[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
THE INFLATION EQUATION:
CORPORATE PROFITEERING,
SUPPLY CHAIN BOTTLENECKS,
AND COVID-19
=======================================================================
HYBRID HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MARCH 8, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-73
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
47-271 PDF WASHINGTON : 2022
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
March 8, 2022................................................ 1
Appendix:
March 8, 2022................................................ 73
WITNESSES
Tuesday, March 8, 2022
Drummer, Demond, Managing Director, PolicyLink................... 4
Goodspeed, Tyler, Kleinheinz Fellow, Hoover Institution.......... 11
Mabud, Rakeen, Chief Economist and Managing Director, Policy and
Research, Groundwork Collaborative............................. 6
Vaheesan, Sandeep, Legal Director, Open Markets Institute........ 8
Zandi, Mark, Chief Economist, Moody's Analytics.................. 9
APPENDIX
Prepared statements:
Drummer, Demond.............................................. 74
Goodspeed, Tyler............................................. 89
Mabud, Rakeen................................................ 94
Vaheesan, Sandeep............................................ 108
Zandi, Mark.................................................. 117
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of the Merchants Payments Coalition........ 127
Letter regarding the State and Local Fiscal Recovery Funds
(SLFRF).................................................... 131
Gonzalez, Hon. Anthony:
``Inflation eroded pay by 1.7% over the past year,'' by Greg
Iacurci.................................................... 135
McHenry, Hon. Patrick:
Written statement of the U.S. Chamber of Commerce............ 145
Ocasio-Cortez, Hon. Alexandria:
Letter correcting statements made during the hearing......... 148
THE INFLATION EQUATION:
CORPORATE PROFITEERING,
SUPPLY CHAIN BOTTLENECKS,
AND COVID-19
----------
Tuesday, March 8, 2022
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Sherman, Scott,
Green, Cleaver, Himes, Foster, Beatty, Vargas, Gottheimer,
Gonzalez of Texas, Lawson, San Nicolas, Axne, Casten, Pressley,
Torres, Lynch, Adams, Tlaib, Dean, Ocasio-Cortez, Garcia of
Illinois, Garcia of Texas, Williams of Georgia, Auchincloss;
McHenry, Lucas, Posey, Luetkemeyer, Huizenga, Wagner, Barr,
Williams of Texas, Hill, Emmer, Zeldin, Loudermilk, Mooney,
Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose,
Steil, Gooden, Timmons, and Sessions.
Chairwoman Waters. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
I now recognize myself for 5 minutes to give an opening
statement.
Today, we will continue the discussion we began with
Federal Reserve Chair Pro Tempore Powell last week about the
economy and the causes of inflation and its impact on families
across the country. Last Friday, we received another strong
Jobs Report which showed that 678,000 jobs were added to the
economy in the month of February. The record-setting job
creation we saw during the first year of the Biden
Administration continues, indeed thanks to the American Rescue
Plan, signed into law by President Biden. The U.S. has had a
stronger economic recovery than any other advanced economy
worldwide. Wages and salaries for workers grew 4.5 percent in
2021, which is the highest pay increase for workers since 1983.
Importantly, these wage increases have been most significant
for low-income workers.
We are still in the midst of the COVID-19 pandemic and its
effects, including higher prices at the grocery store and
higher monthly rents that are taking a toll on household
budgets. Today, I expect we will hear some of our colleagues
attempt to pin inflation on the successful American Rescue
Plan, a bill that helped attack this deadly virus and get
millions of people vaccinated, supported 6 million small
businesses, and helped fuel the economic growth, while
resulting in the first reduction of Federal debt seen since the
Obama Administration. But this oversimplified narrative has
been debunked by experts, including by Chair Pro Tempore
Powell, who explained at last week's hearing that supply chain
bottlenecks caused by the pandemic are one of the main drivers
of inflation, and every American knows, whether they rent or
own their home, that housing is also a key driver of inflation.
For too long, we have not addressed the shortfall in our
housing supply. And this lack of supply is driving up costs. In
2021, the national median rent for an apartment jumped by
almost 18 percent, and home prices rose by almost 17 percent.
Additionally, as giant corporations have grown larger in a wide
range of sectors across our economy over the last several
decades, they have exercised greater power to set prices. Right
now, we are seeing big corporations take advantage of economic
conditions and a lack of real competition to pass higher prices
on to consumers, simply because they can. Moreover, Russia's
unprovoked invasion of Ukraine and the related strong response
the United States and our allies have taken to defend democracy
and support Ukraine have already begun to have ramifications on
gas and other prices.
Congress has an important role to play in addressing the
complex causes of inflation that is hurting consumers. The
Senate can start by confirming President Biden's highly-
qualified slate of nominees so that monetary policy decisions
are made by public officials who are accountable to us.
Congress has already enacted the bipartisan infrastructure bill
that will improve the infrastructure we have, including at our
nation's ports. They have addressed supply chain challenges,
and Congress must finish the work of further bolstering supply
chain resilience, supporting domestic manufacturing, reforming
the shipping industry, and bringing down housing costs.
The House has passed the Build Back Better Act, which
addresses labor and housing supply shortages through
significant investments in housing and child care, and also
includes investments in supply chain resilience and other
sectors. Many economists, including 17 Nobel laureates, have
expressed their view that investments have basically been
expressed in very significant ways. I look forward to hearing
from this panel on how to bring about a robust and stable
recovery for all.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman, and thank you for
having this hearing. If Democrats are looking to crack the code
on the inflation equation, I would suggest a little self-
reflection. Today's hearing title shows that Democrats want to
blame high prices on everything--corporate greed, broken supply
chains, even the COVID-19 virus--but here is where it gets
rich. It left out the one thing that economists of all
political stripes have pointed to as the leading cause of
record price increases: the massive injection of Federal
spending that occurred over the past year.
The Biden Administration's American Rescue Plan plowed
nearly $2 trillion into an already-strong economy, which caused
consumer prices to rise more rapidly than the economy's
productive capacity. This is basic economics. Widespread, out-
of-control inflation is the natural consequence of dumping
unnecessary cash into an economy already well into recovery
from pandemic disruptions. And now, my constituents and yours
are paying the full price for all of that free money. By the
end of last year, the expenses for many working families
exceeded their incomes, despite any wage gains. The outlook, at
least in the short run, doesn't look any better. Until we have
an honest conversation about the root cause of inflation, we
are not going to get anywhere.
My colleagues across the aisle want to talk about so-called
corporate profiteering, so let's talk about that. Profit is not
synonymous with greed. You don't have to take my word for it.
Former Democrat Treasury Secretary Larry Summers, and Jason
Furman, a top economist in the Obama Administration, have been
openly critical of the attempts to blame corporations for
inflation.
According to Summers, ``Business bashing is terrible
economics and not very good politics.'' I agree. Businesses
have certain fixed operational costs, just like we do at home,
and things that make the cost of running a business more
expensive, like taxes and regulations, get included in the
final prices customers have to pay. So as wages remain
stagnant, American families are finding it harder and harder to
keep up. You hear it around the kitchen table across the
country. Housing costs more, food costs more, even baby
formula, if you can find it, because we have a national crisis
around the shortage of baby food, is more expensive.
So, that leads me to the next so-called cause of inflation
my Democrat colleagues talk about, and my friend just talked
about: supply chain bottlenecks. Steve Rattner, who served as
Counselor to the Treasury Secretary in the Obama Administration
noted that, ``Blaming inflation on supply lines is like
complaining about your sweater keeping you too warm after you
have already added several logs to the fireplace. The bulk of
our supply problems are the product of an over-stimulated
economy, not the cause of it.''
In short, Democrats' reckless fiscal agenda fueled a
spending spree right at the moment our supply logistics were
under the most strain.
Supply issues are a product of excessive demand that
happens by default after a huge government cash dump, like the
American Rescue Plan. And then, there are the billions of
dollars in new regulatory burdens and the ongoing impact of
Democrats' mainstream shutdowns during the pandemic.
The House Small Business Committee, with Ranking Member
Luetkemeyer, calculated that the Biden Administration has
produced 283 new regulatory rules, and is on the way to more,
with an estimated cost to businesses of $201 billion. The
private sector has been forced to jump through hoops to meet
local, State, and Federal regulations in their attempt to solve
supply chain issues, thereby raising the cost of doing business
and raising the cost of things for the consumer. Meanwhile, the
previous Administration's incredible efforts to cut
duplicative, overly burdensome regulations and support private-
sector endeavors have been scrapped out of political expediency
or out of a political agenda.
It is time to stop chasing what feels good politically and
do what is right economically. We must restore fiscal
discipline and promote policies that support energy
independence and long-term economic prosperity. Until we do
that, Democrats will keep throwing flimsy excuses at the wall
to see what sticks politically, and Americans are, quite
frankly, tired of cleaning up the mess.
With that, thank you, Madam Chairwoman, for holding this
hearing. Thank you for allowing us to discuss this important
subject matter. I yield back.
Chairwoman Waters. Thank you, Ranking Member McHenry.
I want to welcome today's witnesses: Mr. Demond Drummer,
the managing director for equitable economy at PolicyLink; Dr.
Rakeen Mabud, the chief economist and managing director of
policy and research with the Groundwork Collaborative; Mr.
Sandeep Vaheesan, the legal director of the Open Markets
Institute; Dr. Mark Zandi, the chief economist at Moody's
Analytics; and Mr. Tyler Goodspeed, the Kleinheinz Fellow at
the Hoover Institution.
You will each have 5 minutes to summarize your testimony.
You should be able to see a timer that will indicate how much
time you have left. I would ask you to be mindful of the timer,
and quickly wrap up your testimony when your time has expired.
And without objection, your written statements will be made
a part of the record.
Mr. Drummer, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF DEMOND DRUMMER, MANAGING DIRECTOR, POLICYLINK
Mr. Drummer. Thank you, Chairwoman Waters, Ranking Member
McHenry, and members of the committee for the opportunity to
offer testimony on inflation and its impact on the 100 million
economically-insecure Americans. My name is Demond Drummer, and
I am a managing director at PolicyLink, a national research and
action institute which works to ensure that all people in
America participate in a just society, live in a healthy
community of opportunity, and prosper in an equitable economy.
I would like to center my discussion of inflation on the
nearly 100 million people in America living below 200 percent
of the Federal poverty threshold.
The impact of higher prices falls disproportionately on the
100 million who must pay an even greater share of their income
to meet their basic needs, but if we look closer, we see that
inflation is not the problem. It is being made out to be,
especially for that 100 million. The problem is an economy that
suppresses wages and siphons wealth away from working people.
In the time that remains, I will offer some perspectives on why
the way we talk about inflation is simply wrong.
Next, I will discuss how inflation pales in comparison to
the broader affordability crisis afflicting the 100 million. I
will conclude with policy recommendations that can begin to
bring balance to our economy.
So now, about inflation, the way we talk about inflation
blames our government for price increases, but it is
disingenuous to lay inflation solely or even primarily at the
feet of Federal stimulus. There are many more factors at play,
including the fragility of global supply chains, et cetera.
Yes, our government stimulated demand. That was the point. It
was absolutely necessary during the pandemic. The question is,
who actually raised the prices? It was the companies choosing
to take advantage of the pricing power that comes when buyers
demand more goods than the companies have available to sell.
These price increases were neither automatic nor inevitable.
They were a conscious choice that disproportionately harmed the
100 million people in America living in or near poverty.
To be sure, there are exogenous factors that inform how
companies set their price levels. War and weather can inform
the price of inputs. However, if we are not clear that it is
not government spending directly, but corporate pricing power
that drives inflation, then we will always hesitate to make the
necessary public investments to build a more sustainable and
equitable economy in which the 100 million can truly prosper.
This is the work of our time.
An intense program of economic policy designed to suppress
wages and siphon wealth is a much bigger threat than inflation.
Here are the numbers. Nearly 100 million people live in
households with incomes of less than 200 percent of the Federal
poverty threshold. That is one-third of the U.S. population.
Households below the Federal poverty line spend 18 percent of
their income on energy, nearly 10 times the energy burden of
higher-income households. While productivity grew by nearly 60
percent over the last 4 decades, a typical worker's pay
increased by less than 16 percent. Productivity grew 4 times
faster than wages.
In housing, between 2001 and 2020, home production in the
U.S. fell short of demand by 5.5 million units. The twin forces
of a housing shortage and uneven wage growth have converged to
create a national crisis that was only further exacerbated by
the economic impact of the pandemic. Before the pandemic, half
of all renters in America were paying more than they could
afford on housing: half. In 2021, rents increased by at least
10 percent in 149 metropolitan areas. Today, 6 million renter
households are currently behind on rent. That is double the
pre-pandemic baseline. During the pandemic, meanwhile, the net
worth of U.S. billionaires grew by $2.1 trillion, an increase
of 70 percent.
The solution we recommend is to enact a bold program of
expansionary economic policy that does the following: supports
wage growth for the lowest-income workers; expands the labor
force; ensures that the benefits of productivity gains are
shared equitably; invests in affordable housing infrastructure;
supports alternative pathways to homeownership; accelerates
adoption of low-cost renewable energy; and promotes the
development of high-wage sustainable industries.
This is our moment to enact practical policies and make
public investments that will bring balance to our economy and
deliver real results for the American people, especially the
100 million who are economically-insecure.
Thank you again for the opportunity to testify before you.
It has been an honor.
[The prepared statement of Mr. Drummer can be found on page
74 of the appendix.]
Chairwoman Waters. Thank you, Mr. Drummer.
Dr. Mabud, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF RAKEEN MABUD, CHIEF ECONOMIST AND MANAGING
DIRECTOR, POLICY AND RESEARCH, GROUNDWORK COLLABORATIVE
Ms. Mabud. Chairwoman Waters, and Ranking Member McHenry,
thank you for inviting me to testify today. My name is Rakeen
Mabud, and I am the chief economist and managing director of
policy and research at the Groundwork Collaborative. Groundwork
is an economic policy think tank dedicated to advancing a
coherent economic worldview that produces broadly-shared
prosperity and abundance for all.
My testimony today will focus on three key points. First,
corporate profiteering is playing an important role in rising
prices. Corporate executives and shareholders are enjoying the
highest profit margins in 70 years, and consumers are paying
the price.
Second, Wall Street's presence in every corner of our
economy suggests a profit-price spiral to significant risk. In
contrast, there is no evidence that wages are driving prices
up.
Finally, today's price increases are the direct result of
the outsized power that megacorporations hold over our supply
chains and our economy more broadly.
There are a range of factors driving inflation right now,
including increased and shifting demand, as well as supply
chain disruptions and the resulting shortages. However, the 70-
year record high corporate profit margins demonstrates that
mega-corporations are taking advantage of this crisis to pad
their profits, accelerating price hikes for consumers.
Groundwork has combed through hundreds of earnings calls to
understand why profit margins are at a record high. In these
calls, executives tell investors about the last quarter's
performance and discuss what investors can expect going
forward. Over and over, the message from corporate America is
clear: CEOs are telling their investors that the current
inflationary environment has created significant opportunities
to extract more from consumers by raising prices and pocketing
the extra profits.
Take Constellation Brands, the parent company of popular
beers, Modelo and Corona. On its earnings call in January,
Constellation's CFO said, ``As you know, we have a consumer set
that skews a bit more Hispanic than some of our competitors.
And in times of economic downturn, they tend to get hit a
little bit harder and they recover a little bit slower, so we
want to make sure we are not leaving any pricing on the table.
We want to take as much as we can.''
Megacorporations are able to get away with this kind of
aggressive and extractive pricing precisely because of the
current inflationary environment. As Hostess' CEO said in an
earning call this month, ``We are also seeing consumers
experience a lot of disruptions. They are losing benefits. They
are moving to a normalized COVID environment. They haven't
fully recognized they were absorbing pricing, and inflation is
a helpful cover for these price hikes.'' The same CEO said,
``Pricing by definition is a change model. It's temporary,
consumers get used to it. When all prices goes up, it helps.''
