The American economy is going through its highest inflationary cycle in decades, with prices going up 6.2% since last year according to the Bureau of Labor Statistics. Politicians know that voters will care deeply about inflation, and Democrats are starting to say that it is businesses who are at fault, with Senator Elizabeth Warren (D-MA) leading the charge.
During an interview at MSNBC, Warren said that the rising prices in the energy sector (which had risen 30% in the last year) is not a response to changes in the market but is only the result of greedy oil companies who are engaging in price-gouging for profit. Warren also quoted an article blaming the price rises on retail companies, using CEOs’ statements saying they have been rising prices in order to keep their profit margins high as evidence on their theory.
Warren is not the only Democrat who is trying to deflect the blame on private companies. The Biden administration recently ordered an investigation of oil companies for their alleged role in the increase of oil prices. When it comes to inflation, it appears that Democrats are lining up to take one of the oldest plays in the political book and blame private companies—not the government who has spent trillions of dollars in the last year—for inflation in the hopes of avoiding political backlash.
Why is Elizabeth Warren wrong?
Companies raising their prices in order to keep their profits high is not new, nor nefarious, it is just how the market works. It is supply and demand which set the market prices, the higher the prices the lower the demand, and vice versa. Companies have an incentive to charge the most they can out of a product, but consumers will also decrease the number of goods they buy.
Currently, prices are high because demand is far outpacing supply. Consumers are spending more money after they saved money due to the government programs during the pandemic, additionally, the supply chains are still in disarray as companies face labor shortages and higher energy prices. These rising costs in the supply side plus the higher demand will inevitably have an effect on the prices the consumer pays.
Additionally, the government has printed an astonishing amount of money over the last year and a half. The Federal Reserve showed that the supply of money has jumped from $15,406 billion in January 2020 to $21,187 billion in October 2021, a near 40% increase. This amount may increase even more if Democrats manage to pass their massive reconciliation spending bill.
Inflation is also a monetary problem, as Milton Friedman used to say. Even a former Obama economic advisor has warned that the size of federal spending in 2020 and 2021 might have a great effect on inflation, arguing that while supply chain issues are worldwide, the United States is suffering inflation rates that are far higher than those in Europe, for example.
Sure, companies are experiencing large profit margins as the economic conditions make it possible for them to raise prices without suffering a large decrease in demand. But companies are just reacting to an inflationary economic environment, not creating it.
Blaming private companies for inflation is not a new move
The French revolutionary government printed an absurd amount of money, blamed businesses for the ensuing rising prices, and mandated a law of “general maximums”, enforcing strict price controls, which only resulted in more scarcity and government oppression.
Most recently, the Chavista regime did the same when inflation started to become a chronic problem in the Venezuelan economy. Hugo Chavez and Nicolás Maduro routinely blamed businesses for hoarding and price-gouging, imposing strict price controls as a supposed solution to the issue. Of course, it didn’t work, and hyperinflation went soaring.
Senator Warren’s theory that private companies are causing inflation is not only false, but it is also a rationale that has been used by dozens of governments to implement terrible policies that will just make the problem worse.