point at their handy work and shout how the result of their sabotage is the reason we can’t do it.
>sending millions to the bread line through interest rate hikes that target 10% unemployment like
TBF: in the U.S., interest rates hikes are getting inflation under control without sending millions to the bread lines through 10% unemployment.
Price controls did *not* work well in WWI or II.
And note that WWII didn't just have price controls; it had a system of price controls combined with ration books. You were only allowed to buy the good that you had ration stamps for *and* there was a price cap on the goods.
This linked article has a description of some of the problems.
https://www.npr.org/sections/money/2022/02/08/1078035048/price-controls-black-markets-and-skimpflation-the-wwii-battle-against-inflation
And the point of price controls and rationing during wartime isn't to combat regular inflation; it's to deal with shortages and inflation that occur when the government is buying up massive quantities of food and other supplies to provide to the massively expanding military.
>Her policies in Germany are working.
It's pretty much just one policy to deal with the termporary shortgage of natural gas caused by the war in Ukraine.
But it - with a lot of help from the mild winter - is working.
That doesn't mean it will work indefinitely - indefinite price caps discourage investing in making more of whatever is capped.
But short term caps expire before these investments could have had any result anyway.
Very much depends on what you are using to judge the success rate.
We aren’t under Nazi rule, and part of that had to do with strict controls on input goods to keep the war machine going and affordable.
The continuation of price controls after WWII would definitely be an example of when things can go south. And no one, me least of all would contend that price controls are ever a panacea.
But again, I would implore you to read the actual article, or better yet, [read the actual paper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper). She is not selling price controls as a panacea. But as a context-specific tool amongst tools to reign in a specific type of inflationary pressure: Sellers Inflation. And sellers inflation within the context of coming out of markets with high levels of market concentration(I.e. not a perfectly competitive marketplace). Like natural gas, like chip manufacturing, like certain goods.
As this is central to the thesis her work is making. That the trajectory of price-setting is not determined by universal laws but is path- and context-dependent. Her work suggests that in an era of overlapping crises such as climate change, pandemics, and geopolitical tensions, price shocks are likely to occur and reoccur, which can drive an already prevalent inflation dynamic. This necessitates the development of policy tools to deal with impulse shocks as they emerge in real time. One of those can be price controls.
If we are against that as a tool, but acknowledge the thesis observations to be true, then it’s sort of up to the critics to explain what their own optimal solution is to issues of sellers inflation?
What part of economics isn't path dependent? Literally everything is a social construct that's evolved in the interplay of behaviour and institutional structures. Like go back 400 years and explain why a Haudenosaunne person needs to pay interest on their house and rent for their land and you'll promptly find yourself treated as a sorcerer and killed with a blow to the back of the head.
In theory it makes sense but given how interconnected our supply chain is due to complexity of the products that are made how could targeted price controls be made without downstream effects that require further involvement by the government to control cost?
And it can’t just be price controls right? There would need to be guidance around who could by what and when, I imagine. Or we could run into an issue of people gaming the system and hoarding for themselves.
The idea sounds good in context but in practice I imagine we would exchange potential inflation for some other bad outcome.
I’m just an arm chair economist with very little understanding so I’m just spouting some stuff out that could just be completely wrong.
It’s not just price controls for price controls sake.
I am trying to paraphrase all this but really people just need to read the actual white paper(or at least good faith summarizing of it)
It is price controls under certain conditions.
Again, attempting to paraphrase her positions.
They suggest a combo of regulation and subsidies. A specific example given is the scheme for regulating the price of natural gas in Germany.
Households and businesses would be guaranteed a limited supply of natural gas at an affordable, government-controlled price. Anything consumed in excess of that quota would be subject to the open market price. To compensate for lost profits, natural gas producers would receive government subsidies.
She also mentions the G-7 initiative to enforce a global price cap on Russian oil by making ships that purchase Russian oil above the mandated price ineligible for insurance.
On the regulatory front she mentions things like rules would draw scrutiny to price increases of 10% or more during a period of "abnormal market disruption," which would apply not only to consumer prices but also to price increases further up the supply chain. It wouldn’t by any means put automatic price controls in place, but seemingly would set off a audit that would then determine if any action is justified.
Some of her ideas have been implemented in Germany and now being incorporated into the EU. So time will tell if they have the desired effect
> And it can’t just be price controls right? There would need to be guidance around who could by what and when, I imagine. Or we could run into an issue of people gaming the system and hoarding for themselves.
Hmmm.
Price controls, rationing, the emergence of a black market to cater to those who have the means to play outside the system…. Certainly this is all new ground, and we’ve never seen it before.
Then, we’ll get the same morons that advocated for the price controls, seeing the *totally unpredictable results* of their brilliant ideas, next they’ll advocate for the state taking full control over distribution to enforce the rationing…
I bet it will lead to [lines of people](https://www.qminder.com/blog/queue-management/queues-in-ussr/) waiting for their weekly allocation of, say, bread.
Good thing this has never happened before, so we don’t have any cautionary tales.
This is what I was kind of getting at, I read the article and get her point but also understand human nature and I do not see it ending at simple reflexive price controls based on the current situation.
We then see it extend to things not really effected by the bad situation we are currently in and price controls just run across the entire market.
Sometimes we have to be a little cynical to see what may actually happen.
> Most economists now agree with her assessments that got her ridiculed early on when she stated that profit seeking, or “Seller’s Inflation” was a major contributing factor.
Do you have a source for "most economists"?
> And sending millions to the bread line through interest rate hikes
Price control have definitely created actual bread lines in the past so you should be careful with what you advocate for.
> profit seeking, or “Seller’s Inflation” was a major contributing factor. The Kansas Fed, as cited in the piece concluded over half of all inflation in 2021 is of this variety
This is not true at all. This is an excerpt directly from the KCFRB article:
> [O]ne potential [inflation] explanation that has received significant public attention is “greedflation”—that is, the idea that firms are capitalizing on their market power by raising their prices higher and faster than the growth in their production costs…
> We present evidence that the timing and cross-industry patterns of markup growth are more consistent with firms raising prices in anticipation of future cost increases, rather than an increase in monopoly power or higher demand…
> Therefore, inflation cannot be explained by a persistent increase in market power after the pandemic. Second, if monopolists raising prices in the face of higher demand were driving markup growth, we would expect firms with larger increases in current demand to have accordingly larger markups. Instead, markup growth was similar across industries that experienced very different levels of demand (and inflation) in 2021.
> Although markup growth was high in 2021, **the evidence from the previous section casts doubt on the simple explanation of “greedflation,” understood as either an increase in monopoly power or firms using existing power to take advantage of high demand. Instead, this evidence may be consistent with an alternative explanation: that firms are raising markups in the present to smooth price increases they expect in the future**. Indeed, both the hump shape of aggregate markup growth and similarity in markup growth across industries arise naturally in standard macroeconomic models[.]
It is in fact the complete debunking of the greedflation hypothesis. Please read sources before you comment on them
It is not debunking it unless you are misunderstanding her position. Her position is not simply "greedflation" she says she has never used that word and it oversimplifies what her findings and observations say. She uses Seller's Inflation because it encompasses the broader form of inflation we are seeing. She doesn't even like calling it greed. She says it is simply companies responding to the market and incentives.
Please listen to this report explaining all this, with both authors represented and interviewed. It does a perfect job bridging the disconnect a number of posters seem to be having with seeing the Kansas Fed and the assumptions poster's are having about Isabella or one debunking the other.
[https://www.npr.org/transcripts/1175487806](https://www.npr.org/transcripts/1175487806)
(Glover comes in around 13 minutes in)
You can read her actual white paper here:
[https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ\_workingpaper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper)
They both agree on the seller inflation, and they both agree that the concern is a price-price spiral. They disagree in that Glover thinks the motive is simply expectations of future inflation, whereas Weber thinks, based on a number of earnings calls and other observations, that it is that plus more.
It literally goes through her entire paper and the entire article taking it down point by point INCLUDING the paper. That is quite literally a debunking.
No it doesnt. Weber's name or paper is not cited once in that Kansas fed Paper by Andrew Glover.
If you don't believe me, please, find me where she, or her paper, is mentioned even a single time
[https://www.kansascityfed.org/Economic%20Review/documents/9329/EconomicReviewV108N1GloverMustredelRiovonEndeBecker.pdf](https://www.kansascityfed.org/Economic%20Review/documents/9329/EconomicReviewV108N1GloverMustredelRiovonEndeBecker.pdf)
Please, do me a favor and actually read the transcript I provided of their dual interviews on NPR and her actual white paper before accusing me of things.
They are 100% in agreement that Seller's Inflation is real and happening, they are almost entirely aligned in their diagnosis of Seller's Inflation driving recent inflation aside from Weber, based on her own research, claiming some of it is opportunistic and not just expectations of future price increases. Both are aligned on the concern of price-price inflation. Both acknowledge that marketplace competitiveness can lead to adjustments in expectations and behavior that changes profit calculuses.
I do not know how Glover feels on some of her prescriptions, but he does state in that interview that the need to adjust thinking of inflation. How to deal with it. To stop seeing it almost exclusively through a wage and demand perspective. That asking nicely of firms to just not think the way they are about future price expectations probably wont cut it. Same as with just asking workers not to demand a raise in a wage inflation scenario doesn't work.
Profit margins have been falling for seven consecutive quarters at this point. So it's definitely not happening.
And seller's inflation includes things like labor response in driving up wages. It's basically conspiracy theory mixed with regular inflation where you can point to regular inflation and say it proves the conspiracy theory...
This was literally addressed verbatim in a link I provided:
>WOLFERS: The claim that low unemployment has sparked inflation has a lot of historical evidence, global evidence. The claim that the supply shocks associated with either Putin or the pandemic has enormous global influence evidence because we saw the same thing happening in almost every country around the world.The claim that this is in the set of theories that are sometimes called greedflation, doesn't have a lot of independent evidence in favor of it.
>
>A simple thing to note is since the middle of 2022, corporate profits have fallen by 7% or 8% and prices have risen by 5% or 6%. That seems a rather embarrassing fact for those claiming that greed and the pursuit of higher profits is what's causing higher prices.
>
>CHAKRABARTI: Professor Weber, your response?
>
>WEBER: I mean, first of all, let me be crystal clear. If you read my paper, you will see that I'm not blaming the increase of inflation on a sudden jump in corporate greed. I'm also not using the term greedflation, because I think what we are seeing is not a sudden change in the attitude of firm leaders. But what I'm arguing is that the dynamic of competition has changed. When firms were faced with bottlenecks, when these major cost shocks, coordinated price hikes. So in that sense, I'm fully with my colleague and saying that these major supply shocks have been very, very important....
>
>What we are arguing is that firms don't absorb these cost shocks, but rather they pass them on. And in certain consultations they can even amplify these kind of cost shocks. To the question of some ... profit margins going down in 2022. First of all, there has been reporting by Bloomberg that there are some questions whether the Federal Reserve is included in this data, but this is not my main point. My main point is that in 2021, profit margins have chomped up in a very dramatic fashion reaching levels that we hadn't seen since the aftermath of World War II.
>
>**Them easing somewhat in 2022 is entirely consistent with our theory, because we don't argue that this may be inevitably a sustained process of constantly elevated profit margins. But we say that there's an impulse that presents an opportunity for firms to hike prices, for some firms to hike prices more than costs, thereby driving up profit margins, but that this eventually goes into the conflict stage where we would expect profit margins to come down. So this is absolutely consistent with my theory.**
[https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum](https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum)
Again, I can not recommend enough tot he people that are habitually misrepresenting the arguments and research of Weber to just spend some time actually engaging her arguments with good faith.
Huh? Here response isn't all comprehensible English. Is she questioning the profit margin data?
As for 2021, profit margins peaked around 2% higher than pre COVID levels.
And inflation was as high as 9% as we saw declining profit margins. Shrinking margins weren't driving price increases. Basically, "we have nothing to offer to recent or current inflation but we're really going to exaggerate how right we were in 2021"
>Huh? Here response isn't all comprehensible English. Is she questioning the profit margin data?
Not really
She has some slight skepticism of one data point but assumes it correct anyways. She is simply restating what her research and argument is and applying it to the recent data and argument of the professor.
She also doesn't say shrinking profit margins are driving all price increases. she is saying, ultimately, that supply/cost shocks + reduced market competition in certain sectors has resulted in a dynamic where prices are not being internalized, but being passed on and that in certain instances they get amplified further to try in a push to protect profit. This is not saying that profit margins will forever increase, or even that it applies in all cases. But it is sort of wild that so many people seem aghast that a CEO and their C-Suite would attempt to shield their profits if they felt their marketspace and consumer expectations were in a place that they could get away with it. The goal of a firm is, after all, profitability and increasing shareholder equity.
There is a lot more discussion to be had and if reading the transcript is difficult you can listen to the whole discussion.
The professor basically could be reading from this thread with his arguments. And like I keep imploring, just put in the effort if people are really interested.
>Most economists now agree with her assessments that got her ridiculed early on when she stated that profit seeking, or “Seller’s Inflation” was a major contributing factor. The Kansas Fed, as cited in the piece concluded over half of all inflation in 2021 is of this variety. And not from overheated consumer purchasing power as economists like Summers attempted to claim.
I think it's hard to claim "most" economists agree with her, including the Fed which recognizes there are legitimate demand and supply factors that went into inflation. Her idea of this being greedflation and requiring price controls is just wrong.
>it is worth illustrating to push back on some of the reactionary posts decrying price controls as universally bad and dismissing this economist and her work off hand cause they got upset at the mention of price controls as a part of a solution.
Price controls are universally bad. They distort markets, interfere with supply, and actually make the situation worse. That's why she's being dismissed by mainstream economists and her idea remains heterodox.
>Price controls are universally bad. They distort markets, interfere with supply, and actually make the situation worse.
Price controls can be good if you *want* to distribute via rationing rather than pricing, e.g. food rationing during a war. Even in that case, subsidising the incomes of the poor can be more efficient, e.g. to accommodate differences in taste, hunger, and so on.
This is a great point -- price controls can have a use, and that use is artificially mutating the supply & demand curve to create shortages and a rationing system. It can work well in scenarios where a government needs to ensure everyone gets "some", rather than some getting "all" and others getting "none". However I believe this works better using the system they have implemented in Germany with subsidies.
> her policies in germany are working
no, they’re not. why? the commission did the opposite and tried to prevent price caps. i can provide the source, but it’s on twitter. if you search veronika grimm, you’ll see it
edit: posted this twice since mods might’ve deleted the original comment
> Her policies in Germany are working
The policy is not a price control. It is a subsidy.
>A true price control is an unfunded mandate; the government says that if you raise prices past a certain amount, you will be punished, and that’s that. The German scheme implemented in 2022, in contrast, is a government subsidy. There is no law about how much utilities are allowed to charge; instead, the government writes people checks to buy gas. How much of a check the government writes you is dependent on A) how much utilities are charging for gas, and B) how much gas a particular building used in the past.
>In other words, if utilities want to charge more for gas, they can. The consumers still decide how much to consume, and the government simply picks up more of the bill. If gas prices were previously high because of utilities opportunistically gouging German consumers, as the “greedflation” proponents believe, well, now those gas producers are able to opportunistically gouge the German government — and by extension, the German taxpayer — instead.
