If you’re wondering, corporate profits are still elevated. The legacy of so-called “greedflation” lives on.
Or at least that’s one way to frame what, by now, look like structurally higher margins post-pandemic.
It was fashionable — where that means politically expedient — to blame corporates for high prices during the worst of the inflation outbreak. Politics aside, I don’t think anyone would dispute the assertion that some companies took advantage of the pricing power afforded them by a booming economy to juice sales above and beyond what was necessary to offset the higher cost of doing business.
Whether there was proper “price gouging” is another matter entirely. Price controls don’t work, everyone knows that, and as “evil” as corporations can be, whenever you hear “price gouging” from a politician, it’s almost always an exercise in scapegoating.
With that short preamble, note that the third estimate of Q4 US GDP, released on Thursday, showed a key measure of profits rose a third quarter and a seventh in eight, widening to almost 16% in the process.
As the figure shows, there are just two quarters on record during which that metric was higher: Q3 of 2021 and Q4 of 2021, during the go-go days of the “stimmy” economy.
To reiterate: That chart suggests profit margins reset structurally higher following the pandemic. Consider this: Margins during the worst quarter of the pandemic-era — 13.8% in Q4 2020 – were 10bps wider than during the best quarter pre-pandemic (13.7% in Q3 2006).
Meanwhile, another key metric — interest payments as a share of economic profits — hit another new low in Q4. As the figure below shows, that share was just 4.8% at the end of last year. It was 37.5% in 2001.
If you’re looking to justify tight credit spreads, that’ll work.
One way to look at the above is to suggest that at least some companies can afford to absorb the cost of Donald Trump’s tariffs without passing it along to consumers in the form of higher prices. Of course, that’s not what’ll happen.
Instead, management teams will make you and I pay those costs, underscoring the notion that tariffs are a consumption tax. And what will tariff receipts go towards? They’ll be cited by the Trump administration as revenue to offset the cost of tax cuts for corporates, so that their margins can balloon even wider.
Feeling fleeced yet?
Interesting that in all the rhetoric about how to reduce the deficit, “higher taxes” never appears.
Federal debt is about $36TR. Nominal GDP growth is about 4-5% (2-3% inflation, 2% real). So if deficit is 3% of GDP ($1TR) then debt will grow more slowly than GDP and debt/GDP ratio will gradually decline. Which would be a sustainable, i.e. very good position to be in.
Deficit in 2024 was about $1.83TR, so need to find at least $0.83TR more revenue. That is, if we’re going to do this without cutting spending – which I think we should, since much of federal spending is investment – in human capital, national infrastructure, and geopolitical hence economic stability.
2024 individual income tax was $2.43TR, social security & Medicare tax was $1.71TR, corporate income tax was $0.53TR. Breaking down the individual income tax, the top 1% pay a 26% tax rate, the 5%-1% pay 19%, 10%-5% pay 14%, 25%-10% pay 10%, 50%-25% pay 7%, and 100%-50% (bottom 50%) pay 3%.
I’ll spare the details, but if the top 1% pay 35%, 5%-1% pay 25%, and the other group pay the same as now, that increases individual income tax by about a quarter, to about $3.01TR. Increase social insurance tax by 20% (increase the cutoff or surcharge the top 5%), and increase corporate income tax by 20% (possibly not that different than letting Trump I’s corporate tax cut expire?) and . . . that in total adds $1TR to federal revenue.
Which gets the deficit down to the target level and a little more. Interest expense might cooperate, with a sustainable debt path.
Incidentally, the average AGI of top 1% is $2.5MM, avg AGI of 5%-1% is $376K, avg AGI of 10%-5% is $222K.
https://www.visualcapitalist.com/breaking-down-the-u-s-governments-2024-fiscal-year/
https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2024/
(Apologies to MMT, but even if debt and deficits are merely a consensual hallucination Neuromancer-style, its the world we are living in.)
John, I like your modest proposal. Can you calculate the likelihood of this happening in America?
