Profit Maximization In A Factless World

As you might’ve heard, there’s no such thing as “facts” anymore.

Facts went out of style around seven years ago, and it’s just as well. A lot of people will tell you facts serve a purpose, and that where possible, we should make fact-based choices. But when you think about it, what’s more annoying than facts? Not much.

Every, single day, facts encroach upon our lives and make us sad. Almost as a rule, facts are inconvenient, they’re almost never as fun as fantasy and they can be very scary too, which is why we hide them (facts) from children.

Consider the following. I attended Yale, and for a time, I was among the nation’s foremost corporate attorneys. The work was lucrative, but I found it unfulfilling, so I became an astronomer, and then, when I got bored with that, I spent three years exploring the Amazon basin. My grandfather stormed Normandy, was a policy advisor to three presidents and invented Frosted Flakes.

None of that’s true, but it’d be fun if it were, so who’s to tell me it isn’t? I can’t speak for other Western democracies, but that’s how we think about things in America these days. And I’m not exaggerating.

Reality is a very malleable concept in America, and it’s shaped almost entirely by partisanship. A Democrat’s facts aren’t the same as a Republican’s facts, despite the fact that facts are objective and therefore don’t admit of multiple interpretations. Depending on who you are, you’re immune from facts entirely, and thereby inoculated against reality. George Santos’s problem isn’t that he has a good imagination, it’s that he isn’t Donald Trump.

This malleable, partisan-based bifurcated reality has rendered public opinion polling virtually useless. You only need to ask voters one question: What’s your party affiliation? Once you know that, you can predict their responses to any other question with something approaching certainty.

Recall the recent Gallup poll which asked Americans how much confidence they have in top US officials to make good decisions about the economy. Two-thirds of Democrats expressed trust in Jerome Powell, while less than a third of Republicans were confident in the Fed leadership. Under Donald Trump, the reverse was true. Republicans were highly confident in Powell compared to Democrats (62% to 48%). Inflation is a factor, but you get the point: This is about party not the person and, in Powell’s case, not necessarily the party of the person. Powell’s a Republican, but his popularity among his own party depends quite a bit on whether the person in the Oval Office is a Republican or a Democrat.

As Gallup pointed out, it’s not unusual for Americans to view the world through a partisan lens, but it’s my contention that the situation is getting worse all the time. If that’s true, it’s consistent with the complete disregard for the concept of facts — there’s no objective reality anymore, only subjective assessments based on party affiliation. That makes consensus impossible and, crucially, it goes a long way towards explaining why the country seems to have no sense of shared purpose.

In a testament to how acute this dynamic is vis-à-vis the economy, and also to why it’s potentially perilous, UBS’s Paul Donovan described a transmission channel from partisan-based economic assessments to actual economic outcomes, in this case inflation.

“Republicans and Democrats… appear to be living on different planets,” he wrote, in a recent note, referencing the party breakdown in the University of Michigan sentiment polling. “If your party is out of the White House, all is doom and despondency. If your party is in the White House, the US economy is a perfect paradise,” he went on, before suggesting that companies, being the unemotional profit-maximizers that they are, may seize the opportunity to raise prices.

“Profit-led inflation episodes occur when consumers are told a story about why price increases are necessary,” Donovan said. “Consumers’ willingness to believe the story allows some companies to sneak in profit margin increases.”

This is yet another version of a familiar tale. The act of opportunistic price hikes has many names, some more abrasive than others, but more and more economists are starting to identify margins (rather than labor demands) as the driver of the self-feeding wage-price dynamic (or price-wage dynamic, on this interpretation).

For Donovan, it’s possible that consumers whose political views leave them disposed to harboring an unrealistically dire assessment of current economic conditions might be vulnerable to price hikes, where “vulnerable” means willing to pay up on the assumption that corporates have been left with no choice due to an onerous operating environment born not of exogenous shocks and bad luck, but of bad policy decisions by the “other” party.

“If some consumers are inclined to believe that everything in the economy is bad, they are likely to be more accepting of stories about the necessity of raising prices,” he wrote. He conjured a quote that might emanate from a consumer lost in such an echo chamber: “Of course prices are going up. What else do you expect with this government?”

Bloomberg’s Tracy Alloway summed it up. “If one segment of the American population is repeatedly being told that the economy is falling apart, then they may be more inclined to believe that higher prices are unavoidable, even as they keep on buying,” she wrote.

How to break the cycle? As long as people are buying, corporates will raise prices to protect margins from higher input costs. The higher inflation goes, the more inclined a bitter partisan will be to blame the government rather than opportunistic management teams. Higher prices can mean higher wage bills as employees demand better pay to keep up with the rising cost of living. And those higher wage bills need to be passed along to consumers in order to pacify shareholders.


Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

10 thoughts on “Profit Maximization In A Factless World

  1. The feedback loop between ignoring facts and suffering the consequences seems to get longer and longer. This can’t go on forever, but it appears it can go on longer than we can stay solvent (apologies to Keynes).

  2. I agree with your assessment. It started in the 1940s but has significantly deteriorated starting in the 1980s. Corporations have always been greedy but what kept them at bay was two things: competition and antitrust lawsuits. It seems that any rational reading of the state of competition is that there is none. Companies can raise prices at will and the competition will raise them soon after. As far as the Republican vs Democrat divide, I can see at family functions that the Trump supporters don’t want to see anything bad about what happened during his administration. I think that it has to do with the echo chamber that has been created by right-leaning media. As the just-settled lawsuit with Fox proves that the hosts knew what Trump was doing was bad, but they were more afraid of losing ratings than telling the truth. Unfortunately, people can and do vote against their own best interest, until that stops we as a country will keep on going along till like you have said in the past, we will have 25 people with 99.99% of the wealth with everyone not understanding why they can’t afford to fix their 10-year-old car.