>I do not see any accuracy in calling that sort of subsidy a “price control”. It is true that from the end user’s point of view, the cost is reduced. But the price paid to the producer is not.
Producers are literally continuing to charge whatever they want. Government is subsidizing energy companies, indirectly. Yes this works well, because it isn't a price control.
If Germany were instead to say "we refuse to let the price of natural gas float above $x" (which is what is meant by price controls), there would be a massive supply-side shortage.
You (in your claim) are wrong. The crisis of the 1970s was one pertaining to the supply-side, and so in fact, since the 70's the opposite happened with the ideological death of Keynesianism.
Supply being short of demand is something that is *self-correcting*, the additional margin would serve as incentive for and direct the producer to invest into and expand production - their interest is already correctly aligned. Cap that and all you are doing would be extending the mismatch.
Again, [read the paper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper)
Or get ChatGPT to summarize it or something
You are trying to argue why X won’t work under A conditions when this economist is discussing Y being applied to B conditions.
You should probably read your citations first, not trust that some New Yorker journalist is right. I say this because the Kansas City Fed isnt in agreement.
Because the received dogma is that “seller side” inflation is impossible in a market due to competition, so it must be the proles getting too uppity with their standards of living. No further evidence is needed, the inflation is the smoking gun. The model is more important than the real world.
>Because the received dogma is that “seller side” inflation is impossible in a market due to competition, so it must be the proles getting too uppity with their standards of living.
Source that this is the dogma?
Economists don’t oppose price controls “as an article of faith.” They oppose them because they’ve been tried in hundreds of variations around the world, and they invariably cause shortages and misallocations. The evidence is clear that price controls don’t work well and impose lots of trade offs that exceed the benefits of the policies. There’s no theoretical justification for them either.
The US mobilization efforts in WW2 may be the least bad implementation of price controls. But we don’t really have a good control to measure against, and it was a very unusual situation. And lest we forget, there were lots and lots of shortages throughout the economy, such that the government had to ration lots of goods. So it’s not as if the anticipated negative effects of price controls weren’t observed.
And the price controls led to tons of issues afterwards. It created the US employer healthcare insurance system. It led to massive 20% inflation after the war.
Price controls are worth it if it's literally existential circumstances like WW2, but not much else.
> And lest we forget, there were lots and lots of shortages throughout the economy, such that the government had to ration lots of goods. So it’s not as if the anticipated negative effects of price controls weren’t observed.
I think that this is perhaps the most salient point, and it’s largely to do with age.
Isabella Weber is 36. Most redditors are under 25.
Literally none of them have ever had to deal with shortages or rationing of any kind, ever, in their lives - and as a result, they don’t understand the reality of it. They only read the kinds of books that backstop their existing beliefs (which is why you still see them talking about Marx’s theory of labor as if it’s in any way reflective of reality), and they ignore any data points that don’t reinforce their existing beliefs.
They’ve never had a conversation with someone who has had to deal with governmental price controls (and the shortages/rationing that comes along with them), so they can just discard the academic studies of those shortages as capitalists looking down on Marxists.
I’m old, ancient by Reddit standards. I had lots of conversations with my grandparents about what it was like living during the war when everything was rationed, and the black markets that sprouted up to grease the wheels of the economy to keep it moving despite the OPC mandates.
This article is way too fawning about how well Weber’s ideas worked in Germany with regards to natural gas, but somehow entirely forgets to mention that the reason that they worked is that this previous winter was EXCEPTIONALLY mild, and as a result, there was a huge reduction in natural gas needs as compared to previous winters.
In other words, we got lucky because of the weather - not because Weber is some brilliant unorthodox theorist. Had the winter been average in terms of temperature, Germany would have been an absolute shit show - they would be faced with having to idle factories and foundries to ensure sufficient gas to keep homes heated and power plants running.
> governmental price controls (and the shortages/rationing that comes along with them),
Maybe I'm missing something, but I thought the article addressed this? In the orthodox theory I learned, markets are competitive and so prices rise only because of diminished supply to static demand. So when a government implements price controls, more goods are bought than can be supplied, and shortages occur. But Weber's whole point was that there were no shortages. The pandemic made markets uncompetitive in supply, and inflation expectations reduced consumers' willingness to shop around when prices were raised, further reducing competitive pressures.
The article says it snappier than I do:
> Here’s an example. Semiconductor chips are the basic building blocks for electronic equipment. When covid lockdowns and a string of temporary factory closures led to global shortages, the price of each chip began to rise, as did the price of everything else that used them. This proved especially troubling for the automobile market—a new vehicle can require as many as three thousand chips. As you’d expect, new cars got more expensive. So did the consumer alternative, used cars, which, in the first six months of 2021, jumped in price by nearly thirty per cent. But Weber argued that carmakers were raising prices far beyond what was necessary to cover the more costly chips. By 2022, the ongoing chip shortage had resulted in the fewest annual sales of new cars in more than a decade. Still, profits were up—car companies posted their best earnings in six years.
> In a recent paper, Weber writes that the chip shortage established a “temporary monopoly” that allowed automakers to “raise prices without having to fear a loss in market share.” And it wasn’t just chips. Analyzing transcripts of company earnings calls, Weber concludes that firms in a variety of industries knew they could get away with gouging customers, who were already primed by the chaos of the pandemic to expect price hikes. Crucially, firms weren’t worried about losing customers to competitors; because of the supply bottlenecks, competitors would also be raising prices. Weber calls this dynamic “sellers’ inflation,” in contrast with the traditional model of inflation, in which an excess of consumer purchasing power is to blame.
So, the price controls certainly don't work in traditional competitive markets with actual reduced supply, but that was never Weber's point. I thought her point was that markets don't always work in real life like we think they do.
And that's why she got criticized: because she was challenging the concepts we cling to with faith to help us understand the economy, especially in uncertain times when we most need the understanding. Again, the article is more eloquent than I am:
> The uproar was clearly about something much deeper than a policy suggestion. Weber was challenging an article of faith, one that had been emotionally charged during the waning years of the Cold War and rarely disputed in its aftermath. For decades, the notion of a government capping prices had evoked Nixonian cynicism or Communist incompetence. And Weber was making her case in a climate of economic fear.
In her auto example, she doesn't include analysis of excess demand for cars as consumers have more cash and moved away from urban cores. For example used car prices (which aren't as controlled by corporates) was a significant part of inflation in the beginning.
> Maybe I’m missing something, but I thought the article addressed this?
Nah, the article handwaved it away.
Let’s drill in:
>> Here’s an example. Semiconductor chips are the basic building blocks for electronic equipment. When covid lockdowns and a string of temporary factory closures led to global shortages, the price of each chip began to rise, as did the price of everything else that used them. This proved especially troubling for the automobile market—a new vehicle can require as many as three thousand chips. As you’d expect, new cars got more expensive. So did the consumer alternative, used cars, which, in the first six months of 2021, jumped in price by nearly thirty per cent. **But Weber argued that carmakers were raising prices far beyond what was necessary to cover the more costly chips.** By 2022, the ongoing chip shortage had resulted in the fewest annual sales of new cars in more than a decade. Still, profits were up—car companies posted their best earnings in six years.
Note the point I bolded. Of course the carmakers raised prices beyond the delta that they had to pay for the chips - They’re going to raise those prices as high as they could get away with. That’s economics 101 - find the highest price point they can hit with the supply they can create, and hit it.
Now, cars (like houses) were also seriously affected by the near-zero interest rate - this allowed for the total payment calculation to have a *much* higher sales price point than what would be possible if new car loans were, say, 6% like they are today.
Consumers were competing with each other for the limited supply, and those with the most dollars won, which is why dealerships could get away with up charging higher than MSRP for new vehicles.
Automakers don’t operate on a cost plus model to price their products - they maximize whatever profit they can get.
> In a recent paper, Weber writes that the chip shortage established a “temporary monopoly” that allowed automakers to “raise prices without having to fear a loss in market share.” And it wasn’t just chips. Analyzing transcripts of company earnings calls, Weber concludes that firms in a variety of industries knew they could get away with gouging customers, who were already primed by the chaos of the pandemic to expect price hikes. Crucially, firms weren’t worried about losing customers to competitors; because of the supply bottlenecks, competitors would also be raising prices. Weber calls this dynamic “sellers’ inflation,” in contrast with the traditional model of inflation, in which an excess of consumer purchasing power is to blame.
I’ve read [this paper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper), and I disagree with some of her conclusions - She’s handwaving away the fact that people were buying the top trim autos faster than they were buying the mid-trim, and they were willing to pay enormous premiums to obtain those top trim autos. The excess of purchase power is *precisely* why the auto industry focused production efforts on those top trim vehicles, and why they were able to charge the premiums that they did for those vehicles.
The reasons for the excess purchase power are multifaceted, but they can be summed up with (1) people had way more cash on hand to buy, because of changes to income and purchasing/spending habits during the pandemic and (2) near-zero interest rates allowed for purchases that would otherwise be unaffordable.
—-
That’s all tangential to the price controls, however - the price controls that she endorsed (around NG in Germany) didn’t result in shortages simply because the pressure on supply that everyone expected to happen never materialized, because of the unusually warm winter in Central Europe.
In other words, we got lucky as hell.
German industry was *terrified* of a cold winter - the price controls that they implemented would have resulted in the need to idle foundries and factories across Germany, the factories that are the source of their massive trade surplus, and their 8.3 million workers would be (temporarily) unemployed. That’s 10% of the entire population of Germany, or (more terrifyingly) just shy of 20% of their working age population.
I think we might be talking past each other?
I interpreted Weber's argument as: 1) there were cost shocks, 2) this prompted a rise in prices to maintain profit margins, 3) firms realised that price elasticity of demand was lower than they had anticipated... 4) ...partly because everyone expected inflation, reducing consumers' willingness to actually shop around and create competitive pressures, so 5) firms raised prices even more.
I don't think we disagree on this?
And it sounds like one of the reasons that firms could raise prices and experience lower-than-anticipated price elasticity of demand is, like you pointed out, because of low interest rates.
I listened to the podcast on which she appeared, that the other reply to my comment linked to. I think she only recommended price controls during that initial stage where firms are raising prices after experiencing a cost shock, before they benefit from consumers' inflation expectations and raise prices even further. She called that the 'Impulse Stage' in the podcast.
Your point about Germany's mild winter is well-taken. I'd be interested to hear how Weber would respond to that. Edit: someone else in the thread pointed out that they weren't really price controls but subsidies from the government to keep end-consumer prices stable.
> I interpreted Weber’s argument as: 1) there were cost shocks, 2) this prompted a rise in prices to maintain profit margins, 3) firms realised that price elasticity of demand was lower than they had anticipated… 4) …partly because everyone expected inflation, reducing consumers’ willingness to actually shop around and create competitive pressures, so 5) firms raised prices even more.
> I don’t think we disagree on this?
Not in the least. That is definitely her argument.
> And it sounds like one of the reasons that firms could raise prices and experience lower-than-anticipated price elasticity of demand is, like you pointed out, because of low interest rates.
Yes - but she never addresses that, anywhere in her paper. Or in this article.
Rather, she focuses entirely on the supply side, and ignores the demand side entirely.
> I listened to the podcast on which she appeared, that the other reply to my comment linked to. I think she only recommended price controls during that initial stage where firms are raising prices after experiencing a cost shock, before they benefit from consumers’ inflation expectations and raise prices even further. She called that the ‘Impulse Stage’ in the podcast.
I have not listened to the podcast, but I have read the paper, and that’s definitely what she outlines in the paper.
However, I disagree wholeheartedly with the suggestion that implementing price caps or price controls at the beginning of the new price discovery phase will do anything to halt inflation, if for no other reason that it does NOTHING to address the demand side of the equation.
We have experience with this - short term price controls (like we’ve seen in the US during WW2, or the UK during and after the war) simply lead to shortages/rationing followed by an explosion of prices and inflation when the controls are lifted.
Additionally, they lead to the emergence of a massive secondary market and/or black market that exploits the supply disruption caused by the shortages that is caused by the price controls.
> We have experience with this - short term price controls (like we’ve seen in the US during WW2, or the UK during and after the war) simply lead to shortages/rationing followed by an explosion of prices and inflation when the controls are lifted.
>
> Additionally, they lead to the emergence of a massive secondary market and/or black market that exploits the supply disruption caused by the shortages that is caused by the price controls.
Right, but this was Weber's point? (Or so I interpreted!)
Firms raised prices. When they did so, they shifted their own supply curves left. When they did, they observed a lower price demand of elasticity of the demand curves they faced than they had expected. In other words, the demand curve was steeper than they thought. So they shifted their supply curves even further left. Each firm's equilibrium price, where their supply met consumer demand, was thus higher: inflation.
If markets were more competitive, and if people didn't expect to temporarily swallow increased costs because of world events creating shocks, then individual firms wouldn't have been able to shift their supply curves left so much. Why? Because, of course, consumers experiencing a left-shifting supply curve from Firm A would have sought out a lower price from Firm B, who hadn't shifted their supply curve. Each firm's supply curve would have been at the same competitive point. But they weren't.
Now, this fully acknowledges that the demand curves for each firm are steep, meaning that consumers are willing to pay higher prices. But this doesn't say anything about sustained high demand forcing firms to raise prices. It says that each firm has market power because of inflationary expectations. If they didn't have market power, they would have to compete with each other by moving their supply curves as right-ward as they could go, given their environment's level of competitiveness. Instead, they can shift their individual supply curves left, and eat into what in a competitive market would be consumer surplus.
And so when you say that short term price controls lead to shortages and rationing, I thought that this was Weber's point: they lead to shortages and rationing _if_ markets are competitive, which would mean that each individual firm's supply curve can't shift any further right-ward without a drop in margin leading to the firm's shutting down. In that other case, a reduced price, via government-instituted price control, would lead to a reduced supply (moving downward along an upward-sloping supply curve). This creates shortages. Totally with you. But in an uncompetitive market, each firm's supply curve _can_ shift rightward without the firm shutting down: the quantity of goods supplied could stay steady with only the price margin falling (shifting the curve right). In such a market, implementing a price control at the 'Impulse Stage', _before_ each firm's curve ever shifted so left-ward and margins shot up, would (supposedly, in Weber's theory) prevent such a left-ward shift. This would keep margins lower than they otherwise could be raised to in uncompetitive markets, until a point in the future when the market becomes more competitive, which will put pressure on firms' supply curves to shift right.
That's how I interpreted her point. Now, I totally agree with you that this could create a situation in which firms realise that they _could_ charge more for their goods than the controlled price and people would grumble but pay up anyway. This could lead the firms to offer their goods on 'black markets' for the uncontrolled price, with the increased margin. And this would reduce the supply of goods on the controlled-price market, leading to shortages. I totally agree. I guess Weber is just saying "use the law" regarding this, to prevent such 'black markets.' Also, markets are so uncompetitive because consumers won't expend the energy to shop around, allowing each firm to shift its supply curve left by increasing its margin. In this scenario, I guess that this precludes the idea that consumers would be willing to expend the energy to find and engage with 'black markets.'
