11 ms·

A profit-price spiral in Germany

112 points by rustoo 3y ago

archi42 3y ago
Seems a bit hugged right now... http://web.archive.org/web/20230612200920/https://think.ing.com/articles/never-waste-a-good-crisis-a-profit-price-spiral-germany/ http://web.archive.org/web/20230612200920/https://think.ing....
zwieback 3y ago
Greedflation, copying what other companies do and preparing for expected new supply chain problems all contribute to profit-price spirals.
Quarrel 3y ago
Interesting read, good to see information on it from the German perspective, as the phenomenon seems to be playing out in most of the West. Weber has been fair vocal about the directionality here: https://www.newyorker.com/news/persons-of-interest/what-if-were-thinking-about-inflation-all-wrong https://www.newyorker.com/news/persons-of-interest/what-if-w... With an interesting take on why it is occurring now (contrasting coming out of the pandemic & coming out of WW2, where industry needs to rejig supply lines, different things are in different places profitability wise). Meanwhile, most of the wage-price spiral talk has been coming under a lot of fire, from both the right and left of economics. For instance, the Libertarian / right Cato Institute: https://www.cato.org/commentary/wage-price-spiral-explanation-inflation-dangerous-myth https://www.cato.org/commentary/wage-price-spiral-explanatio... or an Australian thinktank's take: https://www.theguardian.com/business/2023/feb/24/an-economic-fairytale-australias-inflation-being-driven-by-company-profits-and-not-wages-analysis-finds https://www.theguardian.com/business/2023/feb/24/an-economic... while the Australian Treasurer says similar things: https://www.smh.com.au/politics/federal/australians-hit-by-largest-fall-in-real-wages-on-record-20230222-p5cmhn.html https://www.smh.com.au/politics/federal/australians-hit-by-l... and the IMF struggled to find good evidence of them: https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wage-Price-Spirals-What-is-the-Historical-Evidence-525073 https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wag... These critiques have been glad to see, given it seemed everyone seemed to want to blame workers in the first instance, when they are still doing just a lot of catch up with their household inputs. Of course, even Cost-push inflation itself is poo-pooed as an idea by lots of mainstream economists (like Milton Friedman and co), so this pressure on greedy companies (which I think is their default position) might find a better audience (although Friedman would just say, where is the extra quantity of money coming from). The mainstream media seem to throw everyone under the bus as they try and write an article about whichever statistical release happened on any given day, but I'll take greedy companies over greedy workers for today.
- USB5 3y ago
  [dead]
- zwieback 3y ago
  This seems like a pretty good take [PDF] from the Kansas City Fed: https://www.kansascityfed.org/Economic%20Review/documents/9329/EconomicReviewV108N1GloverMustredelRiovonEndeBecker.pdf https://www.kansascityfed.org/Economic%20Review/documents/93...
- remich 3y ago
  The whole wage-price spiral theory is such bunk. The last time we in the U.S. saw significant inflation that could be directly tied to that was a time when union membership was at a much higher % of the workforce, and many unions had clauses in their CBAs that _automatically_ triggered wage increases in response to inflation. The economy in the U.S. is in such a different place now, falling back to that explanation seems almost like intellectual malpractice.
  - bboygravity 3y ago
    Anything goes to have the public look away from the government's insane over-spending. Enabled by central banks.
    - nerdponx 3y ago
      This is a non-sequitur.
  - roughly 3y ago
    The wage-price spiral theory is the sort of thing that would lead to a boom in the guillotine supply industry if it were more widely known or understood. “Worker wages going up is intrinsically bad and should be fought by intentionally causing a recession and putting people out of work” is the kind of thing economists can say out loud in public because there’s no such thing as class solidarity outside the billionaire class anymore.
- resolutebat 3y ago
ivan_gammel 3y ago
Property and construction are the most distorted markets in a half of the world and this article is yet another proof of that. Our society as a whole would actually benefit if state intervention would make property market unattractive for investors by oversupply: government could invest 50-100B€ in creating non-profit construction verticals that will oversaturate market. The next logical step would be to allow some of the constructed apartments to be privatized by tenants at low cost: maybe not by everyone, but only by those who has a socially important job (police, firefighters, healthcare and social workers, teachers) and majority of difficult problems that government has to deal with would go away. Yes, a lot of people who bought expensive properties may forget about any returns, there could be some margin calls and banking system won’t be happy. But this would be a necessary sacrifice for a healthier economy in which money go elsewhere.
- amelius 3y ago
  One can dream ...
- potatototoo99 3y ago
  What? Only "socially important jobs" could buy the cheaper apartments? What the hell
  - debesyla 3y ago
    Why not? It makes sense - not every job is equal and some are both important and usually not paid enough. Society or your local town won't collapse if there's not enough web developers but it may do if it lacks firefighters.
    - splix 3y ago
      That would be a payment, just not with money, right? So why it's better than just paying this money directly and letting the person decide, rather than introducing an extra step by putting the money into a development and then giving the property instead? The direct payment looks more efficient to me.
rtb 3y ago
"greed"? The force that pushes back on corporate greed should be competition. The problem is the modern trend of consolidation, monopolisation and lack of proper competition.
- Glyptodon 3y ago
  Why compete when we all own index funds? Just use proxies to communicate and sychronize about "industry and sector costs and margins" and take your share. Maybe work a little on cost reductions to look good, and don't rock the boat: So long as investors can be exposed to whole markets and industries without caring about individual winners, there's really only one owner of the publicly traded participents. Or is that an exaggeration?
  - im3w1l 3y ago
    Yes. It's something that could happen, but I don't think it already has. The CEO is usually more exposed to their own company than any other.
