Profit driven Inflation – Part 2
Back on 28 November 2022 my blog ‘The Cyclops Adrian Orr; and the real way to fix Inflation -Part 1’ identified profit maximisation and the pricing process as causes of inflation in the economy. In The Guardian 13 December an article by Robert Reich ‘The fed needs to stop raising interest rates’; say’s in relation to the US economy that ‘…domestic inflation is being driven by profits, not wages. And interest rate hikes don’t reduce profit-driven inflation…’. All heresy to those indoctrinated in neo-liberal economics.
He too suggests there are other ways to control inflation and includes a windfall tax and a method to calculate that tax. Our Reserve Bank is stupidly raising interest rates to crush the demand side of the economy, the life blood of the economy; which is just about people buying things to satisfy their basic needs, and some of their wants. If people are mortgaged up to the hilt, i.e., to get basic shelter, that is not an indication of their poor decision making but a reflection of the neo liberal market reality that private enterprise builds as cheaply as it can and then sells as expensively as it can to maximise profit. This is enhanced and facilitated by those willing to make massive loans to these people/buyers in order to maximise their own company profits.
The neo-liberal market economy creates self serving corporate monsters who work against people ( too many people struggling to pay groceries, mortgages and rents, monsters lacking flexibility for adapting the economy for climate change, or to look after water, etc). And the Greens under David Shaw have been endeavouring to work alongside it! Labour; well they gave up the fight years ago.
Working alongside neo-liberal monsters could never work. Just take the electric car subsidy, business just jack up their prices to take the subsidy. Labour’s first budget with the extra $50 for the accomodation allowance; rents simply went up to absorb it. They mocked Labour/Green naivety. Working for families is a subsidy to help employers pay low wages, and yet business grumble about it. If government fiscally tries to spend to help people; business just raise prices to take it because there is ‘demand in the economy’. If the government talks of raising taxes then businesses threaten to raise prices to keep their profits the same. It’s all gimme gimme for business in a neo-liberal economy.
There is no self regulation or natural brake on pricing in the structure of the neo-liberal economy. But there is! Say neo-liberals! Reduced demand. But wealth in our neo liberal economy is no longer dependant on providing goods and services, so demand is no longer an effective a tool to bring down prices. Business now wait till government stumps up money to help people pay their higher prices. All while they shift wealth to shares and other capital assets.
And crazier; business don’t feel wealthy because they followed ‘good’ accounting advice and are all heavily debt financed, so they need high share prices to sustain those loans. The CEO incentive is to keep share prices high. And neo-liberal goverments since the 1980s have encouraged this as if it is a good, removing regulations and constraints. The whole economy under neo-liberalism is a house of cards, propped up by government largesse when they try and support people. The pricing process is broken and is being abused to maximise profit.
But it wasn’t always like this. In the US, e.g., Henry Ford paid high wages so that workers could afford to buy his car. But he also drove production costs down and tried to sell his car cheap to encourage purcahses. It was about turnover to maximise profit. The way to wealth was to supply a good or service to people. But now the path to wealth is about holding a capital asset, e.g., a house, or shares. It is about marketing and how to extract ‘consumer surplus’, to maximise each point of sale. How to deceive and manipulate customers to spend. The focus is not on driving down costs. In fact some costs are tax positives; depreciation, interest payments.
In the 50 and 60’s we had a roaring economy based around supplying goods and services to ordinary people and inflation was not a big problem. Suddenly now it always causes inflation. Why? The existence of government services acted as a brake on overpricing. Government had e.g. insurance, bank, power companies, post office, a ministry of works, an effective rail service and interislander. All these government agencies were slow to raise prices and therefore kept a check on private business ability to raise prices or they would be priced out of the market. That was a more effective competition. And with essentials (housing, health, education) were taken care of at a relatively low cost, supported by higher taxes, it left more discretionary income to stimulate the rest of the economy.
But now, perversely, competition is often inhibited. Government agencies SOE’s work to maximise profit. For example The Interislander doesn’t compete with the alternative. It could compete and crush it like private enterprise is supposed to do, but its more profitable with a struggling or weaker competitor to use them to help keep your own prices high. Consumers have nowhere else to go. Yes new firms may want to come in but they still want to keep the prices high to maximise profits. We see this problem in housing, in mobile phones, everywhere. It’s easier to raise prices to gain profit rather than gain market share. To wheedle and fiddle pricing while consumers are distracted living their own lives. The whole efficiency theory of the market is bumkin.
So a windfall tax doesn’t stop inflation it just taxes the outcome of it, but it might if producers decide to not pay the tax by keeping prices lower. But we did previously have some natural checks on pricing and inflation:
- when the economy had a path to wealth based on supplying goods and services to people. (I’.e if you raise prices you lower demand and then you can find your business out of market share).