Wall Street's influence in every corner of our economy
makes this period of inflation unique and puts us at risk for a
profit-price spiral. As profits rise as a result of price
hikes, so, too, does the investor demand for those profits,
sending prices spiraling upwards.
Take Walmart and Target, whose executives wanted to pursue
a strategy of increasing market share by keeping prices low. As
a result, both companies experienced brutal sell-offs. Simply
put, investors weren't having it. Having seen how successful
price hikes were across the retail industry, they punished
anyone who was not pursuing the same strategy. Within 3 months,
both companies have raised their prices.
While investor demands for higher profits are sending
prices up, there is no evidence that wages are playing a role.
A recent analysis by the Economic Policy Institute looks at the
relationship between price increases and wage increases across
sectors. They find no correlation between these two factors
since December 2020. In other words, there is absolutely no
evidence to suggest that wage increases for workers are to
blame for the price increases we are seeing today.
Corporate America's ruthless pursuit of efficiency has
contributed to today's high prices in two important ways.
First, it hollowed out and nearly eliminated diversity in our
supply chain, leaving us without any failsafes to withstand
significant shifts in demand without supply shortages.
Second, it has left us vulnerable to profiteering and price
gouging. Without competition to undercut companies who are
charging excess prices, or laws and regulations prohibiting
this behavior, companies will continue unabated. Congress must
do its part to bring down prices by taxing excess profits to
encourage productive investment, and to encourage vigorous
competition in key product markets and along the supply chain.
It is also imperative that Congress makes long-overdue
investments in our supply chain infrastructure and in sectors
like housing, health care, and child care that have been
putting strain on family budgets for decades.
Importantly, interest rate hikes, which slow inflation by
tamping down demand and making people poorer, will do nothing
to make our markets more competitive, nothing to help spur
overdue investments in housing and infrastructure, and nothing
to address profiteering. We should no longer delay the
important work of reorienting our economy towards the people
who keep it going: consumers, workers, and small businesses.
Thank you, and I look forward to your questions.
[The prepared statement of Dr. Mabud can be found on page
94 of the appendix.]
Chairwoman Waters. Thank you, Dr. Mabud.
Mr. Vaheesan, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF SANDEEP VAHEESAN, LEGAL DIRECTOR, OPEN MARKETS
INSTITUTE
Mr. Vaheesan. Thank you, Chairwoman Waters, Ranking Member
McHenry, and members of the committee for this opportunity to
participate in the hearing. My name is Sandeep Vaheesan. I am
the legal director at the Open Markets Institute, an anti-
monopoly research and advocacy group that works to build a fair
economy.
Ongoing inflation in the United States is, in part, a story
of corporate pricing power. In industries ranging from
agricultural chemicals and seeds, to mattresses, to rental
cars, and to restaurants, CEOs and CFOs have boasted that
they've been able to raise prices and boost profit margins. The
extraordinary pricing power of corporations in many sectors was
not inevitable. It is a result of policy choices, most notably
initiated by President Reagan's Administration in the 1980s
that effectively reinterpreted and neutered the strong
antitrust law that Congress enacted against corporate mergers.
As the Supreme Court recognized in 1966, Congress decided to
clamp down with vigor on mergers and arrest a trend toward
concentration in its incipiency before that trend developed to
the point that a market was left in the grip of a few big
companies.
The Reagan Administration ignored this policy judgment of
Congress and substituted its own pro-merger judgment that
granted extraordinary power to executives and investment
bankers to roll up markets through consolidation. As two
scholars wrote in 1988, the Reagan Administration's policy
statements and dearth of anti-merger enforcement served as an
invitation to corporate America to merge with anyone. Every
subsequent Administration up through President Trump's followed
the Reagan Administration's permissive approach to merger
enforcement. Indeed, they've often further loosened
restrictions on merger activity on the assumption that mergers
produce efficiencies and benefit consumers.
Democratic and Republican Administrations permitted
consolidation despite the lack of evidence to support the twin
assumptions that mergers resulted in efficiency and that
powerful corporations willingly shared any of the benefits of
efficiency with the public. If anything, the great bulk of
evidence pointed in the opposite direction. As business school
professor Melissa Schilling wrote, ``A considerable body of
research concludes that most mergers do not create value for
anyone, except perhaps the investment bankers who negotiated
the deal.''
With the green light for consolidation, corporations have
engaged in hundreds of thousands of mergers over the past 4
decades. Lax merger policies produce high levels of
concentration in many markets. In such concentrated markets,
corporations have more power to raise prices unilaterally and
collude with rivals.
For example, in meatpacking, processors appear to have used
their individual and collective power to raise beef and chicken
prices to consumers. Critically, inflation has given executives
cover to exercise pricing power, which at other times might
provoke strong reactions from customers and the public. A CFO
of a supplier to food companies told The Wall Street Journal,
``Widespread inflation makes it easier to broach the topic of
raising prices with customers.'' A permissive posture on
mergers has also had deleterious effects on the productive
capacity of the United States. Corporations often eliminate,
``redundant'' capacity following mergers, especially those
involving competitors.
Consider the effects of hospital consolidation on health
care capacity. In metropolitan areas and counties across the
country, hospitals in the past few decades have gone on a
merger frenzy, concentrating local health care markets and
obtaining extraordinary power over patients and payers. They've
also closed hospitals and clinics that they deemed superfluous.
Due in part to consolidation, the United States had 1.5 million
hospital beds in 1975, but only 900,000 beds in 2017, even
though the population of the country had increased by more than
100 million during that time period. As a result, the nation
was much less equipped to respond to the pandemic and the surge
in Americans needing hospital care.
Further, in many instances, corporations have opted to grow
through mergers and acquisitions instead of the more socially-
beneficial method of investment and hiring. Two economists
captured this cost of lax merger policy, writing, ``Billions of
dollars are spent on shuffling ownership shares are, and at the
same time, billions of dollars are not being spent on
productivity-enhancing plant equipment, and research and
development.'' The millions of dollars absorbed in legal fees
and investment banking commissions are, at the same time,
millions of dollars not being plowed directly into the nation's
industrial base. The opportunity costs of merger mania are
real, and they bode ill for the reindustrialization of America.
The net result is permissive anti-merger policies, and an
economy in which many corporations wield exceptional pricing
power and have less slack capacity to meet even modest
increases in demand for goods and services. These are not the
only political economic harms of corporate consolidation and
concentration, which include lower wages for workers, but just
the one relevant to today's hearing. The pandemic has merely
exposed the underlying structural problems in the American
economy.
Thank you for the invitation to testify and participate in
today's hearing. I look forward to your questions.
[The prepared statement of Mr. Vaheesan can be found on
page 108 of the appendix.]
Chairwoman Waters. Thank you, Mr. Vaheesan.
Dr. Zandi, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF MARK ZANDI, CHIEF ECONOMIST, MOODY'S ANALYTICS
Mr. Zandi. Thank you, Chairwoman Waters, Ranking Member
McHenry, and members of the committee for the opportunity to
speak and participate in today's important hearing on
inflation. My name is Mark Zandi. I am the chief economist at
Moody's Analytics, but the views I express today are my own. I
am also on the board of directors of MGIC, one of the nation's
largest mortgage insurers, and I am the lead director of the
Reinvestment Fund, a national Community Development Financial
Institution (CDFI) that makes investments in underserved
communities across the country. We are headquartered in
Philadelphia. That is my hometown.
I would like to make three points in my oral remarks. Point
number one: clearly, Americans are feeling the acute financial
pain of higher inflation for the first time in two generations,
and they are rightly unhappy. The typical American household
makes less than $70,000 a year, but the acceleration and
inflation over the past year is costing an additional $3,300 a
year to buy the same goods and services than it did a year ago,
which is $275 a month in additional cost. Just to put that into
some kind of context, the typical household spends about $200 a
month on eating out, about $150 a month on their cell phones,
and about $100 a month on clothes. Obviously, this is very
frustrating, and it is undermining sentiment. Nothing is more
disconcerting and debilitating than inflation on consumer
business and investor psychology. And this is, I think at this
point, a significant threat to the economic recovery. And the
fate of the recovery does hinge on whether inflation will
moderate meaningfully in the near future.
Point number two: the high inflation, the painfully high
inflation has been, in my view, because of a number of causes
obviously, but at the top of the list is the pandemic that has
badly disrupted global supply chains, particularly the Delta
wave of the variant that hit last fall, which was a big
surprise after the vaccines that we received in the spring. The
pandemic has badly disrupted the labor market and demand-supply
dynamics and lots of markets including, most importantly,
perhaps, the energy market.
And that gets us to Russia's invasion of Ukraine, which is
obviously top of mind here, and it's causing prices, oil prices
and other commodity prices to spike, which is exacerbating that
already-high inflation. Let me just give you a sense of that.
The increase in gasoline prices since the invasion began has
added about $50 to the typical gasoline bill per month, so it
just gives you a clear sense of how much damage that is.
Now, I do expect the pandemic to fade. What I mean by that
is that each new wave of the virus will be less disruptive than
the previous one. And I do expect that the severe disruptions
to supplies related to Russia and Ukraine will be short-lived,
in terms of weeks, not months. And if that is the case, I do
expect that inflation will begin to moderate, but clearly
there's a lot of risk around that.
And if the pandemic continues to intensify, if the Russian
invasion of Ukraine is more disruptive, then I expect oil
prices and other commodity prices to stay more elevated for
longer and begin to infect inflation expectations. The Federal
Reserve has a Hobson's choice, really no good choice: They will
have to raise interest rates more aggressively and recession
risks will rise very, very quickly. This is still a low-
probability scenario, but it's a rising one and increasingly
more uncomfortable.
Finally, point number three, is that some blame the high
inflation on governments fiscal policies during the pandemic
that have shored up the finances of pandemic-stricken
households, particularly lower- to middle-income households. I
view that as a misdiagnosis of the problem. And they also call
for government to stand down, and I think that would be a
mistake.
In my view, the policies put forward in the pandemic,
beginning with the CARES Act, and continuing through the
American Rescue Plan, were critical to the economic recovery,
ensuring that the economy got back as quickly as it did to
close to full employment, and we will be there, roughly, by the
end of the year, which is quite an achievement. And now that
the economy is back to full employment, I think it is very
important for lawmakers to focus on how to address the rising
cost of living, child care, elder care, health care, and
educational services. And I will call out the cost of housing.
I think this is a critical element to high inflation going
forward. Rent costs are rising very rapidly, and will continue
to do so, and lawmakers can help in this regard.
So with that, I will stop and turn it back to you. I do
want to thank you again for the opportunity to participate in
today's hearing. Thank you.
[The prepared statement of Dr. Zandi can be found on page
117 of the appendix.]
Chairwoman Waters. Thank you very much, Dr. Zandi.
Mr. Goodspeed, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF TYLER GOODSPEED, KLEINHEINZ FELLOW, HOOVER
INSTITUTION
Mr. Goodpseed. Thank you, Chairwoman Waters, Ranking Member
McHenry, and members of the committee for the opportunity to
testify today on an issue of upmost importance and concern to
the U.S. economy and U.S. households.
We have in the past year observed inflation at levels that
we simply haven't observed since the end of The Great Inflation
of the late 1960s to the early 1980s. And that inflationary
pressure is no longer isolated to a few sectors. In fact, if we
look at all of the measures of core or underlying inflation, to
which those who doubted that there was an inflation problem 10
months ago pointed, those measures are actually now indicating
an inflation problem as bad or worse than that implied by the
headline numbers.
Now, I submit to the committee that the primary cause of
the inflationary pressure that we are observing cannot be one
that is global in nature--supply chains, pandemic-related labor
market disruptions, corporate profit seeking--because the
increase in U.S. inflation has been so much greater than that
observed in other advanced and major economies.
In fact, of 46 advanced and major economies tracked by the
Organization for Economic Cooperation and Development, the
increase in average inflation in the United States in 2021,
over 2019, was greater than in all but Brazil, Turkey, and the
Kingdom of Saudi Arabia. And when we look at the timing of that
divergence in U.S. inflation, it points unambiguously to March
2021. In the 12 months through February 2021, inflation in the
United States and the Euro area have been roughly the same, 1
percent versus 1.1 percent.
However, in March 2021, we saw a big divergence, such that
by the end of 2021, the increase in the rate of inflation in
the United States was approximately 3 times that in the Euro
area. And if we extend that series to January 2022, it
increases to about 5 times. What happened in the United States
in March 2021 that didn't happen elsewhere? We had a fiscal
expansion, a fiscal stimulus that was the largest during an
economic expansion in post-war U.S. history, equal to
approximately 10 percent of the U.S. economy. This consisted
predominantly of demand stimulus through transfer payments to
households, with the immediate effect that demand for goods in
the month of March increased 10.7 percent month-over-month, or
about 240 percent at an annualized rate.
A stimulus of this magnitude likely raised aggregate demand
in the United States to a level 5 percent above its pre-
pandemic potential output. But that is not all of the story,
because pre-pandemic estimates of the potential output of the
U.S. economy are almost certainly overestimates of the
potential of the U.S. economy in 2021. Because in the interim,
we had had 1.5 million estimated early retirements. We still
had in March 2021, 3.7 million Americans reporting that they
didn't look for work in the past month because of the pandemic.
We still had, by my estimations, a cumulative shortfall in
business fixed investment of $1.8 trillion. Worse than that, in
March 2021, the package pass likely exacerbated those existing
supply side problems by raising implicit marginal tax rates on
the return to work. And following that, we had throughout 2021
the prospect of higher tax rates on corporate income after 2021
that was unlikely to incentivize increased business investments
in 2021, because it raises the option value of deferring that
investment into 2022. So, we have a massive increase in demand,
and impaired supply. That difference has to go into prices.
Now, we've heard a lot about supply chains' import
capacity. I have to say that the volume of imports handled by
U.S. ports in 2021 was about 20 percent above pre-pandemic
levels. Our supply chains and our ports did a remarkable job
handling and processing an unprecedented volume of goods
shipments in 2021. Usually, when we see quantity and price
increasing, that means it's an increase in demand, not a
decrease in supply.
We have also heard a lot about market concentration and
corporate power, to which I would ask the following questions.
Why do we only observe this in 2021? Why only in the United
States? If its concentration in some sectors, why are we
observing general price inflation rather than relative price
inflation? And finally, why are we observing an increase in the
inflation rate and the inflation rate increasing at a faster
and faster pace rather than a one-off increase in the price
level?
Thank you.
[The prepared statement of Dr. Goodspeed can be found on
page 89 of the appendix.]
Chairwoman Waters. Thank you very much. I will now
recognize myself for 5 minutes for questions.
I would like to ask each of you to describe for me who will
get hit the hardest if the Fed raises interest rates too
quickly? How might this affect low-income workers, especially
in communities of color that are finally seeing employers offer
bigger paychecks? And to just share with you, I am a little bit
surprised that everybody accepts increasing interest rates as a
surefire way to contain inflation. I have questions about that.
And I would like to ask each of you to respond to the question
about the interest rates. Thank you.
Mr. Drummer. Thank you, Chairwoman Waters. You raise a very
important point. An increase in the interest rate is going to
relax demand for workers. That will put downward pressure on
workers' wages. So, what we are saying is we are going to
manage inflation by lowering the wages of the lowest-wage
workers who are already being hit by the structure of our
economy. It is unjust, it is inappropriate, and, again, you are
right: The interest rate increase is not a silver bullet. It is
going to disproportionately harm the 100 million of our lowest
earners in our economy.
Chairwoman Waters. Thank you. Mr. Zandi, would you please
respond to the question of, who will get hit the hardest if the
Fed raises interest rates too quickly?
Mr. Zandi. Thank you, Chairwoman Waters, for the question.
I think the key thing for low- to middle-income households is
to avoid recession, because if we go into recession, meaning
the loss of jobs, higher unemployment, lower- to middle-income
households would be hit much harder than higher-income
households. So, that is the critical thing here. And to ensure
that the economy continues to expand and avoid recession, I do
think it is important to begin to normalize interest rates.