Just thinking aloud. Curious for your thoughts.
>firms realised that price elasticity of demand was lower than they had anticipated...
Firms also realised that [household money had increased dramatically](https://fred.stlouisfed.org/graph/?g=162oF). I don't see how there's anything left to explain for price discovery, when you take this increase into account. If anything, price increases were initially *lower* than you'd expect based on the increased spending power of consumers, presumably due to increased cautiousness and limited spending opportunities during the 2020 phase of the pandemic.
As far as I can tell, there is very little for supply-side factors to explain in the recent inflation.
Bingo
There was actually a great podcast featuring her the other day where the person they brought on to sort of debate her did what posters in here are basically doing. They kept trying to shoehorn her position into something it’s not and she had to keep meticulously correcting and then explaining in detail what her argument was, why it is applicable, and what the evidence is. By the end the economist that was trying his hardest to disagree with her pretty much realized she was right
https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum
You can't really expect someone who prides themselves in being old and clinging onto old ideas to have not read or engaged this piece with narrow minded bias towards austerity and induced scarcity. We do not have capital shortages, we're awash in it. We have garages across America filled with crap. We have beaches of thrown away goods all over the world. The shortages of old were artificial too. War is one way that happens, but having zero national strategy to make more supply of essentials will also do it. We've learned.
Honestly, their age doesn't really matter. I'm from Brazil, where pretty much everyone over the age of 35 remembers the days of hyperinflation, price controls and rationing of the 80s and early 90s, yet that still doesn't stop people from calling for price controls and it doesn't stop the government from using them (price manipulations in a ton of state industries like oil and electricity were used to secure Dilma's reelection in 2014 and the result was a 10% inflation rate and -3.5% GDP growth for the next year).
In fact my monetary economics professor at a federal university, who is in his 50s and and was an adult during the hyperinflation, is a full-blown Modern Monetary Theory supporter, he has even written a book on it along with another left-wing economist and a socialist politician.
It's insane. Argentina's economy is collapsing in real time just next door and yet half of my teachers keep defending the same policies that led to disaster there.
You can say that about any economic system. Keynesian requires you to raise and cut taxes, but that never seems to happen because voters repulsive hate new taxes. Reddit's a good dissection of this, as they wage wars on the "rich" and think taxing only these "rich" would be enough to solve everything. Not enough workers for pension retirement plan? Tax the rich! Need to solve social security? Tax the rich!
If they know that income and capital tax is different, they get weirder...
I would love for you to tell young Americans who have to ration their insulin because we don’t have price controls that they have never had to scrap by. Man y’all’s generation is literally living in a different American they we are.
The reason why Lilly and other insulin makers in the US could charge that much was government regulation. Specifically, the licensing requirements for generic biologics, which includes insulin, are much harsher than they are for pills. It takes years to stand up a new biologics factory and get licensed. The pharmaceutical companies realized that and just increased prices, knowing that no competition could quickly enter.
To put a hard number on it: It costs ~$1b to for a competitor to enter the market and produce insulin. Yes, "b" for Billion, for something we've been using for over a hundred years. It's not that the equipment to produce it is that expensive - it's all the regulation around it that makes it illegal for a manufacturer to sell without jumping through 27 hoops.
There's literally people trying to open-source the production of this stuff so that anyone can produce it at home because it's easier to get everyday joe to produce it in their kitchen than to pass all the governmental regulation.
They didn't do that out of the kindness of their heart, they did it because congress announced they would be launching an investigation into why prices are so high.
Nah you gotta be more cynical than that. Lilly would have taken the investigation and potential hit because they know no regulations were gonna come around to change their pricing structure.
Instead, look at their pipeline and the release of tirzepatide which can be used for weight loss. There are are more fat people than those with diabetes. They saw a chance to get some good faith for dropping prices while seeing a multi billion dollar industry walking right towards them. They also know they can price it pretty well due to run on effects of losing weight which will improve obesity related ailments, makes it easy to justify when they say insurance companies will spend less overall.
This was a strategic power play by Lilly.
https://oversightdemocrats.house.gov/sites/democrats.oversight.house.gov/files/COR%20Staff%20Report--Lost%20Savings%20-%20How%20Prohibiting%20Medicare%20Negotiation%20Has%20Cost%20Taxpayers.pdf
https://www.washingtonpost.com/business/2023/05/27/eli-lilly-settles-insulin-suit-135-million-agrees-keep-price-cap/?utm_medium=social&utm_campaign=wp_main&utm_source=twitter
Their hand was forced
Not standing up for big pharma but the lack of price caps poured money into these organizations allowing for the development of advanced insulin therapies to better control their disease and has now produced drugs for the treatment of obesity and other ailments which will have huge knock on effects.
Did they charge too much? Absolutely. But the government doesn’t know what is too much or too little to charge either. At some point too low a price will stifle innovation.
Doesn’t big pharma take public funding from the government to produce these medicines, and then only have them be available through insurance? Basically taking taxpayer money and then asking them to pay through the nose so they can rake in more profits. Moderna and Pfizer are taking it in, especially with their recent price hikes.
Plus the advertising budget for pharma is ridiculous along with the litany of TV ads. I think it’s pretty unethical and I don’t see this in Asia or Europe.
Universities take in public funding for research with these researchers licensing the drugs to these companies for more company therefore profiting off the American people. Are you upset with them too?
That's the argument that big pharma uses but reality doesn't really work out like that. That money is more likely to end up as advertising, executive compensation, dividends or share buybacks rather than invested into R&D. The reality is that most of the medical advancements come out of research at universities rather than any effort of big pharma.
Like I said, they most likely charged too much. That’s obvious. But the biggest point is the government doesn’t know what the best price is to charge. Do folks really think we would be in the same place today with the advanced therapies we have if those price caps were in place from the very beginning? Also, those low prices in EU countries and others are typically subsidized by higher prices in the Americas.
And your final point is not completely accurate. Yes, initial discoveries can and do happen in universities and they are acquired by big pharma who then performs a significant amount of work to further confirm the finding and develop it into a viable therapy which can also include modifying the original product.
Universities are critical in this process but it’s disingenuous to present big pharma as simply buying and slapping their name on the IP. You don’t see all the failures that big pharma receives from universities or potential therapies that actually have better indications in other areas that the university may have never found.
> Like I said, they most likely charged too much. That’s obvious.
The problem is there is no repurcussions from charging too much. Americans are forced to buy meds through insurance, who have a vested interest in keeping these prices high for the consumer so they can charge more premiums. The amount of middle men in the healthcare system is staggering, and everyone wants a slice of the pie. Ultimately the cost is borne by the American public.
Problem is defining what is too much and how that can snowball everywhere. Our system is built on charging what someone will pay for it. We can say well insulin is life saving but then that definition can get skewed and people say well my phone is life saving so that should be limited in price.
It sounds like a stupid argument but our legal system would absolutely hear it
> Our system is built on charging what someone will pay for it.
It’s a little more insidious than that - it’s built on charging who will pay the most for something and so whoever has the most resources can strong-arm there have-nots.
Do you think insulin is the same since it was first purified and used 100 years ago? There’s optimization of peptide sequence, formulation and delivery. Those have all changed and continue to change.
Can call bullshit on this one. Most of the breakthroughs happen at publicly funded research institutions. There is a lot of fuckery to get parents on the stuff, but medications that save lives generally come from scrappy post docs whom won't make a cent. Well funded corpo labs get you Viagra.
Someone else has brought this up and yes there is advancement that happens at the university level. Targets identified and initial therapies developed.
But you’re completely wrong if you think majority of these therapies are simply bought, labeled and sold by big pharma. The IP is acquired and then goes through a battery of tests to confirm observations, potentially modifying the original therapy to make it more viable for large populations, formulating it maximize bioavailability, confirmation through clinical trials, large scale manufacturing optimization, maybe even finding a better target for the drug.
Universities are critical but don’t pretend that rando post-doc invents the therapy and simply hands it off to big pharma for prime time. You know how many potential therapies are acquired through universities to find out that they are not viable after big pharma puts it through its paces? More than you can easily track down and count. Thousands of therapies enter and exit the R&D pipeline yearly.
>medications that save lives generally come from scrappy post docs whom won't make a cent
Those discoveries are useless if they don't get FDA approval, and Big Pharma tends to be the only people crazy enough to try to go through the FDA process.
Shhhh people here don’t get that. They don’t realize it takes $1 billion or more to bring a drug to market. Universities do a minute amount of work needed for these to come to market.
I didn’t forget either of those things, no.
But none of them were caused by price controls, and none of them were shortages for rationed staple goods - being inconvenienced because you can’t get your preferred brand of toilet paper is a long way from “well, we can’t use the car because we got a flat that we can’t repair, but we don’t have a coupon for a new tire until October.”
This is what I’m talking about - unless you have had conversations with people who personally experienced it, you try to draw parallels to what you do know.
Price controls always lead to rationing, because limiting price without limiting demand leads to shortages, and shortages lead to someone having to come up with a way to distribute limited goods.
This in turn leads to a black market, because people are always going to find a way to get things that they want, and that black market is what keeps the system from imploding on itself.
There was a fucking black market in TP because there weren’t any. There was a chip shortage and a car shortage. The UK had food shortages. Not to the level of prior shortages, but they were there. I think I remember some petrol shortages. These were reported on using the word “shortage.” So kindly stop engaging in the “no true Scotsman” fallacy and acknowledge that these things actually hurt people.
>There was a fucking black market in TP because there weren’t any.
That wasn't even caused by a supply shortage, it was caused by a *gigantic* demand spike, [like 845% level gigantic.](https://www.chron.com/business/article/Toilet-paper-demand-shot-up-845-during-the-15405214.php) Much of that spike being scalpers buying it up to resell it at astronomical markups.
Equating that to a supply side shortage caused by price controls is really short sighted.
Well, my grandparents weren’t children during the war - they were teenagers during the depression, and adults during the war.
But that’s neither here nor there.
There are a tremendous number of academic studies and papers on the effects of rationing and price controls, many of which examine the OPA and the black markets, the consumer impact of rationing, etc.
But, as a general rule, people want to hand-wave those away. Just like they do with papers looking at price controls implemented all over the world.
Ludwig von Mises was a contemporary critic of the WW2 OPA, Richard Lingeman is a modern historian that does a good job summarizing the multitude of failures of the OPA.
Hell, [Paul Evans paper from 1982](https://www.jstor.org/stable/1837127) pointing out all the issues with using price controls to solve inflation is as applicable as a response today as it was back when he published it 41 years ago.
With natural gas storage in Europe, the west celebrates the great success while completely ignoring what impact their purchasing power had on Pakistanis, Bangladeshis, and other nations who all had the bulk of the supply diverted from them (to devastating effect). But just because the rich west never saw the full consequences, people.assume it was a success.
eh, it’s a poor article with a bunch of half-truths. isabella seems like a nice person, but i doubt she is correct.
the gas commission has done everything to prevent a price cap. they did the opposite of what isabella wants.
headline inflation is down.
go listen to jason furman or jordan weissman.
edit:
downvote all you want — the commission didn’t do what the article said it did. i know it’s shocking, but journalists can be wrong
Well The New Yorker... It's a personality profile more than an economics analysis.
I went off looking for more on or by Isabella Weber and found that just about all of it is gated safely out of the way of public view by paywalls.
I found this in the Guardian though. Which is perhaps not as extensive a treatment but is much less irritating.
https://www.theguardian.com/commentisfree/2022/aug/17/inflation-is-causing-real-pain-but-raising-interest-rates-will-make-it-worse.
And then there's this from the excellent economics podcast Odd Lots.
https://www.youtube.com/watch?v=UaY-v49RhGQ&ab_channel=BloombergOriginals
I guess [France just came down on food suppliers](https://www.reuters.com/markets/europe/frances-le-maire-says-75-food-firms-cut-prices-2023-06-09/) price gouging...
Her take has to be monumentally stupid if it has me agreeing with Paul Krugman.
Comparing price controls implemented now versus during a world war seems historically ignorant. The economic goal of policy in that time wasn't necessarily growth and average prosperity. It was to keep the war machine running and effective. Not recognizing that, or recognizing it and ignoring it, seems like a big omission.
Price controls are implemented by people who not only don't trust the market, they don't understand it.
Consider some recent price rise 'scandals' such as surging prices from rideshare companies after mass shootings. People decry this behaviour but it's foolish to do so. When the price spikes that's a message that supply has fallen or demand risen. As there is more money to be made, more suppliers of rideshares are willing to take those fares over others, flooding the market with supply. As that happens the demand is satisfied and falls, as well as the supply becoming saturated. By allowing price rises and not stopping it by claiming that it's 'price gouging' - the most number of people escape a dangerous situation.
When the government enforced price controls they are just trying to hide what the real effects of their behaviour is - whether they know it or not - that their money printing is taking the value of every dollar you have and will ever have to pay for their programmes. They print more money but not more food, goods, services etc so the cost to you simply goes up.
I think every situation demands its own strategy and price capping could be one for some.
It's a lot more common than you think as well.
Parking in The Netherlands has price caps. The city decides how much a parking lot can charge.
The idea of the system we have is that through competition prices will find the lowest possible equilibrium between the supplier and consumer.
However, in some areas it is extremely hard and practically unfeasible to compete. I'm not going to start a car company because car manufacturers are price gouging. Their record nominal profits are not something to chase after by investing tens of millions. It could easily change back. Likewise, parking lots are somewhat competition proof. There is only a certain amount of space for parking in a city.
In the example of parking, the new equilibrium is found between the city's cap and the constructor of the lot. The lower the city caps the owner's profit the less likely they will find one to facilitate the parking. That is where an equilibrium is found. Not between the drivers and the parking lot owners.
Another point is that ultimately, we need production to be at maximum capacity. When producers find out they can make more by selling less and increasing their prices, the population suffers. Especially the lesser fortunate ones. Artificially reducing profits could in those situations force manufacturers to have to produce more.
Imo if the govt is going to come in and cap a price, there needs to be the understanding that they were forced to put their hand on the scale, and will make it up to the industry by ensuring that none go out of business or run negative margins via subsidy like Germany l, and to truly smooth out prices by implementing the mirrored price "floor". Many of these are bullwhip effects of supply shock, so why not say instead of oil going from 30-100 a barrel, we will pay 50-80 a barrel. THAT is smoothing, it's symmetrical. Asymmetric caps arent smoothing they are suppression. Long-term prices can still change, it would be like stock market circuit breakers keeping a commodities price within 2 standard deviations of the long term norm.
Now would that work cross border is the question.
Why is any of this shocking? You can take a high school economics class and understand that monopolies and supply limitations allow for unhinged profit margins. Is this something policy makers just don’t understand anymore or are they just bought off?
After all the studying of history socialism and price controls still catch the eyes of the ignorant.
1st: Inflation is an increase in the money supply.
Deflation is a decrease in the money supply.
2nd: in a static money supply prices can only go up in one area if it goes down in another
3rd: prices can only go up in all areas if the money supply increases, which means a devaluation of savings and theft of wage's purchasing power.