- Aerroon 3y ago
  Another factor is the consumers. They settle on a brand and refuse to try alternatives. Often for good reasons, but it still reduces competition.
  - rtb 3y ago
    Switching "brands" is a false choice when there are 100s of "brands" all owned by the same 4 conglomerates and all coordinating prices. https://www.theguardian.com/environment/ng-interactive/2021/jul/14/food-monopoly-meals-profits-data-investigation https://www.theguardian.com/environment/ng-interactive/2021/... https://www.visualcapitalist.com/illusion-of-choice-consumer-brands/ https://www.visualcapitalist.com/illusion-of-choice-consumer...
- deleted 3y ago
  [deleted]
- wpwpwpw 3y ago
hansjorg 3y ago
This entire "greedflation" saga is a bit surprising to me. That economic scholars are pushing hard against "greedflation" and for the idea that the main driver of inflation is greedy laborers and their excessive wage demands, is as expected. Until very recently these were the only kind of scholars allowed airtime about this topic and their explanations to laymen seemed to hinge on very naive ideas about the level of competition in various markets. What happened to make the "greedflation" story more palatable? Surely it must be something other than just disproving these seemingly ridiculous and ideologically driven ideas about the level of competition?
- kranke155 3y ago
  Joseph Stiglitz agrees with greedflation.* He is a Nobel Prize winning economist. I believe greedflation is easy to prove - huge increase in profit margin without a corresponding increase in costs, and public corpo PR focused on “inflation” as an excuse. It’s easy to prove with data. IMO there are economists who talk about economics as a cult/religion, described by alt-economist Steve Keen as “economism”. One needs to distinguish between them. * here is Stiglitz’s talk on the subject if you want to hear his opinion and corresponding dataset: https://youtu.be/4BAsZIHp9HI https://youtu.be/4BAsZIHp9HI
  - Aerroon 3y ago
    >greedflation is easy to prove - huge increase in profit margin without a corresponding increase in cost But how would the cost of the previous few years (uncertainty from covid, war etc) show up in the current price? I doubt they have a line item for the risk/hardship the business had to go through over the past few years, but it's definitely going to have some cost that's expressed at a later time in prices. How would you account for that?
    - kranke155 3y ago
      Stiglitz has a talk about this where he discusses exactly this. Can’t think of the time though: https://youtu.be/4BAsZIHp9HI https://youtu.be/4BAsZIHp9HI
hcks 3y ago
The idea of "greedflation" is strange, it seems to only be understandable if you start with the (unconscious?) assumption that workers cannot be the losers of inflation.
- nerdponx 3y ago
  Care to elaborate? The entire problem is that workers are the losers. The "price level" in the economy isn't actually rising, companies just realized they can extract a greater share of total surplus by just raising their own prices, relying on the particularities of the labor market to avoid needing to raise wages along with those prices. As I like to tell people: if the CPI is going up but your salary isn't, it's not inflation, it's you getting poorer.
jmyeet 3y ago
This whole story to me is a sobering and depressing tale of just how effective propaganda is, even with a relatively well-educated and informed audience here on HN. Why do I say that? Because for months I've been saying this but typically such comments get downvoted into oblivion. So many people even here are seemingly unwilling to pause for a few seconds and consider the evidence or simply to question the narrative that we need to raise interest rates or that it's our only tool for fighting inflation or that somehow wages are responsible for inflation. For the record, none of those things are true but yet so many people are conditioned to suck the boot of the capital-owning class, perhaps from the mistaken belief that those people are the capital-owning class or will be someday. You are not Elon Musk. You will never be Elon Musk. Elon Musk doesn't care about you. He would melt you down for parts if it meant an uptick in profits. In the 70s, with the oil price shock we had Nixon, a Republican, quite effectively tackle inflation with wage-price freezes. We've had some countries tackle greedflation with a windfall profits tax. Personally, I'd be happy enough with a mechanism that as long as inflation is above 4%, the corporate tax rate is 80% and all share buybacks and dividends are suspended. The capital-owning class (who own both parties in the US political system) have effectively decimated any form of labor solidarity so people vote against their own interests. Who doesn't vote against their interests? The capital-owning class.
- geodel 3y ago
  > Personally, I'd be happy enough with a mechanism that as long as inflation is above 4%, the corporate tax rate is 80% and all share buybacks and dividends are suspended. Ok, so promote your ideas elsewhere. Why does it even matter, if people does not agree with you here. You think you are right. But it is not some kind of settled science that everyone must agree.
bash-j 3y ago
These large cost increases have been great for businesses. If your company buys a widget for $10 and sells it for $50 and the cost goes up 20%, you can tell your customers our costs have gone up 20% and we can't afford not to pass on the increases, etc. The thing is the business is only paying $2 more, but the customer is paying $10 more. Plus we also have businesses like supermarkets that saw a huge increase in demand during the COVID restrictions, where people couldn't travel, eat out, go to concerts. But even after the record breaking year due to a non repeatable event, they still expect to grow on top of that. When demand falls, the only way to keep or grow your revenue is to increase prices.
Aunche 3y ago
A "profit-price spiral" is simply not a thing. Even the people who use this term never define what exactly is "spiralling." It seems like certain economists are intent on obfuscating the role of expansionary monetary policy on inflation by pointing their fingers at "corporate greed", when they are in fact not exclusive. Corporations are always greedy, so when the economy has more money, they're going to do what it takes to siphon as much as they can. Sometimes, this means that selling more goods and services, which doesn't increase inflation and is the desired outcome of monetary expansion. However, due to supply problems and closures due to the pandemic, this wasn't possible, so corporations increased prices instead.