Interest rates are at zero or effectively zero currently,
and the economy is strong. We are creating a half million jobs
every month. We have been doing that for over a year, in large
part because of the fiscal policies. Unemployment is falling
very rapidly across all demographic groups, and we are
approaching full employment. So, we do need to raise interest
rates, normalize rates to ensure that the economy doesn't
actually overheat and go into recession. It is calibration, it
is difficult. It is a difficult needle to thread. But I think
at this point, we need some normalization rates in the near-
term to ensure that the economy does not overheat, and to avoid
that recession, which would be very hard on low- to middle-
income households.
Chairwoman Waters. Thank you very much. I would like to ask
another one of our witnesses about this particular question,
Dr. Rakeen Mabud. Thank you.
Ms. Mabud. Thank you. Interest rate hikes slow inflation by
tamping down demand and functionally making people poor. It
does so by raising unemployment rates, by slowing down wage
growth, and that is simply not the policy that we want to
pursue right now, especially when we consider the plight of
low-income people and communities of color who have been hit
particularly hard by this period of inflation. The good news is
that Congress has a lot of room to take on sort of the
underlying conditions that are driving prices up, but Fed
policy is really not the right tool right now.
Chairwoman Waters. Thank you very much. At this point, I
will yield to the ranking member, Dr. McHenry, for 5 minutes.
Mr. McHenry. ``Dr. McHenry.'' Thank you, Madam Chairwoman.
Chairwoman Waters. Everybody is a doctor today.
Mr. McHenry. Dr. Goodspeed, thank you for being here today.
I think you said it very well. What I said in my opening
statement is that the Democrats blame everything but their own
fiscal policy for the inflation we are seeing, so that is fine.
Let's just accept that. That is fine. Their explanation is
corporate greed. What is your response?
Mr. Goodspeed. Thank you, Ranking Member McHenry, Dr.
McHenry. My response is, as I noted in my opening remarks, that
if the causal explanation is corporate profit seeking, why do
we only observe this emerging in 2021? Why do we observe this
emerging only in the United States, when market concentration
by some measures have been rising globally? If it is a matter
of concentration, market concentration, why are we observing a
general increase in the price level rather than relative price
increases in more concentrated sectors?
Mr. McHenry. Okay. So along those lines, has there been an
industry segment where you see collusion that has been driving
the price of goods?
Mr. Goodspeed. Not that I have observed, and when I look at
the correlation between measures of market concentration and
observed increases in the consumer price index in 2021, I see a
negligible correlation.
Mr. McHenry. Okay. And there is no evidence of significant
consolidation in Calendar Year 2020 or 2021 that would indicate
something different than pre-pandemic?
Mr. Goodspeed. Not that I have seen.
Mr. McHenry. Okay. So much for that scapegoat. Record
prices get down to this general principle that we understand,
which is too much money chasing too few things. And is that
what is happening here?
Mr. Goodspeed. Fundamentally, I think that is what is
happening. And actually, when we look at the pattern of the
increases in demand for goods, specifically in 2021, as I said,
we had month-over-month a 10.7 percent increase in demand for
goods in March 2021. That was a 240 percent annualized
increase. Goods consumption had been already about 7 percent
above trend heading into March. It then surged to 19 percent
above trend, and ended 2021 at 22 percent above trend. As I
said, our supply chains did a remarkable job handling that
excess demand. I would not place the blame on the supply
chains.
Mr. McHenry. Okay. So, the supply chains are then a
representation of the underlying economic facts, right? It is
not the prime mover here. It is a secondary effect of the
economic policy?
Mr. Goodspeed. I would say it is predominantly a symptom
rather than a cause.
Mr. McHenry. Symptom rather than cause. Okay. So then, are
we in a unique position compared to the rest of the world? How
do we compare with the Europeans? COVID hit mainland Europe in
a significant way, just like it did in the United States. How
do we fare against the Europeans over the last year?
Mr. Goodspeed. Right. As I noted in my opening remarks, the
increase in the rate of inflation in the United States relative
to the Euro area was about 3 times greater. If we try and
extend the harmonized series into 2022, that rises to 5 times
greater. As you noted, we were all exposed to some of the same
global shocks in 2021. In the United States, in 2021, the
magnitude of the increase in the demand stimulus was just
orders of magnitude greater than in the rest of the advanced
economy world. And at the same time, we engaged in active
measures that further impaired some of those supply side
constraints.
Mr. McHenry. Okay. So, bad economics have driven this
inflation question. Democrats control the House, the Senate,
and the White House, sent a $2-trillion bill to juice the
economy at the very time the economy is ripe to open, and that
is why we have exacerbated the problems. You raised this
question. You say to this, their actions, the Democrat policy
actions of last year raised the implicit tax rate on returning
to work. What does that mean? Can you simplify that for me?
What does that mean for the average person? What do they
experience as a result of these policies?
Mr. Goodspeed. What that means is that when you have things
like the extension of supplemental Federal unemployment
insurance benefits into September, that is a year-and-a-half
into the economic recovery, when you effectively eliminate work
requirements for an expanded Child Tax Credit, that lowers the
rate of return on working relative to not working.
Mr. McHenry. And, therefore, we have a hangover effect from
those bad policies.
Mr. Goodspeed. That likely slowed the recovery in labor
force participation in the United States in 2021.
Mr. McHenry. Bad policy, bad economics, bad outcomes. I
yield back.
Chairwoman Waters. Thank you. The gentleman from
California, Mr. Sherman, who is also the Chair of our
Subcommittee on Investor Protection, Entrepreneurship, and
Capital Markets, is now recognized for 5 minutes.
Mr. Sherman. Inflation has been a worldwide problem since
COVID. It is maybe a third larger here in the United States
than in most of the developed world. We had a lot of fiscal
stimulus. We should remember that most of it was bipartisan.
Most of it was signed into law by President Trump. Yes, there
is one bill for $2 trillion, the Rescue Bill, that was
Democratic. There was also a $2-trillion tax cut bill that was
exclusively Republican during the Trump Administration. So,
both parties have been solely responsible for $2 trillion in
fiscal stimulus.
We kept people's incomes high during the COVID pandemic,
but we closed down the bars, the restaurants, and all of the
entertainment. People had money, but they couldn't spend it
having fun at restaurants and bars, so they went shopping on
Amazon. The ports in Los Angeles, as one of the witnesses
pointed out, had a 20 percent increase in all-time volume, and,
of course, there were delays. When it comes, those delays have
led to more inflation. We have passed, pretty much with
Democratic votes, an infrastructure bill. If we had passed it 5
years ago, we wouldn't have had the delays, particularly in the
ports in Los Angeles. We have had many hearings in this
committee on the cost of housing, and clearly, local
governmental decisions raise the cost of creating new,
particularly apartment rental units.
We are told, I believe, by Mr. Zandi, that this inflation
is costing the average American family $275 a month. Keep in
mind that under the American Rescue Plan, families were getting
$250 per child, and $300 if the child was under 5-years-old.
So, we insulated parents up until our failure to pass the Build
Back Better bill. We have passed a Competitions bill to make
sure that more of the chips are built here. Autos are a huge
part of the inflation. I believe one-third is caused by auto
costs, and that is a chip shortage.
I have talked about ports, and finally I would like to talk
about oil. Keep in mind that Democratic policies for
conservation have virtually doubled miles-per-gallon. Imagine
what the cost would be worldwide per barrel if Americans were
still driving the kind of car I was driving when I got my first
car, which got 9 miles to a gallon. We have alternative energy.
We have efficiency. Oil production in the United States is
higher today than it was when Biden took office, were stated
for 2023 will be the all-time record in U.S. oil production.
Mr. Zandi, what is the worldwide elasticity in the demand
for oil? Will we see either here or in other countries, people
using less oil because it is so expensive? And I will point out
that I think there might be more elasticity of demand in other
countries than here in the United States.
Mr. Zandi. Yes, the elasticity of demand, the price
elasticity of demand for oil is low compared to other products
and services, obviously because it is a necessity; people need
to get to work. But to give you a sense of it, before the
Russian invasion of Ukraine and the run up in oil prices, oil
was trading about $75 a barrel. We expect that global demand
for oil this year to be about 6 million barrels a day.
Just for context, there are 100 million barrels a day of
demand roughly. Now, with prices, let's say they average closer
to $100 a barrel. Now, obviously, they are a lot higher today,
given all the things that are going on, but for the year, they
average $100 a barrel, and hopefully it is no more than that.
And global demand will be something like 5.5 million barrels a
day, so that gives you kind of a sense of the price elasticity
of demand. That also reflects weaker global economic activity.
So, there is some impact on demand in the near-term. There is
more impact in the longer-run, because then people can change
behavior.
Mr. Sherman. Okay. People can adjust.
Mr. Zandi. Yes, it is relatively small.
Mr. Sherman. If I can just point out that supplemental
unemployment insurance ended in early September, and we have
seen by its sunsetting that it was not having a major effect on
the availability of labor and the number of people in the
workforce. I yield back.
Chairwoman Waters. The gentlewoman from Missouri, Mrs.
Wagner, is now recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. Dr. Goodspeed,
the United States is experiencing, as we have all talked about
here time and time and time again, record high inflation that
is broad-based and hitting the wallets of my constituents in
Missouri's 2nd Congressional District. Current prices are at
levels not seen in 40 years. It is not just the gas prices that
are 40 percent higher, but meat, poultry, and fish are all 12
percent higher. Overall, groceries in general are up 7 percent.
You have discussed the negative impact that the American Rescue
Plan and its multi-trillion-dollar spending spree had on
inflation and consumer prices. But could you explain how the
Build Back Better Act, which is still discussed widely in this
committee, and an expense of an additional $3.5 trillion, would
impact our economy and rising inflation?
Mr. Goodspeed. Thank you, Congresswoman. There are a number
of provisions in the Build Back Better program that I believe
would exacerbate some of the supply side challenges that we
have talked about before. In particular, all of those new
programs have income phase outs, which means, to use my
previous term, they are going to raise implicit marginal tax
rates on work as they phase out. And, furthermore, insofar as
this is deficit finance, that is likely going to put upward
pressure on interest rates, which is going to make borrowing
costs greater for American households, and possibly necessitate
further action on the part of--
Mrs. Wagner. It doesn't pay for itself, does it, sir?
Mr. Goodspeed. It certainly does not pay for itself.
Mrs. Wagner. Dr. Goodspeed, I know that per usual, our
colleagues across the aisle want to blame big corporations for
inflation, particularly energy companies. But if we look back
at history, it is global crises centered around energy that
have driven up energy prices: the 1973 oil shortages; in 1979,
the Iran hostage crisis; and in 1990, the Persian Gulf War. And
now, it is the Biden Administration's refusal to reinstate
America's energy independence by drilling in the Arctic
National Wildlife Refuge (ANWR), opening up the Keystone
Pipeline, ending the Federal freeze on all new oil and gas
projects, and fast-tracking pending liquefied natural gas (LNG)
export permits, to just name a few.
Dr. Goodspeed, how has the Biden Administration's energy
policies or lack thereof, allowing us energy independence,
impacted the prices Americans are paying in terms of gas,
electricity, heating oil for their homes?
Mr. Goodspeed. To put some perspective and quantitative
perspective on this issue, at the Council of Economic Advisors,
we estimated that the lower cost of energy in the United
States, thanks to the Shale Revolution, was saving the average
American household $2,500 per year on the eve of the COVID
pandemic. And insofar as actions, such as those you just
described, limit the output potential of the U.S. energy
sector, that is likely to chip into that $2,500 per household.
Sorry to be technical, but the elasticity of output in the
United States with respect to the price of oil is about 0.02
percent, negative 0.02 percent. So, that means a 10-percent
increase in the price of oil is going to decrease U.S. output
by about two-tenths of a percent, and I think what we have seen
in the past few months is something quite a bit larger than 10
percent.
Mrs. Wagner. And how does a strong energy policy help our
economy by lower prices and job security, to protect our
country?
Mr. Goodspeed. I think that we are seeing this today with
the difficulty on the part of many European capitals in terms
of responding aggressively to the Russian Federation. Having
domestic production capacity, in effect, serves as insurance in
the event that foreign supply becomes unavailable. And one
thing that we have seen is that different sources of energy are
not perfect substitutes in the event of a crisis, because we
can't simply ship LNG to Germany in the event that Russian gas
and oil becomes unavailable.
Mrs. Wagner. But, boy, if we could, it would sure be a lot
cleaner than the LNG they are getting from Russia, wouldn't it,
sir?
Mr. Goodspeed. That is quite true.
Mrs. Wagner. Yes, it sure would be. We are going to hear
from the President of the United States here shortly; he may be
on right now. And, finally, I think he is going to agree with
the vast majority of American people, and, frankly, the rest of
the world, that we should not be importing Putin's oil into the
United States of America. We have the ability to be energy-
independent on our own, and we don't need this butcher's blood
on our hands. Hopefully, we can open up our own energy
independence with the drilling in ANWR, with the Keystone
Pipeline, with the fracking, with the shale, all of the things
that you talked about, to allow us to move forward towards
energy independence on our own in a cleaner and greener way.
So, I thank you for your input, and I yield back.
Mr. Goodspeed. Thank you.
Chairwoman Waters. Thank you. The gentleman from Georgia,
Mr. Scott, who is also the Chair of the House Agriculture
Committee, is now recognized for 5 minutes.
Mr. Scott. Thank you. Let me start with you, Mr. Drummer.
You mentioned two things in your testimony that I have been
fighting for ever since I have been in Congress: one, the need
to raise wages for workers; and two, removing structural
barriers to employment that have blocked many low-income
Americans out of economic opportunities. So tell us, in your
own words, how important is it for us and Congress to tackle
these issues of income and equality and occupational
segregation that we face today?
Mr. Drummer. Thank you, Representative. It is absolutely
fundamental for the 100 million who are economically-insecure.
Again, that is one-third of America. Just 48 percent of those
are White people, and 52 percent are people of color. This is
America. It is vitally important that we do everything we can
to raise the floor of wages for the lowest earners. Again, I
mentioned in my testimony that wages have stagnated for about 4
decades. Meanwhile, the productivity of workers has increased
fourfold faster than the wages have increased. And the question
is, why shouldn't the workers get the benefits of that
increased productivity? Why should that increased productivity
flow to the top earners and the top shareholders in our
country?
To restore balance in our economy, it is incumbent upon
Congress to not just engage in expansionary fiscal policy, not
just encourage and coax the Fed into doing expansionary
monetary policy, but to have expansionary regulatory policy. We
have to raise the floor. The minimum wage has been lagging
behind normal inflation for decades.
Mr. Scott. Right. Now, Dr. Zandi, let me go to you. This
business going on in Russia and Ukraine right now has opened up
so many areas that illustrate our nation's insufficiency, being
so utterly dependent upon other nations for our energy and our
growing need for food, that I raised in our last meeting. Can
you tell us whether or not we need to move to do things like
revisiting the Keystone Pipeline, for example? The reason I am
saying that is it puts us, our nation, in a terrible position
when we have to depend on Russia for our oil, or Iran, or Saudi
Arabia, or Venezuela, these socialistic countries, several of
whom are our worst enemies.
Do you agree with the growing feeling among both Democrats
and Republicans that we have plenty of oil right here? We have
plenty of resources here. Why do we have to depend upon Russia,
when it might make sense to revisit the Keystone Pipeline and
other areas that we are blessed with the natural resources
here? And I would like for you to comment on that and give us
your opinion.
Mr. Zandi. Thank you for that, Congressman. I think we are
energy-independent. We produce 10 million barrels of oil a day.
We consume 10 million barrels of oil a day. We do import some
Russian oil just because of the economics of it, but we export
oil and petroleum products as well. So, the net of all that is
we are energy-independent.
In terms of natural gas, similarly, we produce a lot of
natural gas already. Natural gas prices remain low here because
that is more of a local market. The problem with oil and oil
prices is it is a global market, and so the issue is what is
going on overseas. And Russia is a big producer. They produce
10 million barrels of oil a day. They export 5 million, making
them the second-largest exporter in the world. If you take that
offline, which is completely understandable given the situation
and what is going on in Ukraine, you must get it, but it is
going to be difficult to adjust to that.