This I will probably not be well received for this analysis, but I have studied this behavior off and on. Think about what people purchase and the value chains that are required to create that stuff. The question is not why are consumer products are suddenly so much more expensive, but how were they so cheap before? Let’s start with a box of Kellogg’s Frosted Flakes, for example. What’s in them? There’s grain, sugar, vitamins, labor, a nice plastic box liner, the box itself and variable company manufacturing overhead. Before they become a box of cereal, each of those inputs first must be created by a separate company or farmer or supplier who wants to make a profit and all of their costs are subject to at least a small amount of inflation. Farm grains have to be shipped to elevators and then to a grain supplier, at a profit. Packaging suppliers don’t do it for free. Then there is parent company fixed cost like advertising (Tony’s got a girl friend, I hear), research, and Kellogg’s general administrative load. OK, that gets the product into the box. Somehow it now needs to find its way into the complex grocery distribution channel (more trucking and warehouse costs, and more profits for the members of that supply chain.) Finally, the product has to reach the store, more shipping cost, stocking store shelves and, of, course we had to pay Kellogg. Rising transport costs, labor, etc.are ongoing through the whole chain. No surprise that grocery chains are the least profitable (net margins) consumer product retailers. And this was just a box of cereal. My regional supermarket stocks and has to manage 85,000 sku’s. Walmart handles 100,000 or more. We’re lucky we have stuff to buy. COVID gave consumer product suppliers and distributors the cover they needed to raise prices to get their profitability back in balance. Although I have seen short sales in stores I frequent, they don’t last, offer small savings, and prices are still pretty sticky. Even Trump won’t save us anytime soon. The consumer economy is very large and complex and that mostly ignored economic concept of elasticity still works. If one wants stuff they will always have to pay the freight.
I think about this all the time and in all sorts of contexts. When you actually sit back and consider — i.e., really think about it — everything that goes into the stuff we buy and the services we enjoy, from the materials, to the labor, to the transportation and just on and on, you sometimes come away asking, “My God, why isn’t this bottle of pancake syrup $450?” And no, I’m not being sarcastic.
I’ll give you folks a real-life example from this very week. Warning: This is going to come across as even more ostentatious than usual, so steel yourselves.
I woke up Monday determined to get a Chanel beanie before they’re all gone for Spring/Summer. Well, Chanel’s a different animal than the other 3 of the Big 4 fashion houses (the Big 4 are Chanel, Louis, Dior and Hermes). You can’t just hop online and buy a Chanel hat. There’s no e-commerce site. There’s just a site and you can look, but there’s no way to buy. If you’ve got the money, you can buy whatever you want from Louis, Dior and Hermes from their websites. Not Chanel. There’s a process for Chanel.
If you want to buy, you have to first make what they call an in-person “fashion purchase,” and it can’t be — you know — a bottle of perfume from Dillard’s or something. That doesn’t count. You have to go to a Chanel boutique or one of their in-store boutiques in a major metro area — e.g., the Chanel in the Atlanta Neiman Marcus — and buy a qualifying fashion item in-person to get your name and address into their system. At that point, you can then call in remotely and have them send you things in the mail.
Ok, well I’ve never actually made that in-person purchase, because Chanel doesn’t officially have a ready-to-wear men’s line, so it’s never been worth it to me to make a trip because all you’re going to get if you’re a man are hats and scarves. I can’t drive six hours for a hat. That, in turn, means I can’t order remotely, so whenever I want something, I have to have my personal shopper in Atlanta go into Neiman Marcus and buy it for me after I talk with my adviser (her name’s Ariana) who shows me what’s available ahead of time.
So earlier this week, I had Ariana text me pictures of the beanies they had, and that exchange lasted for — I don’t know — 45 minutes. Then I had to call my shopper who had to drive over there and buy the one I wanted. Chanel had already shipped for the day from that store, and I wanted it immediately, so my personal shopper had to take that hat to UPS and have it shipped overnight. I also had to Zelle her the money, and that’s another service which we now take for granted, but had to be developed and integrated into bank systems and supervised and so on.
So that’s Ariana, Nicole (the personal shopper), UPS and Zelle, just to coordinate the purchase and shipping of this beanie to me. All of that is to say nothing of the actual item. That is: We’ve eaten up hours of labor (Ariana and Nicole), a little bit of gas (Nicole driving there), some jet fuel (UPS) and tech resources (at the bank so I can instantly transfer money to Nicole with Zelle) and we haven’t even mentioned the beanie itself which, as a Chanel product, was handmade in Italy with all that entails (and it entails a whole helluva lot because, as noted, Chanel’s in a league all its own quality wise), and then shipped halfway around the world, probably to New York first, then down to Neiman Marcus in Atlanta.
So, with all of that in mind, how much should that cashmere beanie cost? I mean — it’s hard to say, right? I paid $1,000 for it. Ridiculous? Maybe. But read all of that again. Maybe not.
Here it is, btw. This is what a $1,000 hat looks like, if you’re curious: https://heisenbergreport.com/wp-content/uploads/2025/03/BeanieMar262025.png
I wasn’t curious about a $1,000 until now, but I’ll be thinking about this chain of events next time I have to take one of my kids to the emergency room and get slapped with a $5,000 bill for a couple stitches.