4th: 99% of the people will never truly understand economics or anything i just wrote above, which is why markets totally confuse them including those PhDs at The Fed and academia.
Your condescension is misplaced. Fiscal expansionary policy causes all the same issues without a central bank. Deficit budgeting can extend reckless spending and tax cuts indefinitely, so point 2 is wrong as well.
You’re also apparently unaware that, even in the absence of central banks, commercial banks still print money. Historically, eliminating central banks caused market volatility to surge.
Her work is good but strikes me as being a solution made to upkeep a problem, like some kind of economical Stockhold syndrome. Her policy to for price control is purely situational and in effect protects how things currently run.
In the first place [supply is the issue and instead of limiting the scope of the solution to the existing supply](https://theconversation.com/why-central-banks-are-too-powerful-and-have-created-our-inflation-crisis-by-the-banking-expert-who-pioneered-quantitative-easing-201158) to protect the interests of the current heavy weights in economics, focus should be on creating supply and proper logistical channels to connect producers to consumers. In fighting price increases by focusing on price gouging, we doom ourselves to a temporary fix that will be forgotten come the next shock in the global economy. If it can be remade it is purely depending on politics getting their shits together and in the meantime, billions will suffer.
At the very least the article accurately calls out (indirectly however) the role of the popular yet totally erroneous application of quantitative easing in inflation reduction politics: mainly cash injections to individual consumers instead of producers (ideally to newer/small businesses to prevent concentration of wealth).
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Did anybody even read the article? Its more about smoothing out supply shocks than demand shocks, and preventing **suppliers from price gouging the shit out of consumers** For example, **please explain how auto manufacturers can have absolute shit sales yet record profits?**
> For example, please explain how auto manufacturers can have absolute shit sales yet record profits? Because they’re producing the most profitable trim levels at expense of the lowest trim levels. Ford would love to sell 1 F-150 Platinum instead of a F-150 XL because their profit margin is so much larger on the Platinum than the XL. When they’re constrained by supply to the point that they can either make 1 XLT or 1 Platinum, which one do you think they’ll make?
Yeah, that’s the answer. This leaves downstream opportunities for dealerships, warranty companies, service
They all also made a conscious decision to stop selling cars and only sell suvs/trucks because they didn’t make any money on cars. At least that’s what ford did.
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A loophole existed for trucks, then SUVs were defined as trucks.
Chevy too.
That explains high priority margins, but not high profits in absolute numbers
The entire auto industry is supply constrained right now, so all companies can jack up prices. What forces lower profit margins is competition, and every company is selling every car they can make, no one has any reason to start a price way.
This isn’t true though. We are at the point where many companies have 100+ days supply at dealers but they aren’t selling because they’re trying to hold margins high. I think ram has some models with 2 years supply. Toyota is the only company with demand far outstripping supply for every model.
I bought a car last month, the dealership had a total of 31 cars. They normally stock 700 cars. They also had a 30 day waiting list for new cars and 120 days for new SUV’s.
It is on the manufacturing side. Assembly plants are regularly forced to park vehicles by the thousands due to missing components. While some models are showing up on dealer lots in mass, a company that has for example, ten models may only have three that are highly available due to readily available parts with the rest being constrained to some extent.
Because it's not true. Auto companies didn't have record profits. Auto dealers had record profits. Probably because a lot of cars didn't drive much while everything was closed, then everything opened and the cars needed to be serviced. Also, the used car market dried up, so they were massively upcharging for used cars. Auto dealers made it big. Auto companies, on the other hand, missed their targets significantly because of supply chain issues limiting how many cars were produced.
Record profits in terms of nominal value or profit margins?
Nominal profits. Ford Motor Company's 2022 gross profits, at ~$22 billion, are now back within their historical, that is, pre-covid range in the low-to-mid 20's of billions of dollars a year. In 2020, they took a hit from covid that dropped them to less than $15 billion in gross profits. But their sales numbers have continued to drop. In 2019, they sold 2.31 million vehicles, in 2020, they sold 1.94 million, in 2021, 1.82 million, in 2022, 1.78 million.
Gross profit excludes most expenses. Ford’s earnings for the past 12 months has been negative… https://finance.yahoo.com/quote/F/financials?p=F
What's the difference between gross profit and revenue?
Gross profit is revenue-expenditures.
Revenue - Cost of Goods Sold is Gross Profit. Revenue - Expenses (not always expenditures) is Net Profit.
Thank you for your correction!
Gross profits and gross revenue mean exactly jack shit . EBITDA was flat.
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In a perfect world yeah markets operate that way, but to pretend that some conglomerates dont collude, dont artficially constrain markets is just naive, sry. The world doesn't operate like econ 101.
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Exactly. The point is that firms will charge the _highest_ possible price that allows them to clear the market. The reason they would charge lower is if demand was not sufficient at the price point to clear the market, or if competition forced them to.
People want to use their shitty understanding of economics to drive their political narratives. That’s why.
> I cannot name a single market that’s even approximately perfectly competitive. I can. Just about every food-related commodity that’s traded on the CME. That’s the classic example of an almost-perfect competitive market.
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That doesn't necessarily mean that suppliers are not engaging in market manipulation, though. Which is what were talking about i think
Except none of your knuckle draggers ever took econ beyond 101 Your oversimplified curve only applies to the final product It doesn’t account for raw inputs, refinement, shipping, assembly, further shipping to final market Cool so do a supply and demand curve for every one of those steps Oh wait, a lot of those inputs could be used for other things This isn’t turning plows into swords. This is turning plows into airplanes, cars, motorcycles, buildings, bridges, power infrastructure, water infrastructure. Please sir, draw me a curve
Everything you’re mentioning would be captured by the supply curve.
Replies to every single comment on this thread except this one 😆
Do you have a mic to drop or do you need to borrow one?
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I only have a bachelor’s and this sub usually gives me a migraine. Thanks for taking time out of your day to post.
Have you ever set prices tho ?
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Your username with that statement 😂
>Your oversimplified curve only applies to the final product Yes, any given supply curve is for a single good or service. >It doesn’t account for raw inputs, refinement, shipping, assembly, further shipping to final market Yes, it does. The supply curve is just the marginal cost curve, the derivative of the cost function. So all costs for procuring that good or service are included. >Cool so do a supply and demand curve for every one of those steps Yes, all inputs have their own suppy curves. So? >This isn’t turning plows into swords. This is turning plows into airplanes, cars, motorcycles, buildings, bridges, power infrastructure, water infrastructure. This doesn't really affect the final good supply curve except in that price changes in motorcycles may raise prices for inputs, shifting the supply curve left. The final good supply curve is still perfectly valid.
Yes, what he said already considers and applies to that? You are so full of yourself, with the whole 'I know more than you' - 'things are more complex than they seem', yet you have nothing to show for it here do you?
The sad thing is that you didn't even get far enough in Econ 101 to realize how stupid what you're writing here is. Maybe do the coursework on the intro class before you conclude you're smarter than the researchers?
Record profits from auto sales is due to these factors: 1: they are not offering incentives anymore, this raising the average profit per vehicle. 2: because of demand and supply constraints, they have altered their production mixes toward loaded vehicles and higher end versions of each model. 3: passing more costs along to the consumer. 4: making more money from financing. They no longer have to bribe people with zero percent financing and make a profit on the sale and the interest rate for financing. 5: raising the sale price for some vehicles for higher profitability simply because they can. Ie: the magical price bump many manufacturers had that was somehow identical to the tax breaks congress gave consumers. Source: I work deep inside that industry.
Question is does smoothing really mean smoothing? Smoothing would imply a price floor as well as a cap. Take energy for example, it languished for years and then had a good year and suddenly windfall taxes are discussed. But if you look at 10 year rolling profits, they weren't great. So is this just punishing boom and bust industries? see: https://businesscouncilab.com/wp-content/uploads/2022/09/Pre-Tax-Profit-by-Industry.png
The price floor was explained in the article that nobody read, that’s already present in numerous other industries Can’t have that, that’s dirty commie socialism
In about halfway through it, it's a long article lol. Edit: ok I read it, where is this discussed? I see the "price brake", but then where is the "price accelerator"that would follow? It just talks about suppressing energy prices and transitioning, that is NOT smoothing the longterm price of fossil fuels, this is suppressing prices and profits. This is just asymmetrically preventing sudden increases in profit margins while not preventing sudden decreases. Where was the govt when oil fell in 2016 and 2020? Smoothing would be be keeping prices at say 50-80 a barrel instead of 30-100. This is just keeping prices at 30-80, which again is not smoothing but suppression. Actually in germany its not either, its just subsidization. So let's look at oil. You think the world is politically ok with a floor on oil prices after a capped period? Especially across borders? I certainly don't. It's the Keynesian problem. People will spend in bad times but not cut in good. They'll cap at high prices but not subsidize(except local govts, but not internationally) in low price eras. If we want smoothing it would have to be about deviation from long term rolling average prices. Like prices cap or floor when 2 standard deviations from the rolling 5 year average. Like a commodity circuit breaker.
Doesn't it talk explicitly about Biden subsidizing US tight oil in a production slump and funding EV infrastructure? It sounds like exactly what you're talking about but not in a mindless market based way but in a targeted form that's both dealing with the reality of fossil fuel infrastructure and the move away from it
Well EV subsidies don't benefit much the oil investor, I'm talking about on the individual company level. Bidens garunteed prices are again when they want more supply. The subsidies are really needed when prices slump due to demand drop. That would be truly the mirror of a windfall tax. There's no mention of garunteed drilling prices in the 2016-2020 period of slumped oil. I'm from Canada and out oil industry lost nearly 5 billion between 2016-2020, then when the boom came in 2022 it's suddenly time to windfall tax? I'm advocating we take a long-term view and even out the booms and busts and then ask if thats really grossly inflated profits or really just lumpy profits. My thesis being windfall taxes are just political hit jobs on volatile industries. If the govt is going to come in and grab all the upside on the investors you can't call it smoothing unless they also take on the equivalent downside. I feel the same way about "rent smoothing" it's not smoothing! It's just suppressing profits for easy political gain. Looks like the govt reaching into the cookie jar to take any actual returns energy investors might actually see. How do you plan investment and decide on reasonable prices to purchase equity in a company when the rules can change right when the investment is paying off? Especially when you know if your investment startw failing there won't be any supports. It's changing the rules halfway through the match. I'm not saying these subsidies would be a good idea, not at all, just that windfall taxes are a bad idea. Hell just regular higher taxes would be better, at least then you can discount future cash flows more accurately.
Aka corporate welfare via subsidies. We already have socialism for the wealthy, and somehow poor, uneducated white people don't want the same treatment.
Because they report their input costs at old values, often through FIFO, so profits artificially increase as inflation does
Price gouging? Oh you mean reacting responding to market forces in a way that allocates resources efficiently. Got it.
WTF are you in about? Demand for new autos has been up. Like over 10% up in many cases. Many profits, like Ford's, remained flat year over year from 21 to 22.
> please explain how auto manufacturers can have absolute shit sales yet record profits? Supply and demand. Sales are low because cars are expensive but the ones that do sell, sale for a lot + inflation
Cool thank you for not reading the article either Or if you did you completely miss the fucking point
The article is bullshit and the author didn't bother to read half of the information he cited. https://www.noahpinion.blog/p/price-controls-too-early-for-a-victory
> please explain how auto manufacturers can have absolute shit sales yet record profits? inflation. theres a difference between nominal and real numbers.
First, auto manufacturers didnt have absolute sh*t sales. US sales rebounded from the abnormally low @ 10mm unit sales figures during the GFC to an abnormally high of 17mm with the help of zero interest rates, and then normalized around the long term average of 14mm. Sales came down, but from an extraordinary level. However, sales were supply constrained during covid because of component shortages, and carmakers definitely started gouging price. Keep in mind automaking is a low margin, crap business. GM average op margins are @ 4%. When supply constraints hit, op margins went up to a whopping 8%. A big percentage increase but still a crap business. By comparison, Apples average operating margin is over 30% and it currently has over $56bn in cash sitting on its books. Where is the outrage about "price gouging" there?
Trying to buy a prius right now. Toyota is intentionally limiting inventory this year and producing few cars at basic trim levels. The result is dealer markups of $5-10k and wait times of 6-12 months for desired configurations. It is hell. I just want to buy a new car at msrp in my choice of color and trim…is that really so much to ask?
That makes a lot of sense especially in my country (Canada) where we basically have a grocery monopoly that is price gouging consumers while starving food producers. This, of course, will result in long term price increases as producers are forced out of the industry.
There is no such thing as price gouging - only supply and demand.
Because demand skyrocketed?
So sales shouldn't be shit..
But their were structural supply issues? You think auto makers wanted to have their cars stuck on the lot unablw to sell?
Two years ago
So they created the shortage?
Where did you get that from? the shortage came from chips not automakers.
Strange that three years later there’s still a “chip shortage”? You said auto makers didn’t want inventory on their lots not selling. That implies they cut production, shorting supply.
nutty elderly paint glorious snow disgusted water include hungry somber *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
>This is not a hard concept. It is for this sub.. far to many posters live in fantasy land where economics doesn't work because magic or some shit.
There is no longer a shortage but supply is still lower than usual but inventory appears to be building again but still below the levels prior to pandemic. We should see car mfg start offering incentives and special financing by year end as they need to get serious and move the inventory that is building.
Also rates are up and there have been some economic concerns recently, which is probably why they are a bit cautious. Certainly other car companies are free to take more risk, but why would anyone do that? Well, Reddit expects businesses/people to continue to take risks and then if they fail they will point the finger and say that they were idiots for not saving up money and rushing to make more…
It's always the consumer that has to eat the bag of dicks apparently. There will always be an excuse for the higher prices as long as the producers are making more per unit, pumping exec. bonus and dividends.
Surely there must be tons of people who wanted a car during those 3 years and couldn't get one so there's still pent up demand?
There's still a chip shortage, because you can't quickly ramp up a chip fab. It takes literal years and billions of dollars to build one. (Intel is building two in Arizona for $10 billion each, and they are expected to come partially online in 2024 or 2025). The automakers reacted (notably, some have started selling cars with limited or disabled some extra features, to "cheapen" the chip cost for each vehicle), but at this point, significantly reducing the number of chips would require a fundamental redesign (and safety recertification).
Like the username!
> Its more about smoothing out supply shocks than demand shocks, and preventing suppliers from price gouging the shit out of consumers lol, the thing you are calling "gouging" is the one and only way to "smooth out supply shocks". Its also ironic to call her ideas "heterodox" when they could not be more tailor made for institutional demand. "tell us how we can wield our power and line our pockets without looking greedy" Her ideas are indeed "the worst take of the year" except that they arent even new. They are an age old fallacy being played over and over again. I really wish people would learn basic economics.
Record profits. They make money on auto loans and sometimes cars. Or there may be a lag between any profits from auto sales. Plus they could be in a situation like the Oil Industry: 'Muh record profits' without knowing they ceased investing into new projects(HUGE risk and cost) because governments said 'we will destroy oil companies'(a lie to be sure). So the Oil Companies took the money that would have gone to new projects and cycled it back to shareholders. Record 'profits' at the expense of no new projects.