So, I think we are there. We need to shepherd our
resources, and we need to make sure that we can provide those
resources in a cost-efficient way and evaluating pipelines and
other things that are important. But at this point, I think we
have done a pretty good job in terms of energy independence.
Mr. Scott. Thank you.
Chairwoman Waters. Thank you very much. The gentleman from
Oklahoma, Mr. Lucas, is now recognized for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman. And, Dr. Goodspeed,
being an old ag econ guy from Oklahoma State, I was very
pleased to hear you discuss the unique concept of the
elasticity of demand, because that is really difficult for a
lot of people to get a grip on: the concept that you either
have enough or you have too much, and that price dramatically
shifts from one perspective to the other. But back to the to
the core issue. The Fed's balance sheet sits at just under $9
trillion, more than double the pre-pandemic amount. The total
U.S. public debts increased nearly $7 trillion since late
January of 2020. Dr. Goodspeed, can you discuss how this drives
inflation and overstimulates the economy from a macroeconomic
perspective?
Mr. Goodspeed. Certainly. Thank you, Congressman Lucas.
What we have observed in the past year is an almost
unprecedented excess of demand over supply in the U.S. economy.
And that has, to a large extent, been accommodated by the
Federal Reserve. And if we look at a broad measure of the money
supply in the United States, that has increased by about 40
percent since the start of the pandemic.
Mr. Lucas. So as we would say in my town meetings, if you
have dramatically increased the amount of money chasing the
same or fewer goods and services, then you drive up the price
of the goods and services, correct?
Mr. Goodspeed. That is correct.
Mr. Lucas. Thank you. Farmers across the country are
experiencing higher costs for chemicals, seeds, fertilizer,
equipment, fuel, and labor, among other increased input costs.
The squeeze and uncertainty felt by farmers and ranchers right
now will be felt for years to come. This means that the higher
food prices we see now may be with us for some time. Dr.
Goodspeed, can you discuss how persistent inflation, is it
simply a supply chain, logistics, or a pandemic recovery issue,
but spreads much deeper into the economy?
Mr. Goodspeed. That is right. Sometimes, we see relative
price increases where prices are increasing in one sector or
another. But what we have seen in the past year is broad-based
inflation that crosses multiple sectors, and it hurts working
people very much because they don't have the same bargaining
power that other workers have. Things like rent, food, energy,
and utilities are much bigger shares of their disposable
personal income. And many lower-income households don't have
hedges against inflation, namely, housing.
Mr. Lucas. So the little guys, we would say in town
meetings, don't have flexibility. They are locked into their
situation, on their income with their expenses ever increasing.
This month, the national debt topped $30 trillion and the
Congressional Budget Office predicts that the debt-to-GDP
ratio, I should say, will double over the next 30 years. How
troubling is this for the long-term, and I mean the long-term
health of the U.S. economy?
Mr. Goodspeed. In the short-term, it means that every 25-
basis-point increase in interest rates is going to raise the
cost of servicing that debt by $75 billion. In the long term--
if we look over history when the U.S. has had debt-to-GDP
ratios of this level, the way we got out of it is not
especially encouraging. Some of it was from growth, but we do
not have those growth tailwinds that we had in the aftermath of
1945. A lot of the rest of it was inflation and what we call
financial repression, which is basically capital controls and
implicit pressure on banks to hold Federal Government debt.
Those are not good recipes.
Mr. Lucas. I started out farming in 1977 as we slid into
the inflationary period of the Carter years, and we went
through Mr. Volcker's dramatic tightening of the money supply,
and we saw the old 1930s interest rate caps come off. I
borrowed caffeine money at 17 percent in 1981, and was so happy
to get it. But I also watched a generation of young farmers and
ranchers come home from the Vietnam War, who were absolutely
exposed economically, be destroyed, and the last of those
sheriff's sales were still taking place in the 1980s. So, I
carry a few scars from watching my neighbors. We need to try to
avoid that, don't we?
Mr. Goodspeed. I think that is right. And when one looks at
past episodes of the Federal Reserve having to play catch-up
with inflation, they have to respond even more aggressively
than had they responded earlier in order to ring that
inflationary pressure out of all sectors. And that was what we
saw in the early 1980s.
Mr. Lucas. The longer the binge, the harder the hangover?
Mr. Goodspeed. Yes.
Mr. Lucas. I yield back.
Chairwoman Waters. Thank you. The gentleman from Texas, Mr.
Green, who is also the Chair of our Subcommittee on Oversight
and Investigations, is now recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman, and I thank you for
holding this hearing. I think it is exceedingly important. I
was at the State of the Union Address, and I thought the
President gave an excellent speech. I was very proud of him, to
be very honest with you. And one of the things he said that
really caught my attention was that, ``Capitalism without
competition is exploitation.'' My question to you, Mr. Zandi,
is, who suffers most from the exploitation when you don't have
the competition in a capitalistic society?
Mr. Zandi. I think competition is a key element,
Congressman, of a well-functioning capitalist system. Without
that competition, we don't have innovation, we don't have
entrepreneurs, and we don't have growth, and clearly, we will
struggle with higher prices and inflation. So, it is a vital
ingredient to a well-functioning economy.
Mr. Green. And we talk about persons within the society.
How would minority people be impacted as a result of this? We
know that minority unemployment, especially Black unemployment
is usually about twice that of White unemployment. By the way,
I am a capitalist. If you don't have that competition, does it
have a greater impact on African Americans?
Mr. Zandi. Yes, I think that is fair to say. If competition
is impaired, it will result in higher prices for the goods and
services produced by that business in that industry. That is
uncompetitive for lower- to middle-income households who don't
have savings, who don't have wealth, who really are struggling
just to pay their bills paycheck to paycheck, and that becomes
an incredibly difficult hardship. Hard choices have to be made
very quickly, and that is obviously what is happening right now
with inflation as high as it is.
People are having to make tough decisions about what they
are spending their money on, because if they have to spend more
to fill their gasoline tank, they are going to have less to
spend on everything else. So, it is critical that we ensure
that markets are competitive, that businesses are offering
prices that are consistent with that competition, because if
they don't, low- to middle-income households, African
Americans, Hispanics, and Hispanic groups will be hurt more.
Mr. Green. Thank you. Mr. Drummer, would you care to weigh
in on this, please?
Mr. Drummer. Yes. If you are talking about the structure of
our economy in general, again, as I said in my testimony, it is
about expansion. We are nowhere near the peak of what America
can do. We are nowhere near the top of our productive capacity.
And so, any claim that any investment into our economy will
inherently be inflationary is just flawed.
Mr. Green. Let me come back to you again, Mr. Zandi. I
always enjoy conversing with you. Your commentary is excellent.
Let's talk for just a moment about indexing. There is a belief
that we should index wages to possibly the CPI or even to the
poverty, such that if you work full time, you don't live below
the poverty line, by indexing. Give me your thoughts on
indexing, please, and you have about a minute to do it. Sorry
about that.
Mr. Zandi. No worries, and thank you for the kind words. I
would not be a fan of that, Congressman. We had experience with
that back in the 1970s and 1980s. The last time we suffered
very high inflation in the indexing, the so-called cost-of-
living adjustments built into contracts exacerbated the wage
price dynamics and ultimately resulted in a very severe
recession that hurt all Americans, particularly lower- to
middle-income Americans. I think it is much better to focus
policy on trying to address the wage inequities and to make
sure that we provide the resources necessary so that people can
get better jobs and get better pay.
Obviously, this is happening, but very true. Education and
training and helping with child care and elder care, things
that allow people to go to work and get the skills that they
need to get higher wages and to do better. And I think that
would result in a more well-functioning economy. The indexing,
I think, would be difficult, and clearly, I am not sure how
lawmakers would be able to intervene or enter into that given
that is a decision by private businesses.
Mr. Green. Thank you. My time has expired. Thank you, Madam
Chairwoman. I yield back.
Chairwoman Waters. Thank you. The gentleman from Kentucky,
Mr. Barr, is now recognized for 5 minutes.
Mr. Barr. Dr. Goodspeed, as the title of this hearing
suggests, my friends on the other side of the aisle want to
blame higher prices on everything but their own policies. They
blame it on supply chain bottlenecks, they blame it on COVID,
and they even blame it on corporate greed, and I want to focus
on that last narrative for a minute, corporate greed.
Let me tell you how it works in the real world, and I will
give you an example from my own district where businesses are
struggling with the cost of higher inflation. The Suffoletta
Family in Georgetown, Kentucky, has been in the retail home
furnishings business since the late 1940s. In a conversation
last week, they informed me that in the last 18 months, the
cost of goods from their manufacturers has increased 30 to 40
percent, and they are still receiving price increase letters
every week. They are also experiencing price increases on sold
orders that have not even been produced yet, but they aren't
going back to their customers asking for more money than what
they agreed to at the time of placing those orders. That is an
important point.
They are not sitting around the table trying to figure out
how to exploit their customers. They are struggling because
their profit margins are down, because the costs of their
inputs are going up. Instead, the Suffolettas are choosing to
absorb those additional costs, contrary to Mr. Drummer's
narrative. They are choosing to absorb them, and like most
small businesses, their cost of labor and overhead has gone up
over 25 percent. So now, they are having to determine how to
operate without passing all those costs on to the end consumer,
and still have some profit at the end of the year. This idea of
businesses trying to exploit this and profit here is offensive
to most small firms in America today.
Steven Rattner, a former Obama Treasury official, summed it
up perfectly: ``Blaming inflation on supply lines is like
complaining about your sweater keeping you too warm after you
have added several logs to the fireplace.'' The original sin
was the $1.9-trillion American Rescue Plan that passed in
March. The bill was almost completely unfunded, and sought to
counter the effects of the pandemic by focusing on demand side
stimulus rather than on investment, and that has contributed
materially to today's inflation levels.
So, Dr. Goodspeed, you have focused on the increase in
aggregate demand, but I want you to elaborate on your testimony
about how the American Rescue Plan also constrained the supply
side. Specifically talk about how the American Rescue Plan
stifled the labor supply, which is contributing to the problem
that the Suffoletta Family is having right now.
Mr. Goodspeed. Thank you, Congressman. And to your
observation about what you are hearing from businesses, we
have, over the past year, seen the Producer Price Index
outpaced by a considerable margin by the Consumer Price Index,
which suggests or implies that firms have been taking that
pressure out of margin rather than passing most of it on to
prices. In terms of the supply side impacts that you mentioned,
I have calculated that there has been a cumulative shortfall
since the pandemic began in business investment of about $1.8
trillion. Throughout 2021, with the Build Back Better agenda,
there was the prospect of substantially higher taxation on
corporate income after 2021, which was unlikely to help
facilitate a recovery in business investment.
Mr. Barr. So to the extent we have supply chain
bottlenecks, part of that is because there has been less
business investment?
Mr. Goodspeed. That is correct.
Mr. Barr. Because of uncertainty of the potential of tax
increases.
Mr. Goodspeed. That is correct.
Mr. Barr. Then, explain how the American Rescue Plan
discouraged labor supply?
Mr. Goodspeed. It discouraged labor supply in two ways.
One, the expansion of the Child Tax Credit, as designed under
the American Rescue Plan, effectively eliminated work
requirements. Relative to the 2017 expansion of the Child Tax
Credit--remember, we doubled the Child Tax Credit in 2017.
Relative to that expansion of the Child Tax Credit, we actually
lowered the return on work. And in addition to that, we
extended the $300-per-week supplemental Federal unemployment
insurance benefit, which likely lowered employment by--
Mr. Barr. So, in addition to increasing aggregate demand
and creating excess demand in the economy, the agenda from the
Administration constrained supply. Let's talk about another
area of constrained supply coming from this Administration. Is
it more likely that oil executives are sitting around their
board table trying to figure out how to stick it to their
consumers; or is it the Administration canceling drilling
leases, closing pipelines, or limiting production; or is it
uncertainty and unease among exploration and production
companies that new environmental crackdowns will come; or is it
the financial regulators that are attempting to limit access to
capital, making it illogical to invest in new oil wells--which
is more likely?
Mr. Goodspeed. I would say the unresponsiveness of supply
in response to onerous regulation and crackdowns on domestic
energy production, because if we look at the historical
relationship between the price of West Texas Intermediate and
rig counts, that relationship broke down in 2021.
Mr. Barr. Thanks. I yield back.
Chairwoman Waters. Thank you. The gentleman from Missouri,
Mr. Cleaver, who is also the Chair of our Subcommittee on
Housing, Community Development, and Insurance, is now
recognized for 5 minutes.
Mr. Cleaver. Let me concentrate on Dr. Drummer and Dr.
Mabud. I don't know if any of you drink Hint Water. It is
advertised quite a bit on TV. Do either of you drink Hint--H-i-
n-t--Water?
Mr. Drummer. No, sir.
Mr. Cleaver. Oh, man. It is necessary. It is the best thing
that has come along. I love Hint Water. It has a hint of peach
or a hint of berry, whatever it is, but it is water, with no
calories, no nothing. It is water. And so, I love it. And I
also love it because I could go to the dollar store and get
Hint at $1 a bottle, because at the dollar store, everything in
there is $1, at least until about 3 weeks ago. And I guess, in
an attempt to avoid false advertising on the doors, they have
something taped up that says all items are now $1.25. So, the
dollar store is now the $1.25 store, which means that Hint goes
up from $1 to $1.25. I am not happy about that. Life is going
down here when Hint costs 25 cents more.
So, Dr. Drummer and Dr. Mabud, do you agree with Dr. Zandi
that no matter what happens to pricing across most goods,
inflation will remain high as long as the cost of housing
continues to rise? Do both of you or either of you agree with
what Dr. Zandi has written?
Mr. Drummer. Thank you, Representative. Based on her
testimony, I would like to defer to Dr. Mabud.
Ms. Mabud. Thank you. Thank you so much. I think the point
that you are making is really critical, which is that low-
income communities, particularly low-income communities of
color, are dependent on these essentials like housing, and
places to buy cheap goods, like the dollar store. And so,
higher prices will inevitably disproportionately affect exactly
those communities, especially when those prices are going up on
essentials that people really need. If you need diapers, you
need diapers. It doesn't matter if the box is $20 a box or $40
a box. And we know that low-income communities are particularly
likely to see rent as a bigger proportion of their budgets and
see food and other essentials as a bigger proportion of their
budgets.
I think the other important thing to remember here is that
these exact same workers and families are also more likely to
face discrimination in the labor market because of occupational
segregation and other barriers to entry into the labor market.
Soc, low-income folks, particularly low-income folks of color,
are really hit from all sides by these price hikes, with rising
prices at the checkout line, and when they pay their rent, and
have a harder time accessing good, well-paying jobs.
Mr. Cleaver. Thank you very much. So, Hint goes up. Dr.
Zandi, if you look at the cost of housing, the cost has
increased a whopping 470 percent over the last 40 years. As
long as that continues to rise like it is, is Hint Water going
to come down?
Mr. Zandi. Yes, that's a good point. Yes, we have a very
severe shortage of housing, particularly for affordable
housing, both on the rental side and on the homeownership side.
This has been developing really since the housing bust in the
wake of the financial crisis. Vacancy rates across the housing
stock are at record lows, so this has resulted in surging
housing values and surging rents. And rents, all in, account
for one-third of the Consumer Price Index, and one-third of
measured inflation is housing. So as long as we have this
shortage, as long as we don't address the supply shortage--and
here is where lawmakers can be critically important--rents are
going to grow quickly. House prices are going to grow quickly,
and the cost of living is going to continue to rise quickly.
Mr. Cleaver. Thank you, Madam Chairwoman.
Chairwoman Waters. You are welcome. The gentleman from
Florida, Mr. Posey, is now recognized for 5 minutes.
Mr. Posey. Thank you very much, Madam Chairwoman. Dr.