112 points by rustoo 3y ago

Seems a bit hugged right now... http://web.archive.org/web/20230612200920/https://think.ing.com/articles/never-waste-a-good-crisis-a-profit-price-spiral-germany/ http://web.archive.org/web/20230612200920/https://think.ing....

zwieback 3y ago

Greedflation, copying what other companies do and preparing for expected new supply chain problems all contribute to profit-price spirals.

Quarrel 3y ago

Interesting read, good to see information on it from the German perspective, as the phenomenon seems to be playing out in most of the West. Weber has been fair vocal about the directionality here: https://www.newyorker.com/news/persons-of-interest/what-if-were-thinking-about-inflation-all-wrong https://www.newyorker.com/news/persons-of-interest/what-if-w... With an interesting take on why it is occurring now (contrasting coming out of the pandemic & coming out of WW2, where industry needs to rejig supply lines, different things are in different places profitability wise). Meanwhile, most of the wage-price spiral talk has been coming under a lot of fire, from both the right and left of economics. For instance, the Libertarian / right Cato Institute: https://www.cato.org/commentary/wage-price-spiral-explanation-inflation-dangerous-myth https://www.cato.org/commentary/wage-price-spiral-explanatio... or an Australian thinktank's take: https://www.theguardian.com/business/2023/feb/24/an-economic-fairytale-australias-inflation-being-driven-by-company-profits-and-not-wages-analysis-finds https://www.theguardian.com/business/2023/feb/24/an-economic... while the Australian Treasurer says similar things: https://www.smh.com.au/politics/federal/australians-hit-by-largest-fall-in-real-wages-on-record-20230222-p5cmhn.html https://www.smh.com.au/politics/federal/australians-hit-by-l... and the IMF struggled to find good evidence of them: https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wage-Price-Spirals-What-is-the-Historical-Evidence-525073 https://www.imf.org/en/Publications/WP/Issues/2022/11/11/Wag... These critiques have been glad to see, given it seemed everyone seemed to want to blame workers in the first instance, when they are still doing just a lot of catch up with their household inputs. Of course, even Cost-push inflation itself is poo-pooed as an idea by lots of mainstream economists (like Milton Friedman and co), so this pressure on greedy companies (which I think is their default position) might find a better audience (although Friedman would just say, where is the extra quantity of money coming from). The mainstream media seem to throw everyone under the bus as they try and write an article about whichever statistical release happened on any given day, but I'll take greedy companies over greedy workers for today.

