It’s Not A Wage-Price Spiral. It’s ‘Greedflation’!

Price gouging!

That’s the culprit for high inflation. I like it as a thesis. I really do. It partly exonerates fiscal policy (although it’s a lot harder to gouge people who don’t have any money, so in that respect, you could argue that government transfer payments made people more “gougable”), and places the blame almost solely with “corporate greed” which, as a concept, nobody likes.

In a Thursday note, SocGen’s Albert Edwards cited a hodgepodge of media coverage in suggesting that “wages are not the problem” when it comes to inflation, profit margins are.

Certainly, negative real wage growth makes a decent case for that. There are any number of ways to illustrate the point in the US context. I frequently employ the visual below, derived from the employment cost data.

About the best you could’ve said towards the end of last year was that the situation was “less bad” — wages and salaries were still contracting on an inflation-adjusted basis, albeit not as sharply as they were.

The seven-quarter contraction certainly cast doubt on the notion that inflation is primarily due to workers making “too much money.” By contrast, companies were making plenty of it — money, I mean.

Margins expanded during the COVID recovery phase and by most accounts, corporate management teams were surprised by their own pricing power. The margin outlook is starting to roll over now, but you can clearly see the run-up in the visual below.

Part and parcel of any good bear case for US equities going forward entails arguing that pricing power has surely run out, that margin pressures will mount as revenue growth slows faster than costs and so on.

Edwards, summarizing an “economics professor” who spoke to the FT, wrote that, “the Fed, on dubious grounds of a wage-price spiral (dubious because real wages have been crushed in recent years), risks killing off higher wage inflation that would naturally suppress high margins and redistribute national income away from companies to households.”

The figure below speaks for itself, and even if didn’t, Albert added helpful annotations.

“There is a high risk that the Fed’s (and other central banks) blunt use of monetary policy to clobber the household sector simply to curb an imaginary wage-price spiral will reignite anger about inequality that has already fueled social unrest,” Edwards wrote. And I agree.

I’d be remiss not to note that the economist Edwards mentioned is a lot more than a professor. William Spriggs is a fixture of liberal economic circles in the US. He’s an Obama-Biden mainstay, a Clinton administration veteran, a staunch advocate for organized labor and currently serves as the chief economist for the AFL-CIO. He spent quite a bit of time at the EPI, has held a dizzying array of economic policy development positions (both in and out of government) and was floated as a possible Treasury Secretary for the Biden administration. His CV is so long that you’d need an industrial strength stapler to secure all the pages if you printed it out.

Anyway, that’s some (hopefully helpful) context. Edwards drove the point home. In the US, “labor’s share of the national income pie was crushed in the wake of China joining the WTO in 2001,” he said Thursday. “The populist backlash against subsequent inequality saw labor regaining some ground in the latter half of the 2010s, but corporates have since fought back.”

All I’d add is that in the pandemic era, this is a bit of a chicken-egg problem. The only thing more vexing than stagnant real wage growth is negative real wage growth, and although record-low union participation belies labor’s resurgence as an economic actor with clout, workers in the US are aware that their hand is stronger due to an acute dearth of labor. If your wages aren’t keeping up with price growth, and your bargaining position is stronger than it would’ve been were it not for the worker shortage, you’re probably going to drive a harder bargain. All else equal, that puts upward pressure on wages which, in turn, can put upward pressure on prices. When you throw in government transfer payments and, crucially, the wealth effect from the Fed’s monetary response to the pandemic (which exacerbated both demand pressures and labor shortages), you have a combustible situation.

At the end of the day, we created a system in the 1980s that elevated investors above all other stakeholders when it comes to how corporate management makes decisions. So, if corporates suspect they have pricing power, they’re going to exercise it. And it’s our fault, as a society, for continuing to countenance that state of affairs.

If we want to change the system, I’m all for it. But we have to accept that doing so is an admission that American-style capitalism is predatory, broken and, if you’re amenable to normative statements, plain old “wrong.”


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19 thoughts on “It’s Not A Wage-Price Spiral. It’s ‘Greedflation’!

  1. “American-style capitalism is predatory, broken and, if you’re amenable to normative statements, plain old ‘wrong.’ ”

    The generational divide in the acceptance (or rejection) of this statement is THE wedge issue of our time. The Baby Boomer generation, after decades of being bombarded with idiotic ideas about how Trickle-Down economics is good for everyone (aka the greatest mass con job in history), is more likely to disagree with H’s statement. The younger generations would be more in agreement especially as the younger generations have mostly been frozen out of wealth accumulation.

    Reganomics aka Trickle Down aka Supplyside aka Robber Baron Economics has been the default economic philosophy for both sides of the political aisle for the past 4+ decades. Our economy as a result is vastly out of balance and predatory.

