Ahmed Rahman on Greedflation

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In this episode of Lehigh University’s College of Business ilLUminate podcast, we are talking with Ahmed Rahman about greedflation, a term that has been hotly debated among economists, policymakers, and the news media in recent months.

Rahman is an associate professor of economics in Lehigh's College of Business. He holds the Charlotte W. & Robert L. Brown III '78 Summer Research Fellowship and also is program director for the Lehigh Business Ph.D. in Business and Economics program. In addition, Ahmed is a research fellow at the Institute of Labor Economics, a nonprofit research institute and research network headquartered in Bonn, Germany.

Rahman spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript [PDF]. 

Jack Croft: Greedflation is a relatively new portmanteau, combining greed and inflation, that has crept into economic discussions over the past couple of years. What does it actually mean?

Ahmed Rahman: It's a new theory, in a nutshell. And it's not surprising that there would be new theories that emerge after 2021 and 2022 since so many macroeconomists were so terribly wrong about the possibility of inflationary pressures building up in the economy. And then economists were also wrong about how relatively easy, I guess, from a historical perspective, the inflation went down.

Since macro people have been so wrong on so many fronts, it seems inevitable there would be a variety of new thoughts and theories about what are the underlying causes of inflation. And so we have our new theory, which is sort of colorfully called greedflation.

It's called different things, but it really refers to an idea-- it's really one of two ideas. I would say the first of these ideas is kind of on the frivolous side, not that serious, and the second one is a little bit more of a real serious economic theory that we can grapple with and think about.

The frivolous version of this is that corporations really just became greedy. They became rapacious when it came to pricing. And in the face of extraordinary macroeconomic chaos, they ultimately took advantage of the American consumer. They had greater market concentration, so that kind of control allowed them to raise prices far beyond what one might say is a reasonable level.

Moreover, they kind of lied to us. These corporations misled the reasons for these price increases suggesting possibly that, well, they had no choice, right? Sometimes greedflation is called excuseflation. Doesn't exactly roll off the tongue, but OK, I get it. Yeah, these companies are actually making these wild claims of needing to raise prices, and we as the consumers are essentially kind of collectively duped.

So that's a definite version of greedflation that resonates. It's politically charged. It definitely calls for a different kind of action, maybe against corporations, maybe some punitive responses here. But I would say it's a little bit more of a frivolous version that doesn't necessarily really hold a lot of backing, either theoretically or empirically.

Croft: It’s a term that is usually credited to an economist at the University of Massachusetts Amherst, Isabella Weber, coining the term greedflation. And it was, as you, I think, kind of implied, originally met with a good deal of skepticism in economic circles. … Has there been a reconsideration of the role of greedflation, though, in rising prices lately among economists, policymakers, and news media covering business?

Rahman: Among certain economists, no. With many economists or many policymakers, however, there is at least some consideration of the things that, as you mentioned, Isabella Weber is talking about. So this is what I'm saying, the nonfrivolous version is going to be Isabella's work. Where this comes from? Isabella Weber and Evan Wasner. They wrote a paper not too long ago. The paper's called Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency? And so that's a pretty interesting title. It has a lot of specific aspects to it.

And this is my simplified version of it, but their story goes something like this: During ordinary times, large companies simply can't-- they're very reluctant to raise prices unilaterally. And it's because even in concentrated sectors where there's a lot of pricing power, there's still this competition that persists.

So mathematically, you can demonstrate it doesn't take a huge amount of competitive pressure to keep companies in line and not jack up their price because, ultimately, if they do and their competitors do not, it's risking losing market share. So the nature of competition-- even if it's not perfect competition, some degree of competition keeps these companies in check.

Now, what Isabella and Evan's work is actually pointing out, this kind of breaks down potentially in the context of supply shocks. As we might have remembered, in 2020-2021, we had these bottlenecks in the supply chain, and that's yielding all kinds of shortages of inputs. And the threat of competition actually stops to restrain price gouging because all these companies are sort of facing the same supply crunch, right? This leads a company to actually raise their prices, and there's no real fear that they're going to lose market share. So there's no new competition, ultimately, that's keeping the company in check.

The final piece of this version of greedflation is that this becomes particularly important in concentrated industries and upstream industries. Upstream sectors would be those companies-- they produce goods that are critical to the functioning of other businesses. This could be energy companies, chip makers, these sorts of firms. So when they exploit the bottlenecks, and they increase their profit margins, they're forcing these downstream businesses to increase their prices as well. And that's the ripple effect that kind of filters through the economy.

And that's where they claim that it is profit margins themselves that are contributing to the overall price increases in the economy. So it's not about a sudden flare-up of greed from companies, but it is coming from the profit motivation of companies. And they're able to exploit the specifics of bottlenecks, coupled with consumers being maybe a little bit confused about what's going on. And so they're really able to pass off any kind of cost increase over with really big price increases for the rest of us.

Croft: [Is} there anything important that you think the listeners should know about greedflation, inflation …

Rahman: Sellers' inflation is less sort of exciting. You have a new way of thinking about inflation, and yet it's also at the same time a little bit dangerous. It's not like we haven't been here before, when prices are going up and up and up or down and down and down. If there's just instability, we have different ways of thinking about how to solve it. And it seems reasonable to look at who seem to be the big beneficiaries of inflation, which are the corporations. And these corporations are actually telling us that they're benefiting from inflation because their earnings reports-- they have it right there.

But I would caution the American public-- I would caution us to [not] vilify companies for doing what they are actually intended and designed to do in the first place, which is to make money for their shareholders, provide quality products for their customers. And when they do that, we have to expect that, during especially weird times, there's going to be profitability that goes up through the roof. There might also just as easily be profits that collapse, and you end up with a great number of bankruptcies, and so on. These are the vicissitudes of the economy.

As much as people who like greedflation like to think about the solution as, "If we just pinpoint a couple of these culprits - its Amazon, or it's Disney, or it's Apple - and we just tell them, 'No, no, no, you cannot raise prices beyond a certain threshold,' then that'll be the solution," I think that's far too simple, and I think it causes more problems for the macro system than it solves.

And yet, I think we should listen and hear them out because there is something to be said about this round of inflation that has been so detrimental. But I think we should keep an open mind on all of this. That would be what I would advocate to everybody.