USB5 3y ago
[dead]
zwieback 3y ago
This seems like a pretty good take [PDF] from the Kansas City Fed: https://www.kansascityfed.org/Economic%20Review/documents/9329/EconomicReviewV108N1GloverMustredelRiovonEndeBecker.pdf https://www.kansascityfed.org/Economic%20Review/documents/93...
remich 3y ago
The whole wage-price spiral theory is such bunk. The last time we in the U.S. saw significant inflation that could be directly tied to that was a time when union membership was at a much higher % of the workforce, and many unions had clauses in their CBAs that _automatically_ triggered wage increases in response to inflation. The economy in the U.S. is in such a different place now, falling back to that explanation seems almost like intellectual malpractice.
- bboygravity 3y ago
  Anything goes to have the public look away from the government's insane over-spending. Enabled by central banks.
  - nerdponx 3y ago
    This is a non-sequitur.
- roughly 3y ago
  The wage-price spiral theory is the sort of thing that would lead to a boom in the guillotine supply industry if it were more widely known or understood. “Worker wages going up is intrinsically bad and should be fought by intentionally causing a recession and putting people out of work” is the kind of thing economists can say out loud in public because there’s no such thing as class solidarity outside the billionaire class anymore.
resolutebat 3y ago

ivan_gammel 3y ago

Property and construction are the most distorted markets in a half of the world and this article is yet another proof of that. Our society as a whole would actually benefit if state intervention would make property market unattractive for investors by oversupply: government could invest 50-100B€ in creating non-profit construction verticals that will oversaturate market. The next logical step would be to allow some of the constructed apartments to be privatized by tenants at low cost: maybe not by everyone, but only by those who has a socially important job (police, firefighters, healthcare and social workers, teachers) and majority of difficult problems that government has to deal with would go away. Yes, a lot of people who bought expensive properties may forget about any returns, there could be some margin calls and banking system won’t be happy. But this would be a necessary sacrifice for a healthier economy in which money go elsewhere.

amelius 3y ago
One can dream ...
potatototoo99 3y ago
What? Only "socially important jobs" could buy the cheaper apartments? What the hell
- debesyla 3y ago
  Why not? It makes sense - not every job is equal and some are both important and usually not paid enough. Society or your local town won't collapse if there's not enough web developers but it may do if it lacks firefighters.
  - splix 3y ago
    That would be a payment, just not with money, right? So why it's better than just paying this money directly and letting the person decide, rather than introducing an extra step by putting the money into a development and then giving the property instead? The direct payment looks more efficient to me.

rtb 3y ago

"greed"? The force that pushes back on corporate greed should be competition. The problem is the modern trend of consolidation, monopolisation and lack of proper competition.

Glyptodon 3y ago
Why compete when we all own index funds? Just use proxies to communicate and sychronize about "industry and sector costs and margins" and take your share. Maybe work a little on cost reductions to look good, and don't rock the boat: So long as investors can be exposed to whole markets and industries without caring about individual winners, there's really only one owner of the publicly traded participents. Or is that an exaggeration?
- im3w1l 3y ago
  Yes. It's something that could happen, but I don't think it already has. The CEO is usually more exposed to their own company than any other.
Aerroon 3y ago
Another factor is the consumers. They settle on a brand and refuse to try alternatives. Often for good reasons, but it still reduces competition.
- rtb 3y ago
  Switching "brands" is a false choice when there are 100s of "brands" all owned by the same 4 conglomerates and all coordinating prices. https://www.theguardian.com/environment/ng-interactive/2021/jul/14/food-monopoly-meals-profits-data-investigation https://www.theguardian.com/environment/ng-interactive/2021/... https://www.visualcapitalist.com/illusion-of-choice-consumer-brands/ https://www.visualcapitalist.com/illusion-of-choice-consumer...
deleted 3y ago
[deleted]
wpwpwpw 3y ago

hansjorg 3y ago

This entire "greedflation" saga is a bit surprising to me. That economic scholars are pushing hard against "greedflation" and for the idea that the main driver of inflation is greedy laborers and their excessive wage demands, is as expected. Until very recently these were the only kind of scholars allowed airtime about this topic and their explanations to laymen seemed to hinge on very naive ideas about the level of competition in various markets. What happened to make the "greedflation" story more palatable? Surely it must be something other than just disproving these seemingly ridiculous and ideologically driven ideas about the level of competition?