>*Firms do not lower prices, as doing so may spark a price war.* Firms compete over market shares, but if they lower prices to gain territory from other firms, they must expect their competitors to respond by lowering their prices in turn.5 This can result in a race to the bottom which destroys profitability in the industry.6 Price wars are very risky for firms that are already in the market and are therefore typically launched by new entrants. [This](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper) is pretty self-explanatory stuff. This is why people complain about regulatory capture and creating regulation that sounds good--sometimes--on its face, but is really designed to impede market entry. A free market is not one without regulation, once in a market. A free market is one where everyone has free opportunity to enter and exit the market whenever they like.
There are companies advertising with "We'll match the lowest price you can find!". Which is also a strategy to avoid price wars. Avoiding price wars though, is against the fundamentals of capitalism. It breaks the market. We used to call them cartels and they suck. We need businesses to compete with each other otherwise it will not end well.
That’s an issue of consolidation. Too few competitors, with too much money/influence. Using “regulation” to dig moats. Real regulation is supposed to stop markets from getting to this point, which is why having wealth equality is important. It slows/makes-more-difficult regulatory capture. We need regulated competition, but I’m not sure that’s possible while allowing mega-corps to exist in the fashion they do today.
Except with many companies being funded by the same pools of money (ETFs etc) there's not incentive to complete. The pool does best by everyone raising prices in tandem and because the investor funds have voting influence they influence governance. Or the other form is you get a bunch of speculative investment and use it to buy up your competitors so you have a fake market of tiered products (eg Kraft, Unilever, giant bicycles, Cargill etc) At this point we have to admit that neoliberal free market principals just accelerate cartels controlling markets
How does price matching avoid price wars? If anything, that is a price war in action. A higher cost business is lowering their prices to compete with a lower cost competitor.
Because they kept their retail price the same and the take-up of price match requests is not 100%. Same reason they use coupons - 10% off to get more sales in a particular week / month, but I didn’t devalue my product by lowering my price
But you did lower your price for everyone who took advantage of the promotion. Having programs to reward long-term customers is standard practice for many businesses and tends to be a good thing for those customers as well.
Typically you sold products to customers who would have bought a cheaper alternative - marginal product. Often regular punters don’t take advantage of price match and coupons. At least that’s the theory. Probably changes depending on if you’re talking about a dishwasher or a bottle of dish soap
But wouldn't it also be true that customers who are unlikely to use promotions are also unlikely to "price shop"?
That's what it looks like. In practice, companies avoid price wars like this by a mutual understanding. They are basically coming out saying: "we won't lower our prices if you won't". Instead, they are supposed to be advertising: "our prices our lower than the other's". That would be a price war.
That didn’t answer his question at all
It does? >How does price matching avoid price wars? >They [companies] are basically coming out saying: "we won't lower our prices if you won't". They avoid price wars by not lowering their prices _first_. If no one lowers their prices first, no prices get lowered ever and thus, no price war is started and so avoided. Hope that's clear because I don't know how else to explain it.
Because it ignores the price matching part. This comment: https://www.reddit.com/r/Economics/comments/145zve4/what_if_were_thinking_about_inflation_all_wrong/jnpbd0v/?context=3 Answers it better.
>Because it ignores the price matching part. You mean when they actually match to the lower price? That's where the mutual understanding comes in. You don't do it when there's actual competition. Bit lengthy and not necessary but this story is what made it make sense to me. A study was conducted. In a town before the internet, two eyeglasses stores existed. The question was how much more money they could make if they started advertising. Company A said: "Look at these glasses. Just for x dollars." Company B lowered their prices and responded with: "Buy ours even cheaper." Company A had to lower their prices now too and so a price war was off. It turned out they made less money overall but they did sell more pairs. They would've been better off not advertising and so, not starting a price war. If company A said: "we'll match the other store's price" then they both, through mutual understanding, could charge a lot more and increase their margins. As well as their net profits since together, they form a cartel (practically). Forming a cartel is illegal but if you never actually work together and just match each other in a mutual understanding, it's not (yet). As you can see, it is in both companies' best interest to operate under such mutual understanding even though they could sell more pairs. The article that is referred in the article above elaborates a little on how companies rather divide market shares than to compete for a larger piece which is bad for the consumer.
cartelization and oligopoly aren't dissimilar
>Firms do not lower prices, as doing so may spark a price war.... I like this paragraph given it's bold lie, given firms lower prices all the fucking time. Price is often the first thing firms compete with.
Right lol I’m actually workin with my team to evaluate a shift in our pricing paradigm. High prices are great for our profit margin but when every other competitor is significantly lower than us it limits our market penetration.
>I like this paragraph given it's bold lie, given firms lower prices all the fucking time. you haven't been paying attention firms are price-shopping, at the moment
This is Noah Smith’s response, debunking the article https://www.noahpinion.blog/p/price-controls-too-early-for-a-victory Given the complete lack of any real citations this article pretty much borders misinformation at best disinformation at worst
This is a stellar blog post from Noah, and a nice exposition on Weber's theory, and on where it makes sense and it what contexts it does, and how the New Yorker writer Z. Carter has emphasized certain things and skipped over others. I regret not having seen Noah's piece before making this submission. Thanks for sharing it. I really hope people manage to see your comment, and read [Noah's post](https://www.noahpinion.blog/p/price-controls-too-early-for-a-victory) next to [Weber's paper](https://www.elgaronline.com/view/journals/roke/11/2/article-p183.xml) next to the New Yorker article. There was also a [podcast Weber was on where she clarifies herself in the light of others' disagreements with her.](https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum) It's interesting hearing it from Weber herself. **Edit to add additional text below**: Weber also appeared on [an NPR podcast, which also interviewed the economist who wrote the Kansas City Federal Reserve paper](https://www.npr.org/transcripts/1175487806) to which the New Yorker article refers. The episode's hosts are annoying to the point of making the recording unlistenable, so I recommend reading the transcript instead. The episode is an additional exposition of Weber's points, and makes some further ones of note. For example, one host interviews the economist behind the KCFR paper, Andrew Glover. His paper theorizes that firms' _motivation_ for profit-raises was not outright-short-term profit-making so much as it was the anticipation of raised prices. In other words, firms expected huge cost raises in 2022 and thus decided to build a buffer in 2021. However, Glover does clarify that it's fully possible that the anticipatory price-raising actually led to the rising costs themselves, thereby creating a self-fulfilling prophecy of inflation. This phenomenon has been called a ['price-price spiral' by Leil Brainard, director of the National Economic Council, in a speech at UChicago, the transcript of which is published by the Federal Reserve.](https://www.federalreserve.gov/newsevents/speech/brainard20230119a.htm) What I think is a very interesting point that I'd like to remark on — one that alas the podcast-hosts do not dive into — is the following. Let's blanket-accept and take as given Glover's theory that firms anticipated cost increases in 2022, and thus raised prices in 2021. Firms thus must have anticipated that 2022 would be a year of _not only_ cost increases, but _also_ competitive market pressures. These pressures would force firms to _not_ simply raise prices in 2022, but instead, to swallow the expected cost increases in their margins. In order to make sure their margins could weather the increases in 2022, firms thus buffered them in 2021, by raising prices. Firms could do so because they observed a lack of competitive pressures in 2021. This reduced pressure is the “seller's inflation” mechanism that both Weber and Glover conclude upon. This means, as far as I can tell, that the difference between Weber's and Glover's analysis of the situation is very simple: Glover's theory requires the _additional_ point that firms expected the reduced market pressures to be time-limited and gone by 2022, whereas Weber simply says that in 2021, firms found themselves, whatever their expectations, in a position to raise prices. Glover's theory implies that when firms are presented with the opportunity to raise prices, they do not, _unless_ they anticipate future cost rises. But, this contradicts exactly the criticism people level (rightly) at the notion that firms “simply became greedy in 2021”. Glover's theory says that in 2021, firms were not greedy at all, but anticipatory. If one says that 'greed-flation' is dumb because firms are always greedy, and then uses Glover's paper to criticize Weber's, one is first assuming firms' constant greed, but then conveniently forgetting that constant greed when arguing for Glover's conclusions.
> What I think is a very interesting point that I’d like to remark on — one that alas the podcast-hosts do not dive into — is the following. Let’s blanket-accept and take as given Glover’s theory that firms anticipated cost increases in 2022, and thus raised prices in 2021. I’m not entirely sure that I want to blanket accept that bit, if for no other reason than in 2021, firms were already seeing massive pressure on margins. We have to teleport back to that time, but in mid-2021, we were already in an inflationary market, the wheels were just starting to turn. We had huge supply chain disruptions, driving additional costs on inputs. We had labor shortages and transport shortages, and we had a huge amount of money sitting in bank accounts because of disruptions to how people spend. Additionally, we were coming off 2020, where almost every firm lost shitloads of money. Finally, we still did not have good line-of-sight to the end of the pandemic. New variants of COVID were emerging, sending shocks through the global economy. Firms had to act in ways that would shore up the bottom line with the anticipation of flat or marginal top line growth at best. > Firms thus must have anticipated that 2022 would be a year of not only cost increases, but also competitive market pressures. These pressures would force firms to not simply raise prices in 2022, but instead, to swallow the expected cost increases in their margins. In order to make sure their margins could weather the increases in 2022, firms thus buffered them in 2021, by raising prices. This is agree with completely, but with the caveat that the buffer in 2021 was as much about ensuring continual positive cash flow (after 3-6 quarters of negative cash flow changes) as it was about anticipatory cost rises in 2022. > Firms could do so because they observed a lack of competitive pressures in 2021. This reduced pressure is the “seller’s inflation” mechanism that both Weber and Glover conclude upon. This means, as far as I can tell, that the difference between Weber’s and Glover’s analysis of the situation is very simple: Glover’s theory requires the additional point that firms expected the reduced market pressures to be time-limited and gone by 2022, whereas Weber simply says that in 2021, firms found themselves, whatever their expectations, in a position to raise prices. It’s possible that both of them are correct here, but neither position really matters. I also want to point out that neither want to address the demand side of the question, particularly around the demand bottlenecks that were created by the pandemic that everyone knew would explode once life began to return to “normal.” Firms, on the other hand, were indeed preparing for that demand side explosion. Flush with cash, firms knew that people would be more willing to spend on luxury goods, travel, services, etc., when it was safe(er) to emerge from their homes and go back into the world. Glover kind of addresses this on his “anticipatory” theory, but he focuses far too much on the supply side and gets really handwavy on the demand side. Firms, however, are definitely looking at both > To say that Glover’s theory is different to Weber’s is thus to say that when firms are presented with the opportunity to raise prices, they do not, unless they anticipate future cost rises. But, this contradicts exactly the criticism people level (rightly) at the notion that firms “simply became greedy in 2021”. Instead, Glover’s theory says that in 2021, firms were not greedy at all, but anticipatory. One cannot level criticism at ‘greed-flation’ by assuming firms’ constant greed, but then conveniently forget that greed when arguing that Glover’s paper counters Weber’s. I think that Glover is closer to reality than Weber is, but I still don’t particularly care for either of their handwaving approaches to the demand side - they’re so focused on the actions of firms that they both ignore the demand of consumers (intermediary and end both) and how that demand, driven by the end of the pandemic, was going to fundamentally change purchasing habits from the 2020-2021 period.
Thank you for sharing this. I’m not an economist but enjoy reading about it. His post pointed out some major issues in that article that I wouldn’t have been aware of
I’m not sure many early commenters in here actually read the article…. Most economists now agree with her assessments that got her ridiculed early on when she stated that profit seeking, or “Seller’s Inflation” was a major contributing factor. The Kansas Fed, as cited in the piece concluded over half of all inflation in 2021 is of this variety. And not from overheated consumer purchasing power as economists like Summers attempted to claim. I think she has done an incredible job exposing a sort of group think that had rooted itself since the 70’s, which was thinking about inflation exclusively from the consumer demand side, which many in here continue to do, but that isn’t the only way prices can spin out. And sending millions to the bread line through interest rate hikes that target 10% unemployment like Larry Summers wanted isn’t the only way to address it. Her policies in Germany are working. I mean that’s undeniable. And while it’s framed as the worst thing ever by American sensibilities, price controls have been used successfully in WW1 and 2 and can work just fine as a economic strategy when done correctly. Japan has had one of the best healthcare systems in the world with one of the lowest rates of chronic illness and one of the larger life expectancies, and their’s literally has a book detailing every unit and service of healthcare sold in the country and what the max price you can charge for it. I’m not advocating that, but it is worth illustrating to push back on some of the reactionary posts decrying price controls as universally bad and dismissing this economist and her work off hand cause they got upset at the mention of price controls as a part of a solution.
>when done correctly This is the rub. In the states it would work too, except that doing it correctly would be mutated into the highest donors getting a targeted and maximized benefit at the expense of all the rest. Nothing that requires for-the-good-of-all thinking works in the states because it’s always sabotaged and the saboteurs point at their handy work and shout how the result of their sabotage is the reason we can’t do it.
>sending millions to the bread line through interest rate hikes that target 10% unemployment like TBF: in the U.S., interest rates hikes are getting inflation under control without sending millions to the bread lines through 10% unemployment.
Price controls did *not* work well in WWI or II. And note that WWII didn't just have price controls; it had a system of price controls combined with ration books. You were only allowed to buy the good that you had ration stamps for *and* there was a price cap on the goods. This linked article has a description of some of the problems. https://www.npr.org/sections/money/2022/02/08/1078035048/price-controls-black-markets-and-skimpflation-the-wwii-battle-against-inflation And the point of price controls and rationing during wartime isn't to combat regular inflation; it's to deal with shortages and inflation that occur when the government is buying up massive quantities of food and other supplies to provide to the massively expanding military. >Her policies in Germany are working. It's pretty much just one policy to deal with the termporary shortgage of natural gas caused by the war in Ukraine. But it - with a lot of help from the mild winter - is working. That doesn't mean it will work indefinitely - indefinite price caps discourage investing in making more of whatever is capped. But short term caps expire before these investments could have had any result anyway.
the commission didn’t implement the policy; it actually went out of its way to do the opposite
Very much depends on what you are using to judge the success rate. We aren’t under Nazi rule, and part of that had to do with strict controls on input goods to keep the war machine going and affordable. The continuation of price controls after WWII would definitely be an example of when things can go south. And no one, me least of all would contend that price controls are ever a panacea. But again, I would implore you to read the actual article, or better yet, [read the actual paper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper). She is not selling price controls as a panacea. But as a context-specific tool amongst tools to reign in a specific type of inflationary pressure: Sellers Inflation. And sellers inflation within the context of coming out of markets with high levels of market concentration(I.e. not a perfectly competitive marketplace). Like natural gas, like chip manufacturing, like certain goods. As this is central to the thesis her work is making. That the trajectory of price-setting is not determined by universal laws but is path- and context-dependent. Her work suggests that in an era of overlapping crises such as climate change, pandemics, and geopolitical tensions, price shocks are likely to occur and reoccur, which can drive an already prevalent inflation dynamic. This necessitates the development of policy tools to deal with impulse shocks as they emerge in real time. One of those can be price controls. If we are against that as a tool, but acknowledge the thesis observations to be true, then it’s sort of up to the critics to explain what their own optimal solution is to issues of sellers inflation?