Goodspeed, I feel like I have seen this movie before. To
paraphrase a classic, we appear to be running up to usual
scapegoats for inflation under the heading, ``primary causes of
inflation trends, majority hitting nonetheless supply chain
bottlenecks and shortages, lack of housing supply, lack of
competition.'' There is no mention of the Majority's deficit
spending and the monetization of those deficits to dramatically
increase money supply.
Last week, Chair Powell agreed that inflation is a monetary
phenomenon. The way we ended up with this inflation is that the
government dramatically increased the deficit in the Rescue Act
and other legislation, and the Federal Reserve provided the
lending to support the deficits at no charge and interest
rates. The primary call to inflation is deficit spending
financed by the Federal Reserve buying the debt and increasing
the money supply.
One price increase that stands out from the rest is the
skyrocketing increase in energy costs that has been mentioned
by almost everybody here today, especially the price of
gasoline. Even before the Ukraine invasion, the price of
unleaded regular was closing in on $4 a gallon. This is a steep
relative price increase, and most analysts understand that this
increase was a result of supply restrictions that followed on
the Administration's assault on the domestic energy production.
Please give us your assessment of how reversing the
Administration's restrictions on domestic oil and gas would
reduce gasoline prices, and how much would gas prices decline
if we reset the clock back to January 19, 2021, and erased the
Administration's impact on the domestic energy sector? Could we
expect to restore energy independences as we had before?
Mr. Goodspeed. Thank you, Congressman, and I think, as you
noted, we have heard some of these stories before. In fact, in
the 1960s and 1970s, there were a lot of allegations that the
price pressures that we were observing were the result of
oligopolistic or monopolistic competition, and, empirically,
those claims were subsequently tested and rejected.
I would expand upon a remark I made in response to
questions from Congressman Barr, namely that if we look at the
historical relationship between the price of West Texas
Intermediate Crude and Oil Rig Counts in the United States,
those two series typically track each other very closely,
meaning the price of oil goes up, rig counts go up, we get more
supply. That relationship completely broke down in 2021, and I
think that was a result of the regulatory crackdown on domestic
energy production, and the looming prospect of more crackdowns.
Now, it is hard to say where domestic oil prices and gasoline
prices would go in the coming months simply because of so much
international geopolitical uncertainty.
Mr. Posey. Thank you. One of the favorite boogeymen of our
friends on the other side of the aisle is the evil price-
gouging firms. They are one of the usual scapegoats for unsound
fiscal and monetary policy. I believe we can expect that
businesses will respond to market forces, including inflation,
like any other economic player, but it is more than a little
naive to habitually resort to the price-gouging monster to
explain 7.5 percent inflation. Is there any solid, convincing,
credible, and peer-reviewed evidence that businesses with
disproportionate market power have been a major cause of
inflation through price gouging?
Mr. Goodspeed. I have seen no serious academic study to
that effect. And I would add that most empirical studies and,
for that matter, theoretical papers on this suggest that in the
short run, the passthrough from cost to price is actually lower
in less-competitive markets than in competitive markets. In the
long run, competitive markets have lower average inflation
rates, but in the short run, the passthrough is actually higher
in competitive markets.
Mr. Posey. Thank you. And while I believe the role that
housing has played in inflation is far more subtle than the
other side suggests in listing it as a major call to inflation,
I do have serious concerns about the cost of building housing.
And I believe that the costs of building new housing, whether
single or multifamily, determines the prices of houses and
rents at the margin to the market. Adding demand to a housing
market, in which the cost of new housing is continually being
pushed up by regulations and restrictions on innovative
building techniques, really serves mostly to just drive up even
further the price of rent and all housing.
Do you agree that to make significant progress in providing
affordable housing, we need to focus on bringing down the cost
of building new housing?
Mr. Goodspeed. I would say that we should be focused on
increasing the supply of housing generally, and we have a
problem in that it is very difficult to build, to construct new
housing in the United States. And we should ask ourselves, why
did the price of housing go up so much in 2021? Let's remember
that housing and autos are the two most interest rate-sensitive
sectors in the U.S. economy. Thank you.
Mr. Posey. Thank you. Thank you, Madam Chairwoman.
Chairwoman Waters. The gentleman from Illinois, Mr. Foster,
who is also the Chair of our Task Force on Artificial
Intelligence, is now recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman. One of the
recurrent themes on both sides of the aisle here has been
inadequate business investment, and now we are being caught in
a number of ways. So, I would like to explore the extent to
which sort of the short-termism and the incentives that
encourage short-termism in so much of our industry. We are
obviously seeing underinvestment in resilient supply chains.
That is kind of obvious in a number of areas. We have also seen
inadequate investment in inventory for rainy days. For years,
the best management procedures have been claimed to be this
just-in-time delivery of everything with essentially no
inventory of anything. And now, manufacturers are panicking and
sort of switching from just-in-time, to just-in-case inventory
policies.
So, there is a tremendous short-term spike in demand which
leads to tremendous market inefficiency throughout. It is sort
of reminiscent of the toilet paper shortage at the start of
COVID, where, as far as people could tell, there was no
increase in the rate of consumption of toilet paper, and yet,
there was a huge shortage because of a malfunction of the
market that I think we are seeing in many areas. We are also
seeing the same thing in computer chips, where companies like
Intel engaged in more than $100 billion in stock buybacks, lost
the lead in advanced semiconductors, and now are asking the
Federal taxpayer for a $50-billion bailout. And a similar thing
in the airlines, where during the Obama expansion, they made
very high profits but didn't leave enough resilience in their
operations and had to ask again for the $50 billion,
essentially a gift from the Federal taxpayer, not a loan like
TARP, just a straight gift.
And there are a number of potential reasons for this
underinvestment, but I was wondering, Mr. Drummer and Mr.
Vaheesan, could you say a little bit about how the CEO
compensation structures might encourage the short-termism,
where keeping small inventories make you profitable this
quarter, but leaving you in trouble when the tide goes out. Mr.
Drummer, do you want--
Mr. Drummer. This is a very good question, Representative,
because it is not just a question of law and policy. It is
about the practices of some of the largest corporations. Yes,
when CEOs are incentivized to make quarterly benchmark profits,
they extract all the work they can from the lowest-paid
workers. Let's compare Walmart and Costco, right? Costco pays
double what Walmart or Sam's Club pays, but they make 7 times
more per employee than Sam's Club. And so, the short-termism is
cultural. And yes, we do need law and policy that forces and
really pushes these companies to do the right thing, because it
ought not be an option to treat your employees right.
Mr. Foster. Yes.
Mr. Vaheesan. Thank you, Congressman. You raise a really
important point. We have seen changes in law and policy over
the past 40 years that have encouraged short-termism. You noted
that CEO compensation is tied to short-term movements and stock
prices. We have also had changes to antitrust policy and
securities laws that have encouraged firms to engage in
practices like stock buybacks, and mergers and acquisitions in
lieu of the more socially-beneficial undertaking of investment
and innovation. I think the chip industry nicely illustrates
that point. It used to be the envy of the world, but now
companies like Intel have been so focused on generating short-
term cash flow that they have been leapfrogged by foreign
rivals like TSMC and Samsung.
Mr. Foster. Go ahead. I will take a risk here and see what
they are--
Mr. Goodspeed. Sure. I would say that one of the reasons
that we had weak investment throughout much of the expansion
from 2009 to 2016 was that the relative cost of capital in the
United States was much higher, so that the cost of domestic
capital formation was quite considerably high. And that is why
in the aftermath of tax reform in 2017, we actually saw the
level of investment rise to about 10 percent above the pre-2017
expansion trend. And I think one of the reasons that we saw a
weak recovery in investment in 2021 was because there was the
prospect of higher corporate income taxation in 2022, which
means that the value of stock--
Mr. Foster. Okay. I understand. There is never a bad time
to lower taxes, no matter what it does to the national debt.
Mr. Goodspeed. The value of--
Mr. Foster. And in my 23 seconds, Dr. Zandi, there are some
things the Federal Reserve is clearly going to do to unwind the
balance sheet. Will that be stimulative or contractive in terms
of the demand? Will it reduce or increase?
Mr. Zandi. At this point, yes, I think, Congressman, the
Fed needs to normalize policy. That includes interest rates,
short-term interest rates, allowing them to go up to zero lower
bound. And at some point, not right away, we have to see how
things go but allow the balance sheet to start to wind down,
which is what they did after the financial crisis, and I think
that worked well. So at some point this year that seems like a
good policy to pursue. Again, you don't want the economy to
overheat and then ultimately go into recession because that
hurts the very people that we want to help.
Mr. Foster. So, they are doing the right thing. Thank you.
And I yield back.
Mr. Zandi. I think so. Yes, that would be--
Chairwoman Waters. Thank you very much.
The gentleman from Missouri, Mr. Luetkemeyer, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. Mr.
Goodspeed, President Biden had one accomplishment last year,
and that was the approximately 300 new regulations his
Administration issued on businesses and workers. The cost of
these regulations total about $201 billion. That is their cost,
by the way, that they said they had. This is 3 times the
regulatory cost imposed by the Obama Administration, and 40
times the cost imposed by President Trump in their first year
in office, respectively. My question, I guess, begins with, how
do these regulatory burdens impact inflation and the price of
goods, their business' ability to hire workers, and their
ability to have more resources to actually focus on more
businesses?
Mr. Goodspeed. Thank you, Congressman. These regulatory
changes, at the end of the day, increase costs. They increase
compliance costs. Compliance costs incur opportunity costs
because workers working on compliance aren't working on other
more productive activities. There is also a deadweight loss
insofar as it prevents transactions that would otherwise have
occurred, and there are also spillovers into unregulated
industries. And I would just add that over the long run, an
increased regulatory burden tends to decrease the flow of new
firms into the market and decrease the exit of incumbent firms,
so it lowers competition. So, insofar as one's hypothesis that
insufficient competition was a cause for the inflation that we
have observed, the regulatory burdens that we have seen
increase in the past year likely exacerbated rather than
attenuated that.
Mr. Luetkemeyer. You just sort of made the case that--I
know of the other side constantly talks about them doing things
when you are concerned about low- and middle-income folks, and
yet they continue to produce legislation, more rules that do
the very thing that they are saying they want to try and
minimize. As you just indicated, the hammer comes down on the
low- and moderate-income people in the spectrum with inflation,
with all sorts of rules, costs, rules and regulations. Is that
not correct?
Mr. Goodspeed. That is correct.
Mr. Luetkemeyer. I also am the ranking member on the House
Small Business Committee, and we had an economist come in for a
briefing the other day, and I asked him to break down
inflation. And I said, basically, I think it is composed of
excess money supply, rules, and regulations, energy costs, and
the supply chain/jobs problem. Would you agree that is kind of
the main four main drivers of our inflation we have today?
Mr. Goodspeed. I would agree with that.
Mr. Luetkemeyer. I asked him to break it down percentage
wise, and he said about 40 percent money supply, 20 percent
regulations, 20 percent energy, and 20 percent supply chain.
Would that be in the ballpark, do you think, or is one of them
little bit low, or one a bit high? What would you estimate?
Mr. Goodspeed. I would lower the estimated probability for
supply chains. I would substitute for the regulatory costs. I
would just say, generally speaking, it is excess demand
relative to supply.
Mr. Luetkemeyer. Okay. Again, we had the Chairman of the
Federal Reserve in here, Jerome Powell, last week, and I read
this off to him. And he was talking about being able to
manipulate the economy through interest rates and all sort of
stuff. And I told him that unless you are going to go with 10
percent, these type of costs, if you look at them, where do
you, in this group, have that much influence? And so, if you
look at supply chain, look at energy production regulations,
almost all of those are under the direct ability of the
Administration to impact those, or is it not, would you not say
that?
Mr. Goodspeed. It is.
Mr. Luetkemeyer. And a lot of it is, quite frankly, without
Congress even being able to intervene. The President, in his
first week in office, the first thing he did was to close down
the pipeline. He can open that back up. There we go. That fixes
that 20 percent.
Supply chain--he can help with some of the threats of
taxation. He can help the people get back into the workforce.
Rules and regulations--that is obviously falling all on him
and his Administration. And then, you come to money supply, and
you look at, I don't know, I am guessing at 50-50 the Fed, by
the way they manipulated, and 50 percent by us, the Congress,
those guys putting more money into the system. So it would look
to me like the Fed will only have like 2, 2.5 percent out of
the 7.5 percent, at most. The Administration can fix this
thing, and, to me, it all lies at their feet. Would that be a
fair analogy?
Mr. Goodspeed. I think that is a fair analogy. I would add
that the two sectors over which the Fed has the most control
with respect to inflation are housing and auto prices, and we
have seen some big increases there in the past year.
Mr. Luetkemeyer. Very good. Is inflation going to go away,
and do you think we have a recession coming shortly?
Mr. Goodspeed. When I look at the underlying inflation
measures, when I look at the change in inflation expectations,
I think that this is going to be very persistent, and it is
going to take some very aggressive action on the part of the
Fed, and hopefully Congress. And that is disconcerting because
that could mean some economic pain.
Mr. Luetkemeyer. Thank you very much, Dr. Goodspeed.
Chairwoman Waters. Thank you. The gentleman from
California, Mr. Vargas, is now recognized for 5 minutes.
Mr. Vargas. Thank you very much, Madam Chairwoman, and Mr.
Ranking Member. I appreciate it.
It is interesting that when President Trump and the
Republicans took office at the crest of the largest economic
expansion in history, things were going well, and they were
very happy about that. Then, of course, he presided over the
worst labor market in the modern U.S. history, as did the
Republicans. And the reality was, it was the pandemic. The
truth of the matter is, you can't blame all those millions of
job losses on Donald Trump and some of the crazy things he
would say. It was the pandemic. But here, it is interesting,
the Republicans blame everything except for the pandemic. It
seems to me, Dr. Zandi, that you kind of nailed the thing down
pretty well when you were talking about the pandemic. Am I
wrong here? Is a lot of the inflation due to the pandemic?
Mr. Zandi. Yes, Congressman, you are precisely right. It is
the pandemic. And there is a long list of reasons for the high
rates of inflation. At the very top is the supply disruptions
created by the pandemic, particularly around the Delta wave. I
will give you a poster child example. Chip plants in Malaysia
shut down last August and September. They couldn't produce
chips for U.S., and German, and Japanese vehicles. The F-150,
the most popular vehicle in the United States, couldn't get the
chips. They had to shut down. They couldn't produce,
inventories collapsed, we had shortages, and prices have gone
skyward. And roughly one-third of the acceleration and
inflation that we have observed over the past year is simply
related to that fact. That is directly related to supply
chains. And I can give you other examples, but you are exactly
right.
Mr. Vargas. It seems to me--and again, I could be wrong--
that is the case. Again, otherwise we can say, well, those damn
Republicans, they lost millions and millions of jobs. What is
wrong with Joe Biden? Their policies are so terrible. It was
the pandemic. It is the pandemic here, and that is why I think
we should work together to figure this thing out instead of
yelling at each other about these things. But I am--
Mr. Zandi. Can I point out that just because there is a lot
of discussion around inflation overseas, what matters is the
acceleration of inflation over the past year, and they are very
comparable in every advanced economy, including in the United
States. It is the increase in inflation, and if there is any
differences, they are related to measurement differences. So
precisely what is happening here is happening in Canada, and in
the U.K., and in Germany, all across the advanced world. So, it
is very, very similar, and goes back to the point that this is
the pandemic, as the pandemic has affected everyone equally.
Mr. Vargas. Yes, it has happened all over the world. It is
a little bit like this, just to be frank, reminds me of the old
tobacco hearings, and you would have a group come in and say,
``Oh no, those cigarettes are great. They are not unhealthy. Of
course, not.'' And then, the other groups come in and say, ``Of
course, they are not healthy; they cause cancer.''
The truth of the matter here is that we see inflation all
over the world. We see these problems all over because of the
pandemic, and that is the big deal here. And it seems like the
Republicans want to place blame on somebody, and they want to
place blame on the Democrats. They don't want to take a look
at, well, really the blame is on the pandemic and how do we
work together. Now we have the problem with Russia. How do we
work together?