  3. FWIW, I agree with your assessment but I don’t even think it’s to do with political blindness. I’m French, in France and left leaning by and large. When inflation struck, I lost my bearing on many prices and I have no idea whether I should be offended my meat is now 35-50 EUR/kg instead of 20-25. Is it all about input cost or is it profiteering?

    Basically, inflation shook the (price) anchor loose and it’s relatively easy to hide a 5% profit increase in a general price hiking environment. Competition ought to keep that behavior in check but, well, competition ain’t what it used to be…

    How to break the cycle?

    There are ways. Tax hikes would be my favorite but we’ve lost the ability to raise taxes. So it’s down to interest rates and CBs engineering a recession. In a democracy, we get the leaders we deserve. Murdoch can be proud. I hope he choke on his starlet brides.

  4. You’ve just made a great case for abandoning the 2 party system. This is something I’ve firmly believed is required for this country to mature politically for a long time. A country this large, rich, powerful, and diverse makes no sense to have binary choices in government. It’s impossible to satisfy all parties when there are literally only TWO choices.

    1. I have to agree re the flaws of our 2 party system, at least until our politicians stop this internecine warfare where the enemy is not beyond our borders but merely across the aisle. Even when federal money (via deficits) is to be had, there is no general or easy agreement about whether that is even a good thing anymore, so it’s hard to envision a case where the country unifies behind something much more difficult like restraining our freedoms or tightening our belts.

      But recent experience suggests the presence of a non-zero third party or independent candidate is less likely to promote consensus or compromise than it is to throw the election to whichever party competes less with that rogue candidate. Ross Perot is blamed for undermining George H.W. Bush to the benefit of Bill Clinton. Ralph Nader is blamed for undermining Al Gore to the benefit of George W. Bush. Jill Stein and Bernie Sanders have been blamed for siphoning critical votes from Hillary Clinton to the benefit of Trump.

      It appears that both parties have learned to weaponize this strategy, although, unsurprisingly the Republicans appear well ahead in this political gamesmanship, with seemingly Democrat candidates getting elected and suddenly turning conservative (Sinema, Manchin). Meanwhile, the Democrats seem intent on shoring up their prospects by marginalizing their more liberal wing, while the Republicans appear to be unwilling to roll up the welcome mat on its open border to the hard or ultra-right wing of the party. So while I think ultiamtely expanding beyond the 2 party system may be the only thing to solve our partisan quagmire, I fear that the growing pains towards that goal could prove just as threatening or even existential.

    2. What two-party system? Republicans and Democrats? Nonsense. We are just like in the countries in Europe that are plagued with multiple parties. Our current House Speaker only got the job by making silly promises to at least three groups inside the GOP (none of which contains adults). It took a record 15 votes to get the job. The Democrats, too, are beset by subparties, the Bernie wing, the more temperate middle, and the Manchin/Sinema bunch (again, no adults in sight). Neither party can raise an uncompromised majority so what we really have is five or six small parties, steadfast in their dogmatic principles, just as we see in the various countries in Europe. Italy, with its multiple parties, has changed governments 69 times since the end of WWII, an average of one new one every 1.1 years! Whee. Remember, it’s not the number of parties we have that makes us a democracy, it’s the fact that we citizens get to do the vote. In England, for example, citizens vote only for their members of parliament, followed by a separate vote from amongst those officials who then select the Prime Minister. While they are in office, the MOPs can select new Prime Ministers as long as they stay in office. How do you think we got that stupid electoral college? Even though we don’t have a peerage of hereditary dukes, earls and others, in place of a House of Lords, we do have Senators. Initially they were not selected by a vote of the people. They had to be significant landowners and selected by their state legislators until 1913, when the 17th Amendment to the Constitution was approved. Women, of course, were not allowed to vote until the approval of the 19th Amendment in 1920. As it is our present version of democracy is only a bit over 100 years old.

      1. I’d humbly suggest that “our present version of democracy” is a teenager born in 2010 when the Supreme Court’s Citizens United decision extended to corporations the full rights to spend money as they wish in federal, state and local elections. Now we have the best government that money can buy along with all the divisiveness big money can buy. What could possibly go wrong?

      2. The details of my life are quite inconsequential, where do I begin? My father was a relentlessly self-improving boulangerie owner from Belgium with low grade narcolepsy and a penchant for buggery. My mother was a fifteen year old French prostitute named Chloe with webbed feet. My father would womanize, he would drink, he would make outrageous claims like he invented the question mark. Some times he would accuse chestnuts of being lazy, the sort of general malaise that only the genius possess and the insane lament. My childhood was typical, summers in Rangoon, luge lessons. In the spring we’d make meat helmets. When I was insolent I was placed in a burlap bag and beaten with reeds, pretty standard really. At the age of 12 I received my first scribe. At the age of fourteen, a Zoroastrian named Vilma ritualistically shaved my testicles. There really is nothing like a shorn scrotum, it’s breathtaking, I suggest you try it.

        1. Brilliant! Also – Listen. Strange women lying in ponds distributing swords is no basis for a system of government. Supreme executive power derives from a mandate from the masses, not from some farcical aquatic ceremony.

NEWSROOM crewneck & prints