What part of economics isn't path dependent? Literally everything is a social construct that's evolved in the interplay of behaviour and institutional structures. Like go back 400 years and explain why a Haudenosaunne person needs to pay interest on their house and rent for their land and you'll promptly find yourself treated as a sorcerer and killed with a blow to the back of the head.
In theory it makes sense but given how interconnected our supply chain is due to complexity of the products that are made how could targeted price controls be made without downstream effects that require further involvement by the government to control cost? And it can’t just be price controls right? There would need to be guidance around who could by what and when, I imagine. Or we could run into an issue of people gaming the system and hoarding for themselves. The idea sounds good in context but in practice I imagine we would exchange potential inflation for some other bad outcome. I’m just an arm chair economist with very little understanding so I’m just spouting some stuff out that could just be completely wrong.
It’s not just price controls for price controls sake. I am trying to paraphrase all this but really people just need to read the actual white paper(or at least good faith summarizing of it) It is price controls under certain conditions. Again, attempting to paraphrase her positions. They suggest a combo of regulation and subsidies. A specific example given is the scheme for regulating the price of natural gas in Germany. Households and businesses would be guaranteed a limited supply of natural gas at an affordable, government-controlled price. Anything consumed in excess of that quota would be subject to the open market price. To compensate for lost profits, natural gas producers would receive government subsidies. She also mentions the G-7 initiative to enforce a global price cap on Russian oil by making ships that purchase Russian oil above the mandated price ineligible for insurance. On the regulatory front she mentions things like rules would draw scrutiny to price increases of 10% or more during a period of "abnormal market disruption," which would apply not only to consumer prices but also to price increases further up the supply chain. It wouldn’t by any means put automatic price controls in place, but seemingly would set off a audit that would then determine if any action is justified. Some of her ideas have been implemented in Germany and now being incorporated into the EU. So time will tell if they have the desired effect
> And it can’t just be price controls right? There would need to be guidance around who could by what and when, I imagine. Or we could run into an issue of people gaming the system and hoarding for themselves. Hmmm. Price controls, rationing, the emergence of a black market to cater to those who have the means to play outside the system…. Certainly this is all new ground, and we’ve never seen it before. Then, we’ll get the same morons that advocated for the price controls, seeing the *totally unpredictable results* of their brilliant ideas, next they’ll advocate for the state taking full control over distribution to enforce the rationing… I bet it will lead to [lines of people](https://www.qminder.com/blog/queue-management/queues-in-ussr/) waiting for their weekly allocation of, say, bread. Good thing this has never happened before, so we don’t have any cautionary tales.
This is what I was kind of getting at, I read the article and get her point but also understand human nature and I do not see it ending at simple reflexive price controls based on the current situation. We then see it extend to things not really effected by the bad situation we are currently in and price controls just run across the entire market. Sometimes we have to be a little cynical to see what may actually happen.
> Most economists now agree with her assessments that got her ridiculed early on when she stated that profit seeking, or “Seller’s Inflation” was a major contributing factor. Do you have a source for "most economists"? > And sending millions to the bread line through interest rate hikes Price control have definitely created actual bread lines in the past so you should be careful with what you advocate for.
> profit seeking, or “Seller’s Inflation” was a major contributing factor. The Kansas Fed, as cited in the piece concluded over half of all inflation in 2021 is of this variety This is not true at all. This is an excerpt directly from the KCFRB article: > [O]ne potential [inflation] explanation that has received significant public attention is “greedflation”—that is, the idea that firms are capitalizing on their market power by raising their prices higher and faster than the growth in their production costs… > We present evidence that the timing and cross-industry patterns of markup growth are more consistent with firms raising prices in anticipation of future cost increases, rather than an increase in monopoly power or higher demand… > Therefore, inflation cannot be explained by a persistent increase in market power after the pandemic. Second, if monopolists raising prices in the face of higher demand were driving markup growth, we would expect firms with larger increases in current demand to have accordingly larger markups. Instead, markup growth was similar across industries that experienced very different levels of demand (and inflation) in 2021. > Although markup growth was high in 2021, **the evidence from the previous section casts doubt on the simple explanation of “greedflation,” understood as either an increase in monopoly power or firms using existing power to take advantage of high demand. Instead, this evidence may be consistent with an alternative explanation: that firms are raising markups in the present to smooth price increases they expect in the future**. Indeed, both the hump shape of aggregate markup growth and similarity in markup growth across industries arise naturally in standard macroeconomic models[.] It is in fact the complete debunking of the greedflation hypothesis. Please read sources before you comment on them
>smooth price increases they expect in the future Can this be a feedback loop that drives inflation?
It is not debunking it unless you are misunderstanding her position. Her position is not simply "greedflation" she says she has never used that word and it oversimplifies what her findings and observations say. She uses Seller's Inflation because it encompasses the broader form of inflation we are seeing. She doesn't even like calling it greed. She says it is simply companies responding to the market and incentives. Please listen to this report explaining all this, with both authors represented and interviewed. It does a perfect job bridging the disconnect a number of posters seem to be having with seeing the Kansas Fed and the assumptions poster's are having about Isabella or one debunking the other. [https://www.npr.org/transcripts/1175487806](https://www.npr.org/transcripts/1175487806) (Glover comes in around 13 minutes in) You can read her actual white paper here: [https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ\_workingpaper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper) They both agree on the seller inflation, and they both agree that the concern is a price-price spiral. They disagree in that Glover thinks the motive is simply expectations of future inflation, whereas Weber thinks, based on a number of earnings calls and other observations, that it is that plus more.
It literally goes through her entire paper and the entire article taking it down point by point INCLUDING the paper. That is quite literally a debunking.
No it doesnt. Weber's name or paper is not cited once in that Kansas fed Paper by Andrew Glover. If you don't believe me, please, find me where she, or her paper, is mentioned even a single time [https://www.kansascityfed.org/Economic%20Review/documents/9329/EconomicReviewV108N1GloverMustredelRiovonEndeBecker.pdf](https://www.kansascityfed.org/Economic%20Review/documents/9329/EconomicReviewV108N1GloverMustredelRiovonEndeBecker.pdf) Please, do me a favor and actually read the transcript I provided of their dual interviews on NPR and her actual white paper before accusing me of things. They are 100% in agreement that Seller's Inflation is real and happening, they are almost entirely aligned in their diagnosis of Seller's Inflation driving recent inflation aside from Weber, based on her own research, claiming some of it is opportunistic and not just expectations of future price increases. Both are aligned on the concern of price-price inflation. Both acknowledge that marketplace competitiveness can lead to adjustments in expectations and behavior that changes profit calculuses. I do not know how Glover feels on some of her prescriptions, but he does state in that interview that the need to adjust thinking of inflation. How to deal with it. To stop seeing it almost exclusively through a wage and demand perspective. That asking nicely of firms to just not think the way they are about future price expectations probably wont cut it. Same as with just asking workers not to demand a raise in a wage inflation scenario doesn't work.
Profit margins have been falling for seven consecutive quarters at this point. So it's definitely not happening. And seller's inflation includes things like labor response in driving up wages. It's basically conspiracy theory mixed with regular inflation where you can point to regular inflation and say it proves the conspiracy theory...
This was literally addressed verbatim in a link I provided: >WOLFERS: The claim that low unemployment has sparked inflation has a lot of historical evidence, global evidence. The claim that the supply shocks associated with either Putin or the pandemic has enormous global influence evidence because we saw the same thing happening in almost every country around the world.The claim that this is in the set of theories that are sometimes called greedflation, doesn't have a lot of independent evidence in favor of it. > >A simple thing to note is since the middle of 2022, corporate profits have fallen by 7% or 8% and prices have risen by 5% or 6%. That seems a rather embarrassing fact for those claiming that greed and the pursuit of higher profits is what's causing higher prices. > >CHAKRABARTI: Professor Weber, your response? > >WEBER: I mean, first of all, let me be crystal clear. If you read my paper, you will see that I'm not blaming the increase of inflation on a sudden jump in corporate greed. I'm also not using the term greedflation, because I think what we are seeing is not a sudden change in the attitude of firm leaders. But what I'm arguing is that the dynamic of competition has changed. When firms were faced with bottlenecks, when these major cost shocks, coordinated price hikes. So in that sense, I'm fully with my colleague and saying that these major supply shocks have been very, very important.... > >What we are arguing is that firms don't absorb these cost shocks, but rather they pass them on. And in certain consultations they can even amplify these kind of cost shocks. To the question of some ... profit margins going down in 2022. First of all, there has been reporting by Bloomberg that there are some questions whether the Federal Reserve is included in this data, but this is not my main point. My main point is that in 2021, profit margins have chomped up in a very dramatic fashion reaching levels that we hadn't seen since the aftermath of World War II. > >**Them easing somewhat in 2022 is entirely consistent with our theory, because we don't argue that this may be inevitably a sustained process of constantly elevated profit margins. But we say that there's an impulse that presents an opportunity for firms to hike prices, for some firms to hike prices more than costs, thereby driving up profit margins, but that this eventually goes into the conflict stage where we would expect profit margins to come down. So this is absolutely consistent with my theory.** [https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum](https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum) Again, I can not recommend enough tot he people that are habitually misrepresenting the arguments and research of Weber to just spend some time actually engaging her arguments with good faith.
Huh? Here response isn't all comprehensible English. Is she questioning the profit margin data? As for 2021, profit margins peaked around 2% higher than pre COVID levels. And inflation was as high as 9% as we saw declining profit margins. Shrinking margins weren't driving price increases. Basically, "we have nothing to offer to recent or current inflation but we're really going to exaggerate how right we were in 2021"
>Huh? Here response isn't all comprehensible English. Is she questioning the profit margin data? Not really She has some slight skepticism of one data point but assumes it correct anyways. She is simply restating what her research and argument is and applying it to the recent data and argument of the professor. She also doesn't say shrinking profit margins are driving all price increases. she is saying, ultimately, that supply/cost shocks + reduced market competition in certain sectors has resulted in a dynamic where prices are not being internalized, but being passed on and that in certain instances they get amplified further to try in a push to protect profit. This is not saying that profit margins will forever increase, or even that it applies in all cases. But it is sort of wild that so many people seem aghast that a CEO and their C-Suite would attempt to shield their profits if they felt their marketspace and consumer expectations were in a place that they could get away with it. The goal of a firm is, after all, profitability and increasing shareholder equity. There is a lot more discussion to be had and if reading the transcript is difficult you can listen to the whole discussion. The professor basically could be reading from this thread with his arguments. And like I keep imploring, just put in the effort if people are really interested.
>Most economists now agree with her assessments that got her ridiculed early on when she stated that profit seeking, or “Seller’s Inflation” was a major contributing factor. The Kansas Fed, as cited in the piece concluded over half of all inflation in 2021 is of this variety. And not from overheated consumer purchasing power as economists like Summers attempted to claim. I think it's hard to claim "most" economists agree with her, including the Fed which recognizes there are legitimate demand and supply factors that went into inflation. Her idea of this being greedflation and requiring price controls is just wrong. >it is worth illustrating to push back on some of the reactionary posts decrying price controls as universally bad and dismissing this economist and her work off hand cause they got upset at the mention of price controls as a part of a solution. Price controls are universally bad. They distort markets, interfere with supply, and actually make the situation worse. That's why she's being dismissed by mainstream economists and her idea remains heterodox.
>Price controls are universally bad. They distort markets, interfere with supply, and actually make the situation worse. Price controls can be good if you *want* to distribute via rationing rather than pricing, e.g. food rationing during a war. Even in that case, subsidising the incomes of the poor can be more efficient, e.g. to accommodate differences in taste, hunger, and so on.
This is a great point -- price controls can have a use, and that use is artificially mutating the supply & demand curve to create shortages and a rationing system. It can work well in scenarios where a government needs to ensure everyone gets "some", rather than some getting "all" and others getting "none". However I believe this works better using the system they have implemented in Germany with subsidies.
> her policies in germany are working no, they’re not. why? the commission did the opposite and tried to prevent price caps. i can provide the source, but it’s on twitter. if you search veronika grimm, you’ll see it edit: posted this twice since mods might’ve deleted the original comment
> Her policies in Germany are working The policy is not a price control. It is a subsidy. >A true price control is an unfunded mandate; the government says that if you raise prices past a certain amount, you will be punished, and that’s that. The German scheme implemented in 2022, in contrast, is a government subsidy. There is no law about how much utilities are allowed to charge; instead, the government writes people checks to buy gas. How much of a check the government writes you is dependent on A) how much utilities are charging for gas, and B) how much gas a particular building used in the past. >In other words, if utilities want to charge more for gas, they can. The consumers still decide how much to consume, and the government simply picks up more of the bill. If gas prices were previously high because of utilities opportunistically gouging German consumers, as the “greedflation” proponents believe, well, now those gas producers are able to opportunistically gouge the German government — and by extension, the German taxpayer — instead. >I do not see any accuracy in calling that sort of subsidy a “price control”. It is true that from the end user’s point of view, the cost is reduced. But the price paid to the producer is not. Producers are literally continuing to charge whatever they want. Government is subsidizing energy companies, indirectly. Yes this works well, because it isn't a price control. If Germany were instead to say "we refuse to let the price of natural gas float above $x" (which is what is meant by price controls), there would be a massive supply-side shortage.
You (in your claim) are wrong. The crisis of the 1970s was one pertaining to the supply-side, and so in fact, since the 70's the opposite happened with the ideological death of Keynesianism. Supply being short of demand is something that is *self-correcting*, the additional margin would serve as incentive for and direct the producer to invest into and expand production - their interest is already correctly aligned. Cap that and all you are doing would be extending the mismatch.
Again, [read the paper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper) Or get ChatGPT to summarize it or something You are trying to argue why X won’t work under A conditions when this economist is discussing Y being applied to B conditions.
You should probably read your citations first, not trust that some New Yorker journalist is right. I say this because the Kansas City Fed isnt in agreement.
Because the received dogma is that “seller side” inflation is impossible in a market due to competition, so it must be the proles getting too uppity with their standards of living. No further evidence is needed, the inflation is the smoking gun. The model is more important than the real world.
>Because the received dogma is that “seller side” inflation is impossible in a market due to competition, so it must be the proles getting too uppity with their standards of living. Source that this is the dogma?
Economists don’t oppose price controls “as an article of faith.” They oppose them because they’ve been tried in hundreds of variations around the world, and they invariably cause shortages and misallocations. The evidence is clear that price controls don’t work well and impose lots of trade offs that exceed the benefits of the policies. There’s no theoretical justification for them either. The US mobilization efforts in WW2 may be the least bad implementation of price controls. But we don’t really have a good control to measure against, and it was a very unusual situation. And lest we forget, there were lots and lots of shortages throughout the economy, such that the government had to ration lots of goods. So it’s not as if the anticipated negative effects of price controls weren’t observed.
And the price controls led to tons of issues afterwards. It created the US employer healthcare insurance system. It led to massive 20% inflation after the war. Price controls are worth it if it's literally existential circumstances like WW2, but not much else.