The two big things that I see are housing and cars, housing
in particular. We do have to figure that out. In California,
the prices have gone out of sight, and I don't see them coming
back until we get more supply, and there are things that we
need to do. But anyway, that is what I would like to say. I
just want to say that sometimes it is kind of nutty listening
to this stuff because, again, it is not realistic.
Mr. Zandi. Can I say, Congressman, on housing, what was in
Build Back Better around tax credits, light tax for low-income
housing, neighborhood home tax credit for fixing,
rehabilitating old housing stock and dilapidated parts of urban
centers, the Housing Trust Fund, all of these things will go to
quickly increase the supply of affordable housing, and goes
directly to this very strong surge in rent growth and house
prices that we are observing right now. So, there are things we
can do, and what is in Build Back Better goes a long way to in
fact doing that.
Mr. Vargas. That is why I supported it. My time has ended.
Thank you.
Mr. Auchincloss. [presiding]. The gentleman yields back.
The gentleman from Texas, Mr. Sessions, is now recognized
for 5 minutes.
Mr. Sessions. Mr. Chairman, thank you very much. To our
colleagues who are watching this, please know that I think that
there is an equal participation here today for us to tout. And
I appreciate Mr. Vargas and his comments very much, my dear
friend.
I would like to go back to a statement that I believe Mr.
Drummer made where he spoke directly about household incomes
and how it has been flat when, in fact, if you go to the Bureau
of Labor Statistics, you will see that household incomes rose 3
times higher under Reagan and Trump policies than under Obama
and Biden. And that is because I believe that what is occurring
in particular right now that we can directly relate to is that
we have problems getting people to go to work.
As of this morning, the Office of Personnel Management
(OPM) is still weighing their decision-making on whether we are
going to have Federal workers go back to work. I know what that
is like, because my office has been at work during this entire
pandemic and we simply attempted to work with each other. But
OPM still has people on what they call, ``maximum telework.''
And if you have the Federal Government workers who are not
reporting to work, if you have an Administration that is
continuing with their onslaught at the free enterprise system,
including workers of airlines, workers of transportation, how
can people not go back to work when we have not encouraged it?
We have to be leading-edge people to say as managers of our
business, let us go back to work. If you have a reasonable
reason, why not, then that flexibility should be given by OPM.
But the way Republicans see it is that policy matters. In other
words, elections matter. Policy matters. And in that
circumstance, when you give people more take-home pay, when
prices are reduced, when gasoline at the pump is a good deal
rather than a jab deal, the free enterprise system really does
really well by itself.
Mr. Drummer made a number of comments which I tend to want
to agree with, with equitable prosperity, but that is what the
free enterprise system is. And that is why under the policies
of Republicans--I don't have to say Donald Trump, but
Republicans and Donald Trump--more people worked than ever,
more African Americans, more men, more women, more minorities,
and people were at work.
And if you go back to an old book from the Dallas Fed, the
myth of the rich and poor in America, the facts of the case are
really simple. If you have a job, whether it be higher or lower
pay, for 10 years, if you create a circumstance where you go to
work, you will raise yourself from one segment, one, in
essence, economic level to another. We need people back at
work. We need our free enterprise system to work. We are a
capitalist nation. Mr. Drummer, have I said anything that you
want to help me with?
Mr. Drummer. Thank you, Representative. You said many
things that I want to help you with, and I would love to engage
this conversation even beyond this hearing. One, it is also a
fact that wages have not kept up with productivity, and we have
to examine what kind of economy allows a situation for workers
to be more productive. But the wage growth is pretty flat, not
numerically flat, but it is extremely unimpressive, and for the
last 40 years has been uncharacteristic in the course of the
whole of American history. So, we have to examine that.
Two, also in terms of the point of people wanting to go
back to work, we don't have a shortage of people who want to
work. We have a shortage of good jobs, and that is the problem.
Listen, we don't have a benefit cliff. We have a wage--
Mr. Sessions. I appreciate the gentleman. I have hauled
hay. I have climbed poles. I have done a lot of things that I
had to do to help myself out. And I am sorry you don't think
there are enough good jobs. We have--
Mr. Drummer. Good-paying jobs, Representative--
Mr. Sessions. I will just accept that as your answer, and I
appreciate the time and thank you, sir. And I yield back my
time.
Mr. Auchincloss. The gentleman yields back.
The gentlewoman from Ohio, Mrs. Beatty, who is also the
Chair of our Subcommittee on Diversity and Inclusion, is now
recognized for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman. I would also like to
thank all of our witnesses for being here today, and for
providing testimony.
I want to begin by acknowledging the pain and the
frustration that Americans are feeling over this inflation. I
don't think we can say stop. I have also said from the
beginning of the pandemic that this is a global public health
and economic crisis. And I know after 2 years of the shutdowns,
looking at supply chains, and also the Omicron variant, this
latest issue with inflation is the last thing that we want or
that we need. Democrats in Congress and the Biden
Administration are committed to doing everything we can to deal
with the inflation and its impact on the lives of American
families.
Mr. Drummer, let me thank you, because I do concur with you
in your last statement. Inflation has historically reinforced
economic disparities among minorities and people in rural
America. When inflation costs hit the average American, it hits
harder for Americans who have already had economic challenges
and been disadvantaged, because for every dollar increase in
inflation, this could equate to $5 for someone who is
financially unstable. Can you speak to the inflationary
challenges these Americans face, whether it is purchasing food
for their families or buying gas for their daily commute? Can
you talk about that briefly?
Mr. Drummer. We are in a bit of a quandary here, and I
appreciate the question, Representative. The reality right now
is that, yes, price increases disproportionately impact the
household budgets of low-wage workers. That is a fact. But it
is also a fact that a rate cut is going to do what? Depress
demand for workers, and do what? Take money out of the pockets
of these very same people. So, if we care so much about low-
income households, I don't think the rate cut is our silver
bullet to fix that situation. What we have to do is take a step
back, and understand that inflation concerns is a red herring.
There are larger structural problems that we have to address,
and let us get to business and build this country and have an
equitable economy where all can prosper and reach their full
potential. And that is what we are here to talk about.
Mrs. Beatty. Let me go to my next question, and thank you.
Dr. Mabud, I am sure you are aware that the Federal Reserve Act
mandates that the Federal Reserve must promote things like
maximum employees, moderate long-term interest rates, and last,
but not least, stable prices. I don't want this to be a quiz
game, but do you know how many Governors that there are on the
Federal Reserve Board? There are seven. And did you know there
were three vacancies now? And I guess I am concerned about the
vacancies because my Republican colleagues have literally
walked out and not appointed these things. And I think the
American people need to know that we are doing everything to
help during these tough times.
Do you have any comments on how some will say it doesn't
affect inflation, but the reason for having seven is to bring
diverse people. What do you think about not filling those
Federal Reserve spots? I think there is a reason that they are
on there, for us to hear all the differences as we look at the
effect of inflation. Dr. Mabud?
Ms. Mabud. Thank you for that question. Simply put, I think
now is not the time for political games. As Mr. Drummer said,
families are in crisis. So, now is really the time to have a
full slate of folks on the Fed Board, and it is time for us to
take on these issues.
I do want to note that the Fed has a dual mandate, right?
It has the mandate to keep stable prices, but it also has a
mandate to ensure full employment. And there are huge swaths of
this country who have never experienced full employment. Even
now, in the midst of what is arguably an historic recovery, the
Black unemployment rate is still double that of the White
unemployment rate. So, I am really eager to see a Fed that is
taking that full employment piece of their mandate seriously.
Mrs. Beatty. Okay. Thank you, and I yield back.
Mr. Auchincloss. The gentlewoman yields back.
The gentleman from Texas, Mr. Williams, is now recognized
for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman, and in full
disclosure, I am a small business owner. I am a defender of
profits. Profits are good. Profits mean jobs. I have been in
the car business for over 50 years, and we are in one of the
strangest markets I have ever seen. If I had gone on TV 3 years
ago, for example, and said in a commercial that if you buy a
car today, it will go up in value over the next 3 years, the
Federal Trade Commission (FTC) would have fined me for false
advertising. But this is exactly what is happening in the
industry today. We simply cannot get our hands on enough new
cars to satisfy consumers' demands. And this, in turn, has
caused us to pay a very high premium to obtain used cars so
that we have any inventory to sell at all. If we don't have
inventory, we won't be able to sell anything, and we couldn't
maintain a payroll, in my case of hundreds of employees.
To put this into perspective, how much has changed because
of the pandemic, we used to carry 800 units on the ground, and
today, I called my daughter and I just checked in, and she said
that we have 20 units on the ground. We talk about corporate
greed, but corporate greed has not caused us to carry 90-
percent less inventory. It is the result of strange supply
chains, overspending, and the threat of taxes and minimum wage
conversation.
There is no mass conspiracy, I have news for everybody,
between every business in America to squeeze the consumers to
raise their profits. That doesn't happen. Corporate greed is a
buzzword. It is a buzzword from people who have never run a
business. While the price for a good might be higher from week-
to-week, it does not mean that profit margins are also
proportionally increasing. If you are looking at gross sales
dollars, you are looking at the wrong figures. If an $100-
million company grows to a $200-million company, it is highly
unlikely that the profit margins were also able to double, and
it doesn't happen. So, what should we be talking about is
government greed, not corporate greed.
We have seen many new regulations that are causing
businesses to hire more compliance officers that are a net
negative to their bottom line. We have heard many Democrats
talking about companies paying their fair share, which means
they see a profitable company as something that they can
squeeze money from to fund their own pet projects. These public
policy decisions are having a detrimental impact on prices,
since businesses are having to dedicate more resources to
comply and respond. It isn't this fake notion of corporate
greed for companies that struggled through the pandemic
creating higher prices; it is government greed.
So, Dr. Goodspeed, can you talk about the effects of higher
taxes and more regulations on the price of consumer goods?
Mr. Goodspeed. Certainly, Congressman. And if I may, first,
just as a point of fact for the record, I would like to point
out that when I say that inflation in the United States has
risen more than in other advanced economies, I mean that on the
eve of the American Rescue Plan, inflation in the Euro area and
in the United States was 1 percent. The increase in that
inflation rate using a harmonized measure of consumer price
inflation, so that we are comparing apples to apples, the
increase in that inflation rate in the United States has been 3
times that in the Euro area.
In terms of taxes and regulation, I think that there are
both supply- and demand-side factors here. In terms of price
pressures, one of the things about the tax measures in 2017 is
that it incentivized higher labor force participation and it
incentivized greater investment in domestic capital formation.
That tends to increase the productive capacity of the United
States economy, which lowers inflationary pressure.
Mr. Williams of Texas. And creates competing wages.
Mr. Goodspeed. And creates competing wages. And to put
numbers on that, during the first 3 years of the preceding
Administration, real wages, inflation-adjusted wages, grew 9.8
percent for the bottom 10th of the wage distribution. They grew
4.8 percent for the top 10 percent of the wage distribution.
Real wealth inequality declined, real income inequality
declined, and labor share of income rose during the 3 years to
2019.
Mr. Williams of Texas. Yes, if you reduce regulations, you
reduce taxes, you let Main Street compete, competition drives
everything, everybody's saying about corporate greed.
Mr. Goodspeed. Right.
Mr. Williams of Texas. People get an even shot at rising
and making good for their life.
Mr. Goodspeed. Correct. And that is why we observed in
2019, 1 year alone, that the median American household
experienced real inflation-adjusted income gains of $4,400.
That was more in 1 year than in the preceding 16 years
combined.
Mr. Williams of Texas. Okay. Thank you, and I yield back.
Mr. Auchincloss. The gentleman yields back.
The gentleman from Florida, Mr. Lawson, is now recognized
for 5 minutes.
Mr. Lawson. Thank you, Mr. Chairman, and I welcome all of
the witnesses to the committee.
One of the things that I wanted to have you all elaborate
on is, Chairman Powell addressed the committee, maybe about a
week ago, and he said that when the Fed seeks to bring
inflation down, they raise interest rates, which puts
restraints, raising overall borrowing costs for households,
businesses, and consumers. If that is the case, and I think
they probably know more about it than I do, what happens in
inflation when interest rates are raised on houses and our
cars, and everything else that you can think of, but the
average consumer carries more credit card debt with higher
interest rates than the interest rate that is going to probably
be decided on by the Fed? How do you stabilize the interest
rates that are being charged on credit card debt during this
inflationary period as compared to trying to get the economy
stable, because they are going to increase with more and more
debt, with interest rates that exceed sometimes 30 percent?
Would anyone care to talk about it on the panel?
Mr. Drummer. Yes, Representative.
Mr. Zandi. I will take a crack at it, Congressman.
I think that there are a number of different channels
through which higher interest rates will affect the economy.
You mentioned one, through higher interest expense for
households, particularly those that have debts and most
specifically credit card debt, and home equity lines of credit.
But it works through other ways as well--one of the
quickest and most significant ways is through lowering asset
prices. So, one of the reasons why stock prices are down--
obviously, there are many reasons, including Russia's invasion
of Ukraine and higher oil prices--is that investors are now
discounting a normalization of interest rates, and that has
brought down stock prices. Of course, that hurts high-income
Americans, high-net-worth Americans. So all Americans are going
to feel the financial result of these higher interest rates.
But we do need to see, as the economy comes into full
employment, as unemployment gets close to 3 percent, we do need
to see the rates of growth in the labor market and the economy
more broadly kind of get back to a level that is consistent
with the growth in the labor force. And we need that moderation
to occur.
Zero interest rates, which is where we are today, is
inconsistent with that outlook for where we are headed. So, we
do need to see interest rates normalize. And all Americans from
top to bottom are going to feel it. But obviously, middle-
America Americans would desperately need to avoid going back
into recession. And if we don't normalize rates, slow the
economy as we come into full employment, the odds of that are
going to rise and we are going to hurt the very same people we
want to help.
Mr. Lawson. Okay. And I am going to try to get in another
question before my time runs out. The Administration puts forth
a lot of funding for small and mid-sized corporate processes to
assist with the processing capacity. Do you think we need to
take the same approach for the timber industry, and invest in
small and mid-sized timber processes? We know there have been a
lot of processing issues with timber. Would it be beneficial to
the housing supply market to invest in smaller processes to
help increase the timber supply within housing? And that is for
the whole panel.
Mr. Goodspeed. Thank you, Congressman. I can't necessarily
speak to the timber industry specifically, but what I can say
is that it would certainly be good tax policy to expand the
expensing for investment in new plants and equipment in the
United States. That would include equipment of all sorts. And
as I noted in some of my earlier remarks, one of the issues
with the prospect of higher corporate income tax rates down the
road is that it raises the incentive for firms, including firms
in the timber industry, to defer investment in new equipment to
2022 because the deduction for new equipment investment is much
more valuable under a 28 percent rate than a 21 percent rate.
So, that was unlikely to help equipment investment recover in
2021.
Mr. Zandi. Can I just push back on that, Congressman? I
don't think there is any material evidence that the lower tax
rates that were put into place back in 2017 have impacted
investment in a meaningful way. And I don't think the
discussion and debate around rolling back some of those tax
cuts had any impact on business investments over the last year.
In fact, I would say if we go look at business investment in
equipment, it is much higher than it would have been without
the pandemic. It has gone skyward. And that goes to supply
chains, and that goes to trying to improve productivity growth.
So, I don't think there is any--
Mr. Auchincloss. The gentleman's time has expired.
Mr. Zandi. The timber industry is a problem, but I don't
think the solution is lower tax rates.
Mr. Lawson. Okay. With that, Mr. Chairman, I yield back.
Mr. Auchincloss. The gentleman from Georgia, Mr.
Loudermilk, is now recognized for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman.
I am almost speechless--not entirely, I have plenty to
say--that we are here doing this, because obviously, some of my
colleagues haven't learned anything from history, especially
recent history. I heard in testimony earlier that we expect the
inflation to be short-lived; we will get out of it soon. Yes,
if you really buy into a lot of what we heard here today, that
it is the big corporations that are the problem and it is not
the self-imposed destructive policies that have brought us to
where we are right now.