    The only way it changes is political will.

  2. Case in point: When the Fed started their tightening campaign, a leader in the Economist applauded because inflation had finally started to become evident in the labor market. A valid concern, but I had a brief blood pressure spike when I recalled that they had been silent when profit margins reached record levels year after year, partly thanks to oligopolist pricing power.

    As you said, we created this starting during the Dawn of America and it is finally coming home to roost. Thankfully for US business, American voters have, once again, swung to the hard right as a result. “Your problems are due to China and migrants, not a structural weakness of our “free market” system.”

      1. Brilliant analogy! Reagan f__d the working class and gave the economy the clap. Forty years later, the country is physically weak and finally losing its mind.

  3. Isn’t this the whole point of trickle-down economics? Concentrate wealth and income at the head of the economic table and pat ourselves on the back when a few crumbs fall to the ground.

  4. There are many causes. Safety net weaker now than 40 years ago. Public goods spending outside of national defense lagging compared to 40 years ago. Effective taxes for top 5% are lower compared to the other 95%. Union membership lower which dilutes worker leverage. Labor productivity weak for a variety of reasons. Reduced immigration leading to weakening demographics. And infrascture spending lagged in the US leading to many frictions and inefficiencies. There are probably more- Edwards mentioned China joining WTO as one….

  5. Great topic, I’m not sure one article will suffice. I am 69.5 yrs old, I started on Wall ST in 1979, left 2009. I attended an ivy league university. I am not the smartest member of my large family by a country mile…Here’s how I roll: Follow the money, when a big problem is intractable ask cui bono?, don’t be too naive, can you explain this to a 14 year old? So, starting in the sixties there has been a concerted effort to suppress the majority, politically and economically. As a nation, we don’t execute well. We also don’t hold the rich and powerful accountable. We have also allowed a lunatic to do incredible damage to our international position. Lastly, our psychotic but highly intelligent technology and science group has run away with the football. I’m suprised things aren’t worse than they are….

  6. The chart on labor costs vs. output prices seems to show that workers were getting hammered through the Bush and Obama Administrations but had begun to make progress during the Trump Administration. They are now getting hammered again. Could this be a reason for Trump’s core support among working class voters?

    1. Whatever “progress” made my workers likely helped by COVID-19 supplemental payroll protection checks and that progress was like a crumb compared to progress capital made via the cut in corporate tax rates.

  7. Thanks for the info on William Spriggs I’m glad I didn’t have to look him up. You are so right about how the tax structure was changed to screw the middle class and we won’t recover till it is changed.
    At the core the real problem is that big business has done a great job at perpetuating the “Big Myth” that American style free market is the only answer.
    I am currently reading a book tracing the roots of the organizations that helped push this myth on the American people after the new deal.

    1. There is a high risk that the Fed’s (and other central banks) blunt use of monetary policy to clobber the household sector simply to curb an imaginary wage-price spiral will reignite anger about inequality that has already fueled social unrest,”


      I know a lot of lower middle class people who got pretty nice raises in the past 2 years who will tell you they just might be better off WITH inflation, it just depends how you ask the question.

      (What does Joe 6-pack think of inflation? He hates it. Would he like to go back to prices of things 3 years ago and back to his paycheck 3 years ago? Hard pass)

  8. Socialism doesn’t sound too bad now, no? No offense, but you’re increasingly sounding like a socialist, which, imo, isn’t a bad thing as long as we aren’t conflating socialism and communism or authoritarianism.

    1. Just last night back from a trip to Paris , anecdotally those euro social democracies seem to be doing ok.
      I found it oddly optimistic to observe it was mostly young people demonstrating on the street.
      Perhaps democracies have a population number , that once exceeded , becomes too messy to implement well.

  9. As it’s ever been. There is no system of government so far that has avoided an ever worsening of an equitable distribution of wealth. Revolutions were the answer, but now modern weaponry and surveillance make that exceedingly difficult, creating places like North Korea, Russia, China, Iran etc and in our own way the US. American democracy was supposed to address that problem, but alas we are stumbling badly.

  10. Implying that if there is “corporate greed” (also called human greed in less propagandistic articles) induced inlation then inflation bacame a one factor induced event is amazingly biased. Wage-price spiral (another form of human greed) is another factor boosting inflation. And we can list about a dozen more. Inflation is a nominal phenomena, how is real wage growth or decline an issue in this regard?

    1. “propagandistic articles”

      Are you serious? Did you even read the article? For one thing, some of it is tongue-in-cheek (that was apparently totally lost on you), and on top of that, I included references to pretty much everything you just said and all manner of implicit caveats. Don’t accuse me of publishing propaganda. I chafe at that, and I won’t countenance it in comments.

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