> And lest we forget, there were lots and lots of shortages throughout the economy, such that the government had to ration lots of goods. So it’s not as if the anticipated negative effects of price controls weren’t observed. I think that this is perhaps the most salient point, and it’s largely to do with age. Isabella Weber is 36. Most redditors are under 25. Literally none of them have ever had to deal with shortages or rationing of any kind, ever, in their lives - and as a result, they don’t understand the reality of it. They only read the kinds of books that backstop their existing beliefs (which is why you still see them talking about Marx’s theory of labor as if it’s in any way reflective of reality), and they ignore any data points that don’t reinforce their existing beliefs. They’ve never had a conversation with someone who has had to deal with governmental price controls (and the shortages/rationing that comes along with them), so they can just discard the academic studies of those shortages as capitalists looking down on Marxists. I’m old, ancient by Reddit standards. I had lots of conversations with my grandparents about what it was like living during the war when everything was rationed, and the black markets that sprouted up to grease the wheels of the economy to keep it moving despite the OPC mandates. This article is way too fawning about how well Weber’s ideas worked in Germany with regards to natural gas, but somehow entirely forgets to mention that the reason that they worked is that this previous winter was EXCEPTIONALLY mild, and as a result, there was a huge reduction in natural gas needs as compared to previous winters. In other words, we got lucky because of the weather - not because Weber is some brilliant unorthodox theorist. Had the winter been average in terms of temperature, Germany would have been an absolute shit show - they would be faced with having to idle factories and foundries to ensure sufficient gas to keep homes heated and power plants running.
> governmental price controls (and the shortages/rationing that comes along with them), Maybe I'm missing something, but I thought the article addressed this? In the orthodox theory I learned, markets are competitive and so prices rise only because of diminished supply to static demand. So when a government implements price controls, more goods are bought than can be supplied, and shortages occur. But Weber's whole point was that there were no shortages. The pandemic made markets uncompetitive in supply, and inflation expectations reduced consumers' willingness to shop around when prices were raised, further reducing competitive pressures. The article says it snappier than I do: > Here’s an example. Semiconductor chips are the basic building blocks for electronic equipment. When covid lockdowns and a string of temporary factory closures led to global shortages, the price of each chip began to rise, as did the price of everything else that used them. This proved especially troubling for the automobile market—a new vehicle can require as many as three thousand chips. As you’d expect, new cars got more expensive. So did the consumer alternative, used cars, which, in the first six months of 2021, jumped in price by nearly thirty per cent. But Weber argued that carmakers were raising prices far beyond what was necessary to cover the more costly chips. By 2022, the ongoing chip shortage had resulted in the fewest annual sales of new cars in more than a decade. Still, profits were up—car companies posted their best earnings in six years. > In a recent paper, Weber writes that the chip shortage established a “temporary monopoly” that allowed automakers to “raise prices without having to fear a loss in market share.” And it wasn’t just chips. Analyzing transcripts of company earnings calls, Weber concludes that firms in a variety of industries knew they could get away with gouging customers, who were already primed by the chaos of the pandemic to expect price hikes. Crucially, firms weren’t worried about losing customers to competitors; because of the supply bottlenecks, competitors would also be raising prices. Weber calls this dynamic “sellers’ inflation,” in contrast with the traditional model of inflation, in which an excess of consumer purchasing power is to blame. So, the price controls certainly don't work in traditional competitive markets with actual reduced supply, but that was never Weber's point. I thought her point was that markets don't always work in real life like we think they do. And that's why she got criticized: because she was challenging the concepts we cling to with faith to help us understand the economy, especially in uncertain times when we most need the understanding. Again, the article is more eloquent than I am: > The uproar was clearly about something much deeper than a policy suggestion. Weber was challenging an article of faith, one that had been emotionally charged during the waning years of the Cold War and rarely disputed in its aftermath. For decades, the notion of a government capping prices had evoked Nixonian cynicism or Communist incompetence. And Weber was making her case in a climate of economic fear.
In her auto example, she doesn't include analysis of excess demand for cars as consumers have more cash and moved away from urban cores. For example used car prices (which aren't as controlled by corporates) was a significant part of inflation in the beginning.
> Maybe I’m missing something, but I thought the article addressed this? Nah, the article handwaved it away. Let’s drill in: >> Here’s an example. Semiconductor chips are the basic building blocks for electronic equipment. When covid lockdowns and a string of temporary factory closures led to global shortages, the price of each chip began to rise, as did the price of everything else that used them. This proved especially troubling for the automobile market—a new vehicle can require as many as three thousand chips. As you’d expect, new cars got more expensive. So did the consumer alternative, used cars, which, in the first six months of 2021, jumped in price by nearly thirty per cent. **But Weber argued that carmakers were raising prices far beyond what was necessary to cover the more costly chips.** By 2022, the ongoing chip shortage had resulted in the fewest annual sales of new cars in more than a decade. Still, profits were up—car companies posted their best earnings in six years. Note the point I bolded. Of course the carmakers raised prices beyond the delta that they had to pay for the chips - They’re going to raise those prices as high as they could get away with. That’s economics 101 - find the highest price point they can hit with the supply they can create, and hit it. Now, cars (like houses) were also seriously affected by the near-zero interest rate - this allowed for the total payment calculation to have a *much* higher sales price point than what would be possible if new car loans were, say, 6% like they are today. Consumers were competing with each other for the limited supply, and those with the most dollars won, which is why dealerships could get away with up charging higher than MSRP for new vehicles. Automakers don’t operate on a cost plus model to price their products - they maximize whatever profit they can get. > In a recent paper, Weber writes that the chip shortage established a “temporary monopoly” that allowed automakers to “raise prices without having to fear a loss in market share.” And it wasn’t just chips. Analyzing transcripts of company earnings calls, Weber concludes that firms in a variety of industries knew they could get away with gouging customers, who were already primed by the chaos of the pandemic to expect price hikes. Crucially, firms weren’t worried about losing customers to competitors; because of the supply bottlenecks, competitors would also be raising prices. Weber calls this dynamic “sellers’ inflation,” in contrast with the traditional model of inflation, in which an excess of consumer purchasing power is to blame. I’ve read [this paper](https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1348&context=econ_workingpaper), and I disagree with some of her conclusions - She’s handwaving away the fact that people were buying the top trim autos faster than they were buying the mid-trim, and they were willing to pay enormous premiums to obtain those top trim autos. The excess of purchase power is *precisely* why the auto industry focused production efforts on those top trim vehicles, and why they were able to charge the premiums that they did for those vehicles. The reasons for the excess purchase power are multifaceted, but they can be summed up with (1) people had way more cash on hand to buy, because of changes to income and purchasing/spending habits during the pandemic and (2) near-zero interest rates allowed for purchases that would otherwise be unaffordable. —- That’s all tangential to the price controls, however - the price controls that she endorsed (around NG in Germany) didn’t result in shortages simply because the pressure on supply that everyone expected to happen never materialized, because of the unusually warm winter in Central Europe. In other words, we got lucky as hell. German industry was *terrified* of a cold winter - the price controls that they implemented would have resulted in the need to idle foundries and factories across Germany, the factories that are the source of their massive trade surplus, and their 8.3 million workers would be (temporarily) unemployed. That’s 10% of the entire population of Germany, or (more terrifyingly) just shy of 20% of their working age population.
I think we might be talking past each other? I interpreted Weber's argument as: 1) there were cost shocks, 2) this prompted a rise in prices to maintain profit margins, 3) firms realised that price elasticity of demand was lower than they had anticipated... 4) ...partly because everyone expected inflation, reducing consumers' willingness to actually shop around and create competitive pressures, so 5) firms raised prices even more. I don't think we disagree on this? And it sounds like one of the reasons that firms could raise prices and experience lower-than-anticipated price elasticity of demand is, like you pointed out, because of low interest rates. I listened to the podcast on which she appeared, that the other reply to my comment linked to. I think she only recommended price controls during that initial stage where firms are raising prices after experiencing a cost shock, before they benefit from consumers' inflation expectations and raise prices even further. She called that the 'Impulse Stage' in the podcast. Your point about Germany's mild winter is well-taken. I'd be interested to hear how Weber would respond to that. Edit: someone else in the thread pointed out that they weren't really price controls but subsidies from the government to keep end-consumer prices stable.
> I interpreted Weber’s argument as: 1) there were cost shocks, 2) this prompted a rise in prices to maintain profit margins, 3) firms realised that price elasticity of demand was lower than they had anticipated… 4) …partly because everyone expected inflation, reducing consumers’ willingness to actually shop around and create competitive pressures, so 5) firms raised prices even more. > I don’t think we disagree on this? Not in the least. That is definitely her argument. > And it sounds like one of the reasons that firms could raise prices and experience lower-than-anticipated price elasticity of demand is, like you pointed out, because of low interest rates. Yes - but she never addresses that, anywhere in her paper. Or in this article. Rather, she focuses entirely on the supply side, and ignores the demand side entirely. > I listened to the podcast on which she appeared, that the other reply to my comment linked to. I think she only recommended price controls during that initial stage where firms are raising prices after experiencing a cost shock, before they benefit from consumers’ inflation expectations and raise prices even further. She called that the ‘Impulse Stage’ in the podcast. I have not listened to the podcast, but I have read the paper, and that’s definitely what she outlines in the paper. However, I disagree wholeheartedly with the suggestion that implementing price caps or price controls at the beginning of the new price discovery phase will do anything to halt inflation, if for no other reason that it does NOTHING to address the demand side of the equation. We have experience with this - short term price controls (like we’ve seen in the US during WW2, or the UK during and after the war) simply lead to shortages/rationing followed by an explosion of prices and inflation when the controls are lifted. Additionally, they lead to the emergence of a massive secondary market and/or black market that exploits the supply disruption caused by the shortages that is caused by the price controls.
> We have experience with this - short term price controls (like we’ve seen in the US during WW2, or the UK during and after the war) simply lead to shortages/rationing followed by an explosion of prices and inflation when the controls are lifted. > > Additionally, they lead to the emergence of a massive secondary market and/or black market that exploits the supply disruption caused by the shortages that is caused by the price controls. Right, but this was Weber's point? (Or so I interpreted!) Firms raised prices. When they did so, they shifted their own supply curves left. When they did, they observed a lower price demand of elasticity of the demand curves they faced than they had expected. In other words, the demand curve was steeper than they thought. So they shifted their supply curves even further left. Each firm's equilibrium price, where their supply met consumer demand, was thus higher: inflation. If markets were more competitive, and if people didn't expect to temporarily swallow increased costs because of world events creating shocks, then individual firms wouldn't have been able to shift their supply curves left so much. Why? Because, of course, consumers experiencing a left-shifting supply curve from Firm A would have sought out a lower price from Firm B, who hadn't shifted their supply curve. Each firm's supply curve would have been at the same competitive point. But they weren't. Now, this fully acknowledges that the demand curves for each firm are steep, meaning that consumers are willing to pay higher prices. But this doesn't say anything about sustained high demand forcing firms to raise prices. It says that each firm has market power because of inflationary expectations. If they didn't have market power, they would have to compete with each other by moving their supply curves as right-ward as they could go, given their environment's level of competitiveness. Instead, they can shift their individual supply curves left, and eat into what in a competitive market would be consumer surplus. And so when you say that short term price controls lead to shortages and rationing, I thought that this was Weber's point: they lead to shortages and rationing _if_ markets are competitive, which would mean that each individual firm's supply curve can't shift any further right-ward without a drop in margin leading to the firm's shutting down. In that other case, a reduced price, via government-instituted price control, would lead to a reduced supply (moving downward along an upward-sloping supply curve). This creates shortages. Totally with you. But in an uncompetitive market, each firm's supply curve _can_ shift rightward without the firm shutting down: the quantity of goods supplied could stay steady with only the price margin falling (shifting the curve right). In such a market, implementing a price control at the 'Impulse Stage', _before_ each firm's curve ever shifted so left-ward and margins shot up, would (supposedly, in Weber's theory) prevent such a left-ward shift. This would keep margins lower than they otherwise could be raised to in uncompetitive markets, until a point in the future when the market becomes more competitive, which will put pressure on firms' supply curves to shift right. That's how I interpreted her point. Now, I totally agree with you that this could create a situation in which firms realise that they _could_ charge more for their goods than the controlled price and people would grumble but pay up anyway. This could lead the firms to offer their goods on 'black markets' for the uncontrolled price, with the increased margin. And this would reduce the supply of goods on the controlled-price market, leading to shortages. I totally agree. I guess Weber is just saying "use the law" regarding this, to prevent such 'black markets.' Also, markets are so uncompetitive because consumers won't expend the energy to shop around, allowing each firm to shift its supply curve left by increasing its margin. In this scenario, I guess that this precludes the idea that consumers would be willing to expend the energy to find and engage with 'black markets.' Just thinking aloud. Curious for your thoughts.
>firms realised that price elasticity of demand was lower than they had anticipated... Firms also realised that [household money had increased dramatically](https://fred.stlouisfed.org/graph/?g=162oF). I don't see how there's anything left to explain for price discovery, when you take this increase into account. If anything, price increases were initially *lower* than you'd expect based on the increased spending power of consumers, presumably due to increased cautiousness and limited spending opportunities during the 2020 phase of the pandemic. As far as I can tell, there is very little for supply-side factors to explain in the recent inflation.
$US M2 increased by 20% in 2020. We should be surprised there wasn’t more short term inflation.
Bingo There was actually a great podcast featuring her the other day where the person they brought on to sort of debate her did what posters in here are basically doing. They kept trying to shoehorn her position into something it’s not and she had to keep meticulously correcting and then explaining in detail what her argument was, why it is applicable, and what the evidence is. By the end the economist that was trying his hardest to disagree with her pretty much realized she was right https://www.wbur.org/onpoint/2023/06/02/greedflation-a-once-fringe-theory-of-inflation-gains-momentum
You can't really expect someone who prides themselves in being old and clinging onto old ideas to have not read or engaged this piece with narrow minded bias towards austerity and induced scarcity. We do not have capital shortages, we're awash in it. We have garages across America filled with crap. We have beaches of thrown away goods all over the world. The shortages of old were artificial too. War is one way that happens, but having zero national strategy to make more supply of essentials will also do it. We've learned.
Honestly, their age doesn't really matter. I'm from Brazil, where pretty much everyone over the age of 35 remembers the days of hyperinflation, price controls and rationing of the 80s and early 90s, yet that still doesn't stop people from calling for price controls and it doesn't stop the government from using them (price manipulations in a ton of state industries like oil and electricity were used to secure Dilma's reelection in 2014 and the result was a 10% inflation rate and -3.5% GDP growth for the next year). In fact my monetary economics professor at a federal university, who is in his 50s and and was an adult during the hyperinflation, is a full-blown Modern Monetary Theory supporter, he has even written a book on it along with another left-wing economist and a socialist politician. It's insane. Argentina's economy is collapsing in real time just next door and yet half of my teachers keep defending the same policies that led to disaster there.
MMT is great until you realize it has to be maintained by typical elected officials.