Let us turn the clock back to just a few months ago, where
in the first quarter of last year, we heard, oh, there is no
inflation, it is not really there, it is just temporary, caused
by the pandemic, we will be out of it really soon. But many of
us on this side of the aisle, me included, were saying no. And
the direction that we are going with this wasteful spending,
that it is not just the deficit spending that we are in, it is
where we are spending the money. You are dumping money into the
demand side, and then regulating the supply side. It is going
to cause problems, and we have seen that. Then it went into,
well, it is here, inflation is here, but it is not going to
last long. Then we get into, well, finally, you are recognizing
that we are in inflation, but we have to find somebody to blame
it on because it can't be our bad policies.
Quite frankly, my colleagues on the other side are again
turning away from fact and embracing a more advantageous
political science instead of real science, and scrambling to
find a scapegoat for self-created problems that are affecting
Americans across-the-board. And it is not just me saying this,
former Democrat Treasury Secretary Larry Summers warned last
year that excessive fiscal stimulus will cause the highest
inflation in generations. Democrats dismissed these warnings,
but it turned out he was right. Again, this is somebody from
the other side of the aisle.
And Federal Reserve Chairman Powell last week, in
responding to one of my questions, admitted that the reckless
stimulus spending is a significant driver of inflation. These
are facts.
Even the Washington Post has reported that Democrat
pollsters recently advised the White House to find a villain to
blame inflation on. This is the Washington Post. Because
Republicans' criticism that the out-of-control spending as the
cause of inflation is being effective. So, even the Washington
Post is reporting that pollsters, political science, not
natural science, is driving this entire narrative.
Just a little while ago, President Biden finally announced
that we were going to stop importing Russian oil, but then he
continued on to blame U.S. oil producers as the reason that we
are not producing oil, not his Executive Orders. And I also
would suggest, let us look at some of the self-imposed policies
like the influence that ESG has had on American producers by
punishing investors and steering them away from fossil fuels
and investing in petroleum companies in the U.S. but not in
foreign entities. So, there is a lot of blame to go around in a
lot of areas that we have self-imposed the problems that most
Americans are facing today.
The Democrats are now blaming the so-called greedy
corporations for their self-created inflation problems. This is
a baseless and completely unserious argument. This is simply to
distract us from the real problem that they have brought upon
this nation. And the American people are quite frankly not
buying it. Polling shows that 70 percent of Americans
disapprove of the way this Administration is handling
inflation. It is because they are doing the same thing over
again and expecting a different outcome. And I am not even sure
they are expecting a different outcome. They are just hoping
that the American people will finally buy into the narrative
they are pushing out there, but they are not.
In a piece titled, ``The White House once again offers a
bizarre message on inflation,'' the left-wing Washington Post
editorial board said, ``President Biden is facing mounting
criticism for inflation's rise to its highest level since
1982,'' which is right after the end of the Carter
Administration. And I suggest if you go back and look at
history, we are repeating the Carter Administration's years all
over again, but on steroids. Unfortunately, the White House's
latest response is to blame greedy business. And economists
across the political spectrum are rightly calling out the White
House for this foolishness.
I can go through a litany of things that have caused this
problem, but I am running out of time. So, Mr. Goodspeed, in
your testimony you said the American Rescue Plan artificially
increased demand as much as 5 percent above pre-pandemic
forecasts. Can you explain briefly how that is the case?
Mr. Goodspeed. Thank you, Congressman.
Briefly, that means that with a fiscal stimulus of that
magnitude, it increased aggregate demand in the United States
economy at the same, relative to the potential output of the
U.S. economy. That 5 percent is probably an underestimate,
because as I noted in my testimony, the supply-side potential
of the United States economy was probably depressed in 2021.
Mr. Auchincloss. The gentleman's time has expired.
Mr. Loudermilk. Mr. Chairman, I yield back.
Mr. Auchincloss. The gentlewoman from Iowa, Mrs. Axne, who
is also the Vice Chair of our Subcommittee on Housing,
Community Development, and Insurance, is now recognized for 5
minutes.
Mrs. Axne. Thank you, Mr. Chairman. And thank you to the
witnesses for being here. I think we all know how much price
increases are on the minds of our constituents, as we are
talking here in Congress. And the war in Ukraine has far more
severe consequences for their people than higher gas prices.
But since we are here to talk about inflation, let us focus on
that to start.
Right now, gas prices are up $0.55 nationally in the last
week, following oil prices higher after the invasion, of
course. Those prices may rise further now that we are blocking
imports of Russian oil, and I support that move. But since
Russian imports make up only 3 percent of our consumption, that
is not all that is going on here. Even before this invasion,
gas prices were up about $1 over last year, and oil was trading
at $90 a barrel.
Dr. Zandi, it's good to see you. Do you have an estimate of
the price where U.S. shale oil production becomes profitable?
Mr. Zandi. That price is somewhere between $65 and $70 per
barrel. Obviously, I am painting with a broad brush. There are
big differences across the fracking fields of North America.
But that is the marginal cost of producing and transporting
that oil to the global marketplace, so, about $65, $70 a
barrel.
Mrs. Axne. Thank you. Okay. So, about $65 to $70 a barrel
is becoming profitable. And again, oil was trading at $90 a
barrel when last we talked. So, pre-pandemic oil was around $60
a barrel, and domestic production here was around 13 million
barrels a day. Since the pandemic, though, production is down
10 percent, which is about 1.3 million barrels a day. Now, I
understand companies can't turn this on overnight, but oil has
been over $60 for a year now.
Dr. Mabud, do you have any explanation for why production
is still so far below where it was?
Ms. Mabud. Thank you for that question. The fossil fuel
industry is not immune to the type of profiteering that I spoke
about in my testimony. And this moment when things are in flux,
when there are a lot of geopolitical factors happening, is an
opportunity to exploit those headlines in chaos and use their
grip on the market to raise prices. In fact, just 5 oil and gas
companies raked in over $75 billion in profits last year, which
is the highest increase in profits in 7 years. Look, the only
thing more lucrative than pandemic profiteering is war
profiteering. And sadly, we are probably going to be seeing
both. And major oil companies, including household names like
Exxon Mobil, Shell, and Chevron, are set to return record
buybacks to their shareholders in 2022. Analysts are estimating
that these buybacks could range anywhere between $38 billion
and $41 billion, which is nearly double the buybacks in 2014,
the last time that oil traded above $100 a barrel, so this is
just corporate profiteering. And this sector is not immune to
that.
Mrs. Axne. That is incredibly unfortunate. I certainly hear
a lot of calls lately for increased U.S. production directed
right here at Washington, D.C. But the truth is, we are not the
ones that are stopping it from happening. The companies are
just choosing not to produce what we need right now. Here are a
couple of quotes from some oil CEOs just in this last month.
``Our plan now for 2022 is to just keep our volumes flat.''
Another quote, ``Whether it is $150 oil or $200 oil, we are not
going to change our growth plans.'' Maybe my economics is a
little rusty, but I know yours certainly isn't, Dr. Zandi. Is
that how supply and demand is supposed to work?
Mr. Zandi. No. I do think though, Congresswoman, we are
starting to see the economic incentives starting to work. If
you look at Rig Counts, they are double what they were at the
pre-pandemic low. And in the last 6 to 8 weeks, they have
picked up sharply. And I suspect now that we are in $120 oil,
we will see the oil rigs really ramp up.
I don't have a perspective on the industry and how
competitive it is. It has been slow to respond to the higher
prices, that's for sure. But it feels like it is kicking into
gear now. And thank goodness for that, because we will need
that oil.
Mrs. Axne. I am glad to hear that it is turning around and
that they are actually going to start doing some production for
us because we need it. A couple of other things that the CEOs
have been saying, ``The capital that historically we would
spend in growing, now we are redeploying in the form of share
repurchases.'' Another quote, ``We have to do what Wall Street
wants, or else your stock craters.'' This is my big concern,
that Americans, working Americans are suffering as more money
is being put in shareholder pockets. And so, this is why
company after company is reporting record-free cash flows.
Those calls for more oil production shouldn't be coming to
Washington. They absolutely need to be going to Wall Street
because that is who is really demanding that oil companies not
increase their production. So, thank you so much for your
testimony here today.
I yield back.
Mr. Auchincloss. The gentleman from Tennessee, Mr. Kustoff,
is now recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman. And thank you to the
witnesses for appearing today.
Dr. Goodspeed, the Consumer Price Index has gotten a lot of
attention. Of course, we saw the numbers last month that
registered in at 7.5 percent, which was higher than I think a
number of economists were thinking. The number that I have
seen, that is expected when the CPI number comes out later this
week, is 7.9 percent. In historical terms, can you reference
that? We know that when the number came out last month, that
was the highest number that we have seen in 40 years. Where
does 7.9 register? What does that mean for the average American
and consumer?
Mr. Goodspeed. Thank you, Congressman. That frankly is a
level of inflation that we have not observed since the late
stages of the great inflation of the 1960s to the early 1980s.
And I would add that it might very well be higher than that if
we calculated CPI the way we did before 1983. The 1983 was
improvement, but prior to 1983, home prices directly entered
into the calculation of CPI. And I suspect that if they did
again, then we would have actually seen even higher inflation
than 7.5 percent.
Mr. Kustoff. And in your opinion, what would 7.9 percent,
if that number is real, and it projects that way when it comes
out later this week, what would that mean for the average
American? What does that reflect?
Mr. Goodspeed. I think that reflects a substantial decline
in purchasing power even greater than that which we observed in
2021 when, in inflation-adjusted terms, wages actually declined
in 2021. And they declined by various measures between 2 and 3
percent, because even though wages went up, they did not go up
by enough to keep pace with the surge in inflation.
Mr. Kustoff. The markets, as anybody who opens up their
brokerage statement or logs online and looks at it knows, have
been tumultuous, certainly over the last several weeks. Do you
have an opinion of how the markets feel about government
spending and increased government spending?
Mr. Goodspeed. I think markets are reflecting a great deal
of factors, geopolitical uncertainty included, concerns about
fiscal excess necessitating tightening by the Federal Reserve.
I would add that when we are talking about asset classes, one
of the ways in which inflation really hurts lower- and middle-
income households is through the fact that they don't have the
same hedges against inflation that higher-income households
have. Higher-income households are more exposed to equity
markets, higher-income households tend to own their own homes.
So, they are better-hedged against inflation than lower-income
households.
Mr. Kustoff. Thank you, Dr. Goodspeed.
Mr. Zandi, I would like to talk to you about the travel and
the airline industry for a moment. I know during this hearing,
there have been a lot of questions about high energy prices.
The airline and travel industry, as we know, has been through a
roller coaster with the pandemic. We all fly. We have seen
increased capacity, although I am not sure that the business
traveler has returned to his or her pre-pandemic level. But
with high energy prices, at what point do the airlines look at
the price of a barrel of oil and decide that it is not
profitable and start parking airplanes?
Mr. Zandi. Oh, I think we are a long way from that.
Although, you make a great point that the airline industry is
obviously very energy-intensive, and as prices rise, fuel costs
rise, it is going to make it very difficult for them to earn
money. Their profitability is going to be under extreme
pressure. At least, that has been the case historically. And I
would be surprised if that isn't the case here as well. They
may pull back on expansion plans, they may pull back on
particularly unprofitable routes, but I don't think they will
do this in a widespread way. Because the other thing that is
going to happen is I do think demand is picking up, business
travel, as you point out, has been very depressed. But now that
we are on the other side of Omicron, offices are reopening,
particularly in the big urban centers that are globalized, and
we are going to see more business travel. So I would be
surprised, Congressman, if we saw the airline industry actually
park planes on tarmacs.
Mr. Kustoff. To make up for their margins, if oil continues
to increase, they would have to raise their prices, wouldn't
they?
Mr. Zandi. Yes, sure. And I am sure that they will try to
compensate for that.
Mr. Kustoff. Thank you. I yield back.
Mr. Auchincloss. The gentleman from Illinois, Mr. Casten,
who is also the Vice Chair of our Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets, is now
recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. Our memories are short
in this town, but I want to remind everybody that 2 years ago
this month, we were looking at the biggest-ever collapse in GDP
in our history, and the biggest-ever spike in unemployment in
our history. And if I would have told you then, don't worry
about it, 2 years from now we are going to have 300 million
Americans vaccinated, we are going to have employers creating
jobs at a faster rate than the workforce is growing, and we are
going to have Republicans and Democrats united across the aisle
to support NATO to provide defensive weapons to Ukraine and
stand up to Vladimir Putin, you would have told me I was
smoking some funny cigarettes. But here we are.
And I do not mean to make light of the challenges Americans
face today, but I think I speak for all Americans when I say I
am a lot happier to be here than where we were just 2 years
ago. That rate of change is extremely disorienting. It is hard
to understand. It is hard to process. And so, I want to start
with just some really simple questions.
Dr. Goodspeed, if I gave you a 9.2 percent raise in your
income, and your expenses went up by 5.6 percent, would you
have more or less money in your wallet at the end of the year?
Mr. Goodspeed. [Inaudible.]
Mr. Casten. You would have less money if your income went
up at 9.2 percent in your--
Mr. Goodspeed. [Inaudible.]
Mr. Casten. No, a 9.2 percent raise and a 5.6 percent
increase in your expenses.
Mr. Goodspeed. [Inaudible.]
Mr. Casten. Okay. I just described the 2021 wage growth in
the United States and core inflation. And when we only talk
about income growth, or we only talk about expense growth, it
is a one-hand-clapping conversation. What matters to Americans
is how much money is left in their bank, not what is the end,
and, indeed, we have seen a $2 trillion increase in savings in
the last year. You also mentioned, Dr. Goodspeed, that the U.S.
inflation rate, I think, if I understood you, is the 5th-
highest among the G20 countries. Where is our wage growth among
G20 countries?
Mr. Goodspeed. I noted that among 46 economies tracked by
the Organisation for Economic Co-operation and Development
(OECD), the increase in average inflation in 2021 relative to
pre-pandemic was the 4th highest in the United States.
Mr. Casten. Okay. Close. I am just saying that among G20
countries, what is our rate of wage growth, because I want to
make sure we focus on not one-hand-clapping.
Mr. Goodspeed. I do not, off the top of my head, know--
Mr. Casten. I will help you out. It is the second-fastest
rate, and, in fact, the third spot is the U.K., which is just
half of our rate. So, it is a long drop from the silver-medal
podium to the bronze-medal podium. How does our GDP growth
compare over the last year to the rest of the G20?
Mr. Goodspeed. Our GDP growth over the past year has
outpaced most of, if not all of the rest of the G20.
Mr. Casten. Yes, I think we are the 8th-fastest,
interestingly enough, but the number one through three spots
are Argentina, Turkey, and Saudi Arabia. I think it is safe to
say that none of us want to emulate their economic policies,
but they are seeing rapid GDP growth.
It seems to me that, yes, we have had rapid inflation
growth, but we have also been at the top of the league tables,
thanks to a lot of what we did, we would not be there but for
those changes. So, Mr. Drummer, I would like to start with you.
I am under no illusions that that 9.2 percent wage growth has
accrued to every single American. Can you take a minute and
tell us what you see that we have done from a policy
perspective to drive that wage growth? And what we can do to
make sure that those gains are shared by all Americans going
forward?
Mr. Drummer. Thank you, Representative. That's an excellent
question. So, average wages for U.S. workers grew by 4.7
percent. It was the highest growth in 2 decades. However,
inflation also grew by 7 percent during the same time, meaning
that even with--
Mr. Casten. I'm sorry; let me just interrupt you there,
because the Bureau of Economic Analysis had 9.2 percent average
wage growth in 2021. I just want to make sure I am not--
Mr. Goodspeed. To my knowledge, the Bureau of Economic
Analysis doesn't report average wage growth. The average wage
growth would be from the Bureau of Labor Statistics.
Mr. Casten. I'm sorry but the data says 9.2--
Mr. Zandi. I think that is wage and salary growth; I am
pretty confident that is wage and salary growth.
