U.S. Senator Bob Casey (D) recently released the “Special Report on Greedflation.” This publication attempts to explain high inflation by an appeal to corporate greed, and it further proposes policies on how to deal with greed. As one could imagine, this report is chock-full of errors, but one stands out most prominently. The error is that “greedflation” is a bad thing. In actuality, so-called “greedflation” is good.
The report narrates a story of a fictional mother of two named Anne. Anne is facing higher costs, making it harder to “make ends meet.” Anne, according to Casey’s special report, “is falling victim to greedflation.” However, Anne is not a victim, but a beneficiary. Anne should be grateful that these companies raised their prices. If the prices were not raised, then Anne would likely find few consumer goods on the shelves of her grocery store. Why is that?
When the money supply increases, by the intervention of the Federal Reserve, the new money is spent and works its way through the market, raising demand for goods and, therefore, the prices for those goods as well. Essentially, too many dollars are chasing too few goods, fewer goods than usual. The result? Prices increase. The same result happens when the government disrupts production through shutdowns and regulations. The supply of consumer goods is restricted and consumer prices rise.
If the prices remain at the pre-inflation levels, then the quantity demanded of affected goods will be greater than the quantity supplied. As a result, there will be shortages. As a consequence of such shortages, there will be an alternative system of allocating goods other than allocating based on who is most the most eager buyer. Usually, the alternative will be “first come, first serve.” The people who get to the store first buy more of the under-priced goods than they would have otherwise, leaving little or none for latecomers.
A good example of this is toilet paper during the pandemic. Walmart and other grocers, perhaps motivated by the desire to maintain consumer goodwill, kept the price of toilet paper at pre-pandemic levels. As a result, toilet paper was quickly bought up by those who got to the store first, and those who got there later were greeted by nothing but empty shelves.
When prices are suppressed below the market-clearing price (the price at which quantity demanded equals quantity supplied), the distribution of the good in question is deep but narrow, i.e., a few people get large quantities of the good. When the price is at the market-clearing price, the distribution is shallow, but broad; i.e., more people get fewer units of the good.
But is the fictional single mother Anne harmed or benefited? In other words, will she get to the store sooner or later? Sen. Casey made sure to painstakingly describe how busy Anne is. She works a lot and she hardly has any time. This means the opportunity cost of waiting in line at the store for Anne is higher than that of others who are unemployed or retired. She will likely get to the store after it has already been picked clean.
So, when stores act “altruistically” by holding prices below market-clearing prices, consumers like Anne are harmed. Under “inflated” prices, Anne may pay more for each good, but paying more for vital goods is superior to not getting the good at all.
It is clear now that “greedflation” benefitted Anne rather than victimizing her as Sen. Casey alleges.
In the spirit of Casey’s wildly inaccurate and wrongheaded report, what solution is there for the current inflation problem? Ultimately, the government should lift impediments on production, meaning that as many regulations and taxes should be abolished as possible. Furthermore, they should cease inflating the money supply. Both of these policies should be sufficient for dampening the effects of consumer price inflation and elevating the financial wellbeing of people like Casey’s fictional “Anne.”
Ultimately, we should not support government interventions to solve the supposed problem of “greedflation” because government intervention is itself the problem. To bring prices down, we need to get the government out of the market. In the meantime, the average person should be thankful for “greedflation” because they might otherwise be confronted with the harsh reality of empty shelves at grocery stores.