kranke155 3y ago
Joseph Stiglitz agrees with greedflation.* He is a Nobel Prize winning economist. I believe greedflation is easy to prove - huge increase in profit margin without a corresponding increase in costs, and public corpo PR focused on “inflation” as an excuse. It’s easy to prove with data. IMO there are economists who talk about economics as a cult/religion, described by alt-economist Steve Keen as “economism”. One needs to distinguish between them. * here is Stiglitz’s talk on the subject if you want to hear his opinion and corresponding dataset: https://youtu.be/4BAsZIHp9HI https://youtu.be/4BAsZIHp9HI
- Aerroon 3y ago
  >greedflation is easy to prove - huge increase in profit margin without a corresponding increase in cost But how would the cost of the previous few years (uncertainty from covid, war etc) show up in the current price? I doubt they have a line item for the risk/hardship the business had to go through over the past few years, but it's definitely going to have some cost that's expressed at a later time in prices. How would you account for that?
  - kranke155 3y ago
    Stiglitz has a talk about this where he discusses exactly this. Can’t think of the time though: https://youtu.be/4BAsZIHp9HI https://youtu.be/4BAsZIHp9HI

hcks 3y ago

The idea of "greedflation" is strange, it seems to only be understandable if you start with the (unconscious?) assumption that workers cannot be the losers of inflation.

nerdponx 3y ago
Care to elaborate? The entire problem is that workers are the losers. The "price level" in the economy isn't actually rising, companies just realized they can extract a greater share of total surplus by just raising their own prices, relying on the particularities of the labor market to avoid needing to raise wages along with those prices. As I like to tell people: if the CPI is going up but your salary isn't, it's not inflation, it's you getting poorer.

jmyeet 3y ago

This whole story to me is a sobering and depressing tale of just how effective propaganda is, even with a relatively well-educated and informed audience here on HN. Why do I say that? Because for months I've been saying this but typically such comments get downvoted into oblivion. So many people even here are seemingly unwilling to pause for a few seconds and consider the evidence or simply to question the narrative that we need to raise interest rates or that it's our only tool for fighting inflation or that somehow wages are responsible for inflation. For the record, none of those things are true but yet so many people are conditioned to suck the boot of the capital-owning class, perhaps from the mistaken belief that those people are the capital-owning class or will be someday. You are not Elon Musk. You will never be Elon Musk. Elon Musk doesn't care about you. He would melt you down for parts if it meant an uptick in profits. In the 70s, with the oil price shock we had Nixon, a Republican, quite effectively tackle inflation with wage-price freezes. We've had some countries tackle greedflation with a windfall profits tax. Personally, I'd be happy enough with a mechanism that as long as inflation is above 4%, the corporate tax rate is 80% and all share buybacks and dividends are suspended. The capital-owning class (who own both parties in the US political system) have effectively decimated any form of labor solidarity so people vote against their own interests. Who doesn't vote against their interests? The capital-owning class.

geodel 3y ago
> Personally, I'd be happy enough with a mechanism that as long as inflation is above 4%, the corporate tax rate is 80% and all share buybacks and dividends are suspended. Ok, so promote your ideas elsewhere. Why does it even matter, if people does not agree with you here. You think you are right. But it is not some kind of settled science that everyone must agree.

bash-j 3y ago

These large cost increases have been great for businesses. If your company buys a widget for $10 and sells it for $50 and the cost goes up 20%, you can tell your customers our costs have gone up 20% and we can't afford not to pass on the increases, etc. The thing is the business is only paying $2 more, but the customer is paying $10 more. Plus we also have businesses like supermarkets that saw a huge increase in demand during the COVID restrictions, where people couldn't travel, eat out, go to concerts. But even after the record breaking year due to a non repeatable event, they still expect to grow on top of that. When demand falls, the only way to keep or grow your revenue is to increase prices.

Aunche 3y ago

A "profit-price spiral" is simply not a thing. Even the people who use this term never define what exactly is "spiralling." It seems like certain economists are intent on obfuscating the role of expansionary monetary policy on inflation by pointing their fingers at "corporate greed", when they are in fact not exclusive. Corporations are always greedy, so when the economy has more money, they're going to do what it takes to siphon as much as they can. Sometimes, this means that selling more goods and services, which doesn't increase inflation and is the desired outcome of monetary expansion. However, due to supply problems and closures due to the pandemic, this wasn't possible, so corporations increased prices instead.