- we had lots of essential services supplied by government at lower costs than private enterprise could (recall — that is why New Zealand had government services in the first place; private enterprise in the early days of New Zealand was failing. And here we are again with private enterprise failing).
We can help achieve the first bullet above by reforming our tax and ownership laws, and this action will help fight inflation. The three key reforms are:
- Remove the deductibility of expenses for non-individuals (this is already the case for salary and wage earners). So all existing gross income is taxed at least at 10% (on current date it will collect more than what is currently collected with 28% on net income). This traditional ‘income’ is only taxed once. Deductibility for salary and wages paid through the Inland Revenue PAYE system would remain so their is no discouragement to employing people.
- Removing expense deductibility reduces wasteful spending and tax avoidance opportunities. High cost industries like mining and oil exploration will bear their full cost and if this is prohibitive then that reflects the real cost of the busiess. A shift to focus on recycling is certain. Environmental protections and standards must remain so that cheap destructive practises are not allowed.
- Remove for tax the capital/revenue distinction for non-individuals. This means all that is gained from disposal of a capital asset is subject to tax at 10%. And all assets that come into the firm are subject to tax at 10% including loans. (except if the loan is a true third party loan from a New Zealand based, approved and registered entity, i.e., a NZ bank). Yes a business can still borrow from overseas but it is subject to tax because so much tax avoidance happens to covert income into capital; like loans. And there would be an exception from this tax for goods fully consumed in the production of a good or service. Note: this is not a capital gains tax but a redefinition of what ‘income’ is. Assets should be relatively easy to track as companies want to celebrate and sell themselves through their financial accounts. If gains are not here that is likely to be evasion.
- Removing this distinction cuts off the tax advantages to the second path to wealth creation, the holding of capital assets. Therefore fixing the fundamental flaw in our economy. And taxing assets both into and out of an entitiy is a significant disincentive to hold capital assets as a proxy income. This forces the path to wealth creation back to the supply of goods and services to ordinary people as the path to wealth. And that will help put more of a natural restraint on inflation.
- Limit the ownership laws so you must go back to a natural person within one or two steps. This will simply change the way companies are organised. They will become bigger, more visible, and should be more transparent, and therefore more accountable.
These changes can transform the New Zealand economy relatively easily without agreement from overseas trade organisations or countries. It would be traumatic for some, the neo-liberal nutcases who have damaged and poisoned our economy. But a huge number of business opportunities will open up outside the currently favoured high cost business structures with overseas ownership. The neo-liberalism approach to economy is bringing us closer and closer to collapse with each bust. It’s exploitation of the envionrment is unsustainable. We have to do something sooner rather than later and these changes strike at the heart of the problems, like inflation.
These changes are not extreme. They are neither left or right wing, they just help put the correct incentives back into the economic forces that our economy and society rely upon.
p.s. We can eliminate GST. It’s regressive and it suppresses demand which is critical to the economy. And deal with the likely initial inflationary effects of these changes. Other changes are possible.
As has been noted on several occasions, we are not alone on inflation. An extract from an email received from my brother-in-law a few days ago…
“The UK official inflation rate hit 11.1% last month, but it seems to be much higher. We are noticing it particularly at the supermarket, where some items have gone up by 50%. My electricity and gas bill has gone up from £66 per month in 2020 to £203 per month this winter. Everybody is getting a government grant of £67 per month between Oct 2022 and March 2023, but after that we are on our own. Diesel did get up to £2.00 per litre, but has since dropped to £1.85 per litre.”
So yes whilst we are doing it tough, I’d suggest some are doing it tougher.
You had me in stitches at the mere mention of Robert Reich and the Guardian.
LOL
“Robert Bernard Reich is an American professor, author, lawyer, and political commentator. He worked in the administrations of Presidents Gerald Ford and Jimmy Carter, and served as Secretary of Labor from 1993 to 1997 in the cabinet of President Bill Clinton. He was also a member of President Barack Obama’s economic transition advisory board.”
And your background Andrew? Don’t bother, I’m already on the ground in tears.
LOL!
Inflation is being driven my the corporates raising prices and increasing their profitability, the average man or women on the street has not driven up inflation yet they are the one’s being hammered with increased prices and increased mortgage interest rates. We really do live in f***** up world.
Inflation is being driven my the corporates raising prices and increasing their profitability, the average man or women on the street has not driven up inflation yet they are the one’s being hammered with increased prices and increased mortgage interest rates. We really do live in f***** up world.
Would tea and bickies for the workers at smoko time be considered “wasteful expenses”?