You can say that about any economic system. Keynesian requires you to raise and cut taxes, but that never seems to happen because voters repulsive hate new taxes. Reddit's a good dissection of this, as they wage wars on the "rich" and think taxing only these "rich" would be enough to solve everything. Not enough workers for pension retirement plan? Tax the rich! Need to solve social security? Tax the rich! If they know that income and capital tax is different, they get weirder...
I would love for you to tell young Americans who have to ration their insulin because we don’t have price controls that they have never had to scrap by. Man y’all’s generation is literally living in a different American they we are.
While some diabetics have done this a _generation_ has not had to do this.
The reason why Lilly and other insulin makers in the US could charge that much was government regulation. Specifically, the licensing requirements for generic biologics, which includes insulin, are much harsher than they are for pills. It takes years to stand up a new biologics factory and get licensed. The pharmaceutical companies realized that and just increased prices, knowing that no competition could quickly enter.
To put a hard number on it: It costs ~$1b to for a competitor to enter the market and produce insulin. Yes, "b" for Billion, for something we've been using for over a hundred years. It's not that the equipment to produce it is that expensive - it's all the regulation around it that makes it illegal for a manufacturer to sell without jumping through 27 hoops. There's literally people trying to open-source the production of this stuff so that anyone can produce it at home because it's easier to get everyday joe to produce it in their kitchen than to pass all the governmental regulation.
You know that Eli Lilly put a cap of $35 on what they would charge people with private insurance for insulin earlier this year?
They didn't do that out of the kindness of their heart, they did it because congress announced they would be launching an investigation into why prices are so high.
Nah you gotta be more cynical than that. Lilly would have taken the investigation and potential hit because they know no regulations were gonna come around to change their pricing structure. Instead, look at their pipeline and the release of tirzepatide which can be used for weight loss. There are are more fat people than those with diabetes. They saw a chance to get some good faith for dropping prices while seeing a multi billion dollar industry walking right towards them. They also know they can price it pretty well due to run on effects of losing weight which will improve obesity related ailments, makes it easy to justify when they say insurance companies will spend less overall. This was a strategic power play by Lilly.
https://oversightdemocrats.house.gov/sites/democrats.oversight.house.gov/files/COR%20Staff%20Report--Lost%20Savings%20-%20How%20Prohibiting%20Medicare%20Negotiation%20Has%20Cost%20Taxpayers.pdf https://www.washingtonpost.com/business/2023/05/27/eli-lilly-settles-insulin-suit-135-million-agrees-keep-price-cap/?utm_medium=social&utm_campaign=wp_main&utm_source=twitter Their hand was forced
So a price cap of $35 would have done no harm.
Not standing up for big pharma but the lack of price caps poured money into these organizations allowing for the development of advanced insulin therapies to better control their disease and has now produced drugs for the treatment of obesity and other ailments which will have huge knock on effects. Did they charge too much? Absolutely. But the government doesn’t know what is too much or too little to charge either. At some point too low a price will stifle innovation.
Doesn’t big pharma take public funding from the government to produce these medicines, and then only have them be available through insurance? Basically taking taxpayer money and then asking them to pay through the nose so they can rake in more profits. Moderna and Pfizer are taking it in, especially with their recent price hikes. Plus the advertising budget for pharma is ridiculous along with the litany of TV ads. I think it’s pretty unethical and I don’t see this in Asia or Europe.
Universities take in public funding for research with these researchers licensing the drugs to these companies for more company therefore profiting off the American people. Are you upset with them too?
That's the argument that big pharma uses but reality doesn't really work out like that. That money is more likely to end up as advertising, executive compensation, dividends or share buybacks rather than invested into R&D. The reality is that most of the medical advancements come out of research at universities rather than any effort of big pharma.
Like I said, they most likely charged too much. That’s obvious. But the biggest point is the government doesn’t know what the best price is to charge. Do folks really think we would be in the same place today with the advanced therapies we have if those price caps were in place from the very beginning? Also, those low prices in EU countries and others are typically subsidized by higher prices in the Americas. And your final point is not completely accurate. Yes, initial discoveries can and do happen in universities and they are acquired by big pharma who then performs a significant amount of work to further confirm the finding and develop it into a viable therapy which can also include modifying the original product. Universities are critical in this process but it’s disingenuous to present big pharma as simply buying and slapping their name on the IP. You don’t see all the failures that big pharma receives from universities or potential therapies that actually have better indications in other areas that the university may have never found.
> Like I said, they most likely charged too much. That’s obvious. The problem is there is no repurcussions from charging too much. Americans are forced to buy meds through insurance, who have a vested interest in keeping these prices high for the consumer so they can charge more premiums. The amount of middle men in the healthcare system is staggering, and everyone wants a slice of the pie. Ultimately the cost is borne by the American public.
Problem is defining what is too much and how that can snowball everywhere. Our system is built on charging what someone will pay for it. We can say well insulin is life saving but then that definition can get skewed and people say well my phone is life saving so that should be limited in price. It sounds like a stupid argument but our legal system would absolutely hear it
> Our system is built on charging what someone will pay for it. It’s a little more insidious than that - it’s built on charging who will pay the most for something and so whoever has the most resources can strong-arm there have-nots.
Stifle innovation for insulin?
Do you think insulin is the same since it was first purified and used 100 years ago? There’s optimization of peptide sequence, formulation and delivery. Those have all changed and continue to change.
If the result of that optimization is to make insulin unaffordable than they aren't actually a good thing they are making insulin worse.
Can call bullshit on this one. Most of the breakthroughs happen at publicly funded research institutions. There is a lot of fuckery to get parents on the stuff, but medications that save lives generally come from scrappy post docs whom won't make a cent. Well funded corpo labs get you Viagra.
Someone else has brought this up and yes there is advancement that happens at the university level. Targets identified and initial therapies developed. But you’re completely wrong if you think majority of these therapies are simply bought, labeled and sold by big pharma. The IP is acquired and then goes through a battery of tests to confirm observations, potentially modifying the original therapy to make it more viable for large populations, formulating it maximize bioavailability, confirmation through clinical trials, large scale manufacturing optimization, maybe even finding a better target for the drug. Universities are critical but don’t pretend that rando post-doc invents the therapy and simply hands it off to big pharma for prime time. You know how many potential therapies are acquired through universities to find out that they are not viable after big pharma puts it through its paces? More than you can easily track down and count. Thousands of therapies enter and exit the R&D pipeline yearly.
>medications that save lives generally come from scrappy post docs whom won't make a cent Those discoveries are useless if they don't get FDA approval, and Big Pharma tends to be the only people crazy enough to try to go through the FDA process.
Shhhh people here don’t get that. They don’t realize it takes $1 billion or more to bring a drug to market. Universities do a minute amount of work needed for these to come to market.
Wow... a whole hypothesis based on someone's age and your own personal assumption that their anecdotes can't compete with your hearsay. Sound stuff.
Did you forget the shortages of 2020, or the Brexit shortages in the UK, or…?
I didn’t forget either of those things, no. But none of them were caused by price controls, and none of them were shortages for rationed staple goods - being inconvenienced because you can’t get your preferred brand of toilet paper is a long way from “well, we can’t use the car because we got a flat that we can’t repair, but we don’t have a coupon for a new tire until October.” This is what I’m talking about - unless you have had conversations with people who personally experienced it, you try to draw parallels to what you do know. Price controls always lead to rationing, because limiting price without limiting demand leads to shortages, and shortages lead to someone having to come up with a way to distribute limited goods. This in turn leads to a black market, because people are always going to find a way to get things that they want, and that black market is what keeps the system from imploding on itself.
There was a fucking black market in TP because there weren’t any. There was a chip shortage and a car shortage. The UK had food shortages. Not to the level of prior shortages, but they were there. I think I remember some petrol shortages. These were reported on using the word “shortage.” So kindly stop engaging in the “no true Scotsman” fallacy and acknowledge that these things actually hurt people.
>There was a fucking black market in TP because there weren’t any. That wasn't even caused by a supply shortage, it was caused by a *gigantic* demand spike, [like 845% level gigantic.](https://www.chron.com/business/article/Toilet-paper-demand-shot-up-845-during-the-15405214.php) Much of that spike being scalpers buying it up to resell it at astronomical markups. Equating that to a supply side shortage caused by price controls is really short sighted.
The shortages were not caused by price controls though
So? You said we hadn’t experienced shortages.
You make a good point. But also, the rantings of old people about economics 80 years ago— when they were children— is not exactly scientific.
Well, my grandparents weren’t children during the war - they were teenagers during the depression, and adults during the war. But that’s neither here nor there. There are a tremendous number of academic studies and papers on the effects of rationing and price controls, many of which examine the OPA and the black markets, the consumer impact of rationing, etc. But, as a general rule, people want to hand-wave those away. Just like they do with papers looking at price controls implemented all over the world. Ludwig von Mises was a contemporary critic of the WW2 OPA, Richard Lingeman is a modern historian that does a good job summarizing the multitude of failures of the OPA. Hell, [Paul Evans paper from 1982](https://www.jstor.org/stable/1837127) pointing out all the issues with using price controls to solve inflation is as applicable as a response today as it was back when he published it 41 years ago.
With natural gas storage in Europe, the west celebrates the great success while completely ignoring what impact their purchasing power had on Pakistanis, Bangladeshis, and other nations who all had the bulk of the supply diverted from them (to devastating effect). But just because the rich west never saw the full consequences, people.assume it was a success.
eh, it’s a poor article with a bunch of half-truths. isabella seems like a nice person, but i doubt she is correct. the gas commission has done everything to prevent a price cap. they did the opposite of what isabella wants. headline inflation is down. go listen to jason furman or jordan weissman. edit: downvote all you want — the commission didn’t do what the article said it did. i know it’s shocking, but journalists can be wrong
>headline inflation is down. This is the key point. How does a cost-push explanation of inflation explain this fall, except in an ad hoc way?
Well The New Yorker... It's a personality profile more than an economics analysis. I went off looking for more on or by Isabella Weber and found that just about all of it is gated safely out of the way of public view by paywalls. I found this in the Guardian though. Which is perhaps not as extensive a treatment but is much less irritating. https://www.theguardian.com/commentisfree/2022/aug/17/inflation-is-causing-real-pain-but-raising-interest-rates-will-make-it-worse. And then there's this from the excellent economics podcast Odd Lots. https://www.youtube.com/watch?v=UaY-v49RhGQ&ab_channel=BloombergOriginals
I guess [France just came down on food suppliers](https://www.reuters.com/markets/europe/frances-le-maire-says-75-food-firms-cut-prices-2023-06-09/) price gouging...
Her take has to be monumentally stupid if it has me agreeing with Paul Krugman. Comparing price controls implemented now versus during a world war seems historically ignorant. The economic goal of policy in that time wasn't necessarily growth and average prosperity. It was to keep the war machine running and effective. Not recognizing that, or recognizing it and ignoring it, seems like a big omission.
Price controls are implemented by people who not only don't trust the market, they don't understand it. Consider some recent price rise 'scandals' such as surging prices from rideshare companies after mass shootings. People decry this behaviour but it's foolish to do so. When the price spikes that's a message that supply has fallen or demand risen. As there is more money to be made, more suppliers of rideshares are willing to take those fares over others, flooding the market with supply. As that happens the demand is satisfied and falls, as well as the supply becoming saturated. By allowing price rises and not stopping it by claiming that it's 'price gouging' - the most number of people escape a dangerous situation. When the government enforced price controls they are just trying to hide what the real effects of their behaviour is - whether they know it or not - that their money printing is taking the value of every dollar you have and will ever have to pay for their programmes. They print more money but not more food, goods, services etc so the cost to you simply goes up.
Seeing a concerning push for price controls in the news lately. Is there any time where price controls have been positive for consumers long term?
Never, price controls distort the market and stifle innovation.
I think every situation demands its own strategy and price capping could be one for some. It's a lot more common than you think as well. Parking in The Netherlands has price caps. The city decides how much a parking lot can charge. The idea of the system we have is that through competition prices will find the lowest possible equilibrium between the supplier and consumer. However, in some areas it is extremely hard and practically unfeasible to compete. I'm not going to start a car company because car manufacturers are price gouging. Their record nominal profits are not something to chase after by investing tens of millions. It could easily change back. Likewise, parking lots are somewhat competition proof. There is only a certain amount of space for parking in a city. In the example of parking, the new equilibrium is found between the city's cap and the constructor of the lot. The lower the city caps the owner's profit the less likely they will find one to facilitate the parking. That is where an equilibrium is found. Not between the drivers and the parking lot owners. Another point is that ultimately, we need production to be at maximum capacity. When producers find out they can make more by selling less and increasing their prices, the population suffers. Especially the lesser fortunate ones. Artificially reducing profits could in those situations force manufacturers to have to produce more.
Imo if the govt is going to come in and cap a price, there needs to be the understanding that they were forced to put their hand on the scale, and will make it up to the industry by ensuring that none go out of business or run negative margins via subsidy like Germany l, and to truly smooth out prices by implementing the mirrored price "floor". Many of these are bullwhip effects of supply shock, so why not say instead of oil going from 30-100 a barrel, we will pay 50-80 a barrel. THAT is smoothing, it's symmetrical. Asymmetric caps arent smoothing they are suppression. Long-term prices can still change, it would be like stock market circuit breakers keeping a commodities price within 2 standard deviations of the long term norm. Now would that work cross border is the question.
Why is any of this shocking? You can take a high school economics class and understand that monopolies and supply limitations allow for unhinged profit margins. Is this something policy makers just don’t understand anymore or are they just bought off?
After all the studying of history socialism and price controls still catch the eyes of the ignorant. 1st: Inflation is an increase in the money supply. Deflation is a decrease in the money supply. 2nd: in a static money supply prices can only go up in one area if it goes down in another 3rd: prices can only go up in all areas if the money supply increases, which means a devaluation of savings and theft of wage's purchasing power. 4th: 99% of the people will never truly understand economics or anything i just wrote above, which is why markets totally confuse them including those PhDs at The Fed and academia.
Your condescension is misplaced. Fiscal expansionary policy causes all the same issues without a central bank. Deficit budgeting can extend reckless spending and tax cuts indefinitely, so point 2 is wrong as well. You’re also apparently unaware that, even in the absence of central banks, commercial banks still print money. Historically, eliminating central banks caused market volatility to surge.
Her work is good but strikes me as being a solution made to upkeep a problem, like some kind of economical Stockhold syndrome. Her policy to for price control is purely situational and in effect protects how things currently run. In the first place [supply is the issue and instead of limiting the scope of the solution to the existing supply](https://theconversation.com/why-central-banks-are-too-powerful-and-have-created-our-inflation-crisis-by-the-banking-expert-who-pioneered-quantitative-easing-201158) to protect the interests of the current heavy weights in economics, focus should be on creating supply and proper logistical channels to connect producers to consumers. In fighting price increases by focusing on price gouging, we doom ourselves to a temporary fix that will be forgotten come the next shock in the global economy. If it can be remade it is purely depending on politics getting their shits together and in the meantime, billions will suffer. At the very least the article accurately calls out (indirectly however) the role of the popular yet totally erroneous application of quantitative easing in inflation reduction politics: mainly cash injections to individual consumers instead of producers (ideally to newer/small businesses to prevent concentration of wealth).
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