Mr. Casten. Okay. I am sorry to interrupt Mr. Drummer, but
I just want to make sure that we are--
Mr. Drummer. Okay. But to your point, we can get to the
point here that the wage growth is a reflection of what happens
when we have expansionary monetary fiscal policy. We don't get
growth in our economy without stimulating our economy. And that
is pretty much what it comes down to. Now, unfortunately, we do
see that the fastest wage growth did happen for the lower
quartile. But they were coming up from a pretty low number, and
that wage growth still isn't enough. And this is why the rate
increase is so dangerous. We are about to claw back those gains
that they just had after decades of relative stagnation.
Mr. Casten. Dr. Zandi, with the time left, anything you
want to add as far as what we have done from a policy
perspective to make sure that we are at the top of those league
tables on GDP growth and wage growth, and what should we be
doing going forward to make sure we maintain those gains?
Mr. Zandi. I thought the policy response, the fiscal policy
response in particular, and the American Rescue Plan, more
specifically, was a slam dunk positive for the economy. And I
think it is critical to getting the economy back to full
employment as quickly as it has faster than almost any other
economic recovery.
Mr. Auchincloss. The gentleman's time has expired.
Mr. Zandi. And I don't believe that it contributed in any
meaningful way to inflation.
Mr. Auchincloss. The gentleman's time has expired.
Mr. Casten. I yield back.
Mr. Auchincloss. The gentleman from Ohio, Mr. Gonzalez, is
now recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Mr. Chairman. First, I
want to submit for the record a CNBC article entitled,
``Inflation eroded pay by 1.7 percent over the past year,'' by
Greg Iacurci.
Mr. Auchincloss. Without objection, it is so ordered.
Mr. Gonzalez of Ohio. Thank you. There is a bit of debate
as to whether the real inflation rate or, I'm sorry, the real
wage growth was negative. And I think that hopefully helps put
it in context. So we are talking about historic inflation here.
And for the 2012 to 2020 period, prices were relatively stable
and much of the prior period. And so, the question is always
what changed, what actually changed? If you listen to the Chair
and some of the witnesses today, it seems to suggest that the
idea is we should be spending more and we should keep rates
low, and that will somehow correct inflation.
I want to start with Dr. Goodspeed. Do you have any reason
to believe that corporations are greedier today than they were
4 years ago?
Mr. Goodspeed. I have no evidence, nor I have seen any
academic study to that effect, no.
Mr. Gonzalez of Ohio. So, this notion that greedy
corporations are somehow driving inflation--I would argue that
relative greed amongst corporations is pretty stable over time.
It is sort of silly as an explanation for inflation.
And it is notable that Chairman Powell, when he was before
our committee last week, disputed that. And Treasury Secretary
Yellen rejects that explanation as well. And she didn't mention
it a single time when she was before our committee. So, I think
it is disingenuous, to say the least.
Another thing I am hearing is that we should keep rates
low, while also complaining about housing prices, which housing
prices are high.
Dr. Goodspeed, again, what impact do zero percent interest
rates have on the price of housing?
Mr. Goodspeed. They have a very substantial impact on the
price of housing because you are discounting the future flow of
housing services at a much lower rate. And that tends to
increase demand for housing and increase the price of housing.
Mr. Gonzalez of Ohio. So when the Fed lowered rates to zero
at the pandemic onset, it's not surprising that we saw demand
increase, and therefore, prices increase? We saw it in housing,
but we saw it in most markets. Fair?
Mr. Goodspeed. That is fair.
Mr. Gonzalez of Ohio. Okay. And so, this idea that we
should keep rates low and that is going to somehow solve the
housing problem, boy, somebody's going to have to explain that
one to me.
Now, we are going to talk about another thing that changed,
which is in the summer of 2020, the Federal Reserve updated its
statement on longer run goals and monetary policy strategy to
state that the Fed would seek to achieve inflation above 2
percent for some time, after periods of low inflation. That is
a significant change.
Given the persistent increase in inflation over the last
year, do you believe that this policy hindered the Fed's
ability to act sooner to address rising inflation or could you
see where it might have?
Mr. Goodspeed. I don't think that the policy change should
have hindered--they still could have responded earlier. And I
think they should have responded earlier. I fear that they may
have overemphasized the, ``flexible'' part of flexible average
inflation targeting.
Mr. Gonzalez of Ohio. Thank you. And I wish that this chart
were easier to see. I know these are hard to see, but
basically, this is personal goods expenditure from pre-COVID
levels. If you look before the recession, more or less demand
is fairly stable over time.
Here, you see massive jumps in durable goods. Here, here
and here, where these arrows are all correlated almost
perfectly with the fiscal stimulus, the Cares Act, March 27,
2020, you saw a massive increase in demand on durable goods.
Bipartisan COVID Relief Bill December 21st, again, you see a
massive increase in the demand for durable goods. American
Rescue Plan, March 11, 2021, massive increase in demand for
durable goods.
These are all things that have changed. And so, when you
think about what is driving inflation, I think it is fairly
obvious. We have rates that are at zero. We had a pandemic, and
we responded. I voted for most of that stuff, frankly. I didn't
vote for the American Rescue Plan. Massive fiscal stimulus and
so, you have seen a shift in the demand dynamics.
What you have not seen is what the chairwoman and some of
our witnesses seem to suggest, which is that there is evidence
that corporations are somehow greedier today than they were 5
years ago. I don't think anybody would make that claim. But it
seems to be the one that we are hearing. With that, I yield
back.
Mr. Auchincloss. The gentlewoman from Massachusetts, Ms.
Pressley, who is also the Vice Chair of our Subcommittee on
Consumer Protection and Financial Institutions, is now
recognized for 5 minutes.
Ms. Pressley. Thank you, Mr. Chairman. Workers, families,
and small businesses in my District, the Massachusetts 7th
District, and around the country, are feeling the impact of
higher prices, everything from groceries to diapers to
medication, and other essential necessities. Corporations are
claiming that they have no choice, but to pass costs on to
consumers due to inflation, and supply chain bottlenecks, but
their profits are telling a different story.
Mr. Vaheesan, isn't it true that most large corporations
reported greater profits in 2021 than prior to the pandemic?
Mr. Vaheesan. That is correct, Congresswoman. Corporate
profit margins were at a 12-year high in 2021. And,
importantly, markets across the economy were already highly
concentrated, but inflation has given many corporations cover
to exercise their pricing power. And CEOs and CFOs have gone on
record to say that they can exercise pricing power that they
couldn't before.
Ms. Pressley. Two out of three of the largest publicly
traded companies reported more profits in 2021 than they did in
2019, at a time of a global pandemic, and a pandemic-induced
recession, when people are struggling to make ends meet.
Corporations like Amazon, Kroger, and Starbucks are not only
hauling in massive profits, but they are also still raising
prices. That doesn't sound like they are simply, ``passing
costs on to consumers.'' That sounds like corporate price
gouging.
Mr. Vaheesan, for those following from home who hear this
term but don't exactly know what it means--and they are feeling
the impact of it every day--can you briefly describe what price
gouging is, and how it impacts consumers?
Mr. Vaheesan. This price gouging really comes in two forms.
The first is when a firm exercises monopoly or oligopoly power
to unilaterally raise prices far in excess of costs. And that
seems to be in action in industries such as beef, where
processors are raising prices to consumers while keeping prices
down to ranchers.
The second phenomenon is collusion, where a group of firms
come together to jointly raise prices, foreign excess of costs.
And that seems to be happening in poultry processing. In fact,
a number of processors have been indicted and face private
lawsuits over collusive activity. So those are the two types of
price gouging that commonly happen in the economy.
Ms. Pressley. Thank you. And I'll give another sort of
real-time example that I certainly hear from constituents every
day. Take Procter and Gamble, for example. They have repeatedly
raised prices on their products during the pandemic, including
diapers, while increasing their CEO pay, stock buybacks and
dividends and raking in $21 billion in sales last year. So,
these price hikes are rooted in corporate greed, plain and
simple, and low-income families will continue to pay the
highest price.
Dr. Mabud, are we seeing price gouging occur in just one or
two sectors of the economy or would you say it is more of a
broader problem?
Ms. Mabud. Thank you for that question. My organizationz,
the Groundwork Collaborative, has combed through hundreds and
hundreds of earnings calls over the last 3 quarters, and what
we see is in sector after sector, this type of pandemic
profiteering is really, really rampant. And part of the reason
we are seeing such widespread profiteering is because these
CEOs and corporate executives are being egged on by their
shareholders. Because when prices go up, and there are higher
profit margins like we have been seeing, record profit margins,
the demand from investors is yes, keep doing that play, push
the prices up even more, so we can push profits up even more.
And the concern here is that investor scaffolding that
undergirds our entire economy will keep prices elevated for a
longer period of time and allow these huge companies to get
rich while all of us pay the price.
Ms. Pressley. Thank you. And this isn't just about the
exploitive nature of price gouging by large corporations. It is
also about investigating how and why, and do they have the
power to do so?
Ms. Mabud. Absolutely. In many ways, pandemic profiteering
is like that little blinking red light that says the whole
switchboard is going down, right? And what we essentially have
is 50 years of policy decisions that have led to a brittle
supply chain and megacorporations really shaping a system that
works for them and not for others. And as a result, when we
have a moment of inflation and we are hearing this on the
earnings calls, executives are saying, inflation is helping us
with some cover to raise prices, and by the way, we can raise
prices without losing market share because we are so big that
our consumers have nowhere else to go.
Ms. Pressley. Thank you.
Mr. Auchincloss. The gentlewoman yields back.
The gentleman from Michigan, Mr. Huizenga, is now
recognized for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. I am about to attend
a funeral of one of our colleagues, Jim Hagedorn.
Mr. Auchincloss. Mr. Huizenga, you are--
Mr. Huizenga. --sure all of my colleagues--
Mr. Auchincloss. Mr. Huizenga, you have come in with some
buffering issues. Do you want to start over?
Mr. Huizenga. Sure. I apologize for that. I am on my way to
the funeral of one of our colleagues, Jim Hagedorn, and I know
all of my colleagues are thinking of his family today. So, I
apologize as I am in the vehicle doing this.
Some pretty amazing statements are being made today. For
example, the prices are up because of corporate greed, so I
must assume that gas prices were low because the same
corporations were not greedy. A year ago, Amazon had record
profits because they are greedy, not because people are using
them more, and trust me, I am no fan of Amazon per se. But
there is another statement that ruthless efficiency has brought
higher prices. The views on how the economy works are clearly
very, very disjointed here within the committee.
I do want to ask Mr. Goodspeed to explain why inflation is
hurting those middle- and lower-income families that I
represent. I have the second-poorest county in the State of
Michigan. It is one of the top 100 poorest counties in the
nation. It is very rural. It has a significant minority
population, and I am worried about them. Not the top quartile,
I am worried about the bottom, and the second, and the third
quartile of income earners. If you could address that, Mr.
Goodspeed?
Mr. Goodspeed. Thank you, Congressman. And on the subject
of workers and how inflation is impacting them, I would just
like to note for the record that I am not familiar with the 9.2
percent figures cited by the Congressman from Illinois. Insofar
as I can tell, he is referencing nominal, aggregate wage and
salary income, as reported by the Bureau of Economic Analysis,
which is economy-wide. That is something very different from
average wage growth as measured either by average hourly
warning earnings or average weekly earnings or the employment
cost index. So, I would just like to note that for the record.
In terms of your question, Congressman, yes, the inflation
can be particularly difficult for middle- and lower-income
Americans because they tend to have lower bargaining power. It
is more difficult for their wages to keep pace with inflation.
Second, things like rent, gas, groceries, and utilities tend to
account for a higher share of their disposable personal income.
And finally, as I have noted in my testimony, they tend to be
less exposed to classic inflation hedges like equity markets,
and like owner-occupied real estate.
Mr. Huizenga. And how would you respond to these calls for
more Federal spending, that we haven't been spending enough and
that more stimulus is going to help those families that you
were just talking about?
Mr. Goodspeed. I think that more Federal spending is likely
to continue to put upward pressure on interest rates and that
is not good for most households. I think more Federal spending
is likely to exacerbate a lot of the inflationary pressure. And
in the long run, I don't think it is sustainable, so that
implies a higher future tax liability for ordinary Americans.
Mr. Huizenga. In a previous hearing, I took the adage, when
you are a hammer, everything looks like a nail, and converted
it to, when you are a modern monetary theorist or a neo-
Keynesian, everything looks like a spending opportunity. And I
think that is exactly what the debate is here today, whether we
are going to pour more fuel on the inflationary fire that we
have here. And maybe I'll finish with this, Mr. Goodspeed. How
does fiscal discipline regulatory right sizing and private
sector investment rather than government sector investment help
families like those in my district?
Mr. Goodspeed. I think we ran that experiment, Congressman,
in 2017, 2018, and 2019, and the result was, as I noted
earlier, real wage growth for the bottom 10 percent of the wage
distribution of 9.8 percent versus real wage growth for the top
10 percent of 4.8 percent. We saw declining wealth inequality,
and declining income inequality. And we saw real median
household income grow by $4,400, which was more in one year
than in the preceding 2016, combined. I think that is the
result of this sort of policy mix to which you referred.
Mr. Huizenga. I appreciate that. And with that, I will
yield back.
Mr. Auchincloss. The gentlewoman from Pennsylvania, Ms.
Dean, is now recognized for 5 minutes.
Ms. Dean. Thank you to the chairman, and I thank all of our
witnesses for your time and testimony and expertise today.
I want to follow up on a question that I asked Federal
Reserve Chair Powell just last week, at our hearing. I have
voiced my concerns about increasing market concentration and
the role it has played in contributing to the fragility of our
supply chain. I am thinking and some of you have spoken to it
in the beef and poultry industry, for example and its
connection to inflation. In response to my question, Mr. Powell
downplayed the role of market concentration, noting that it is
not a settled question, and he defers to the competition
authorities. Many of you on this panel see it differently.
So maybe, I'll start with Dr. Mabud and Mr. Vaheesan. Can
you please speak more to the market concentration and its
impact on inflation?
Ms. Mabud. Sure. Thank you for that question. Corporate
consolidation and its large size in our economy has really
helped facilitated the price hikes that we are seeing today.
With control and dominance over these markets, these massive
corporations can raise prices and pass along costs to consumers
who have nowhere else to turn. Think about families again, who
need diapers, and all of the diaper brands that we are all
familiar with are made by two diaper companies, and the prices
are going up.
Those companies know that they can get away with it because
families are not going to go without diapers. Pandemic
profiteering is really just one symptom of an economy that
prioritizes profits, all while decimating the economic security
of millions around the country, and faced a broken economy for
decades. It is kind of the tip of the iceberg in many ways, and
I am happy to speak more to the supply chain aspect of this
too, but we'll let my colleague on the panel, go next.
Ms. Dean. Mr. Vaheesan?
Mr. Vaheesan. Yes, that is exactly right. First, corporate
concentration has contributed to higher unilateral pricing
power on the part of businesses, so they can raise prices,
raise profit margins without losing large volume of sales.
Second, in concentrated markets, it is easier for companies
to come together and collude, and as a number of Members noted
today, markets were very concentrated before the pandemic. That
is certainly true. But inflation of an excess of 7 percent has
given powerful corporations the freedom to approach their
purchasers, whether they are wholesalers or retailers and say,
look, inflation is up. We want to raise prices, and they didn't
have that cover before. So it is easier to broach the topic of
price increases without jeopardizing their relationship with
purchasers.
And I think I would add that 40 years of mergers and
acquisitions have meant that companies have plowed money into
buying other companies instead of investing in new capacity.
And the pandemic has really exposed the fragile nature of many
of our supply chains and the lack of economic resiliency.
Ms. Dean. Thank you very much, both of you.
Dr. Zandi, it is good to see you, my fellow Philadelphian,
Pennsylvanian. I want to thank you.
Mr. Zandi. It's good to see you.
Ms. Dean. Maybe tacking on to this question about
concentrations in the market and inflation, what are some
solutions that Congress can apply? And then, I have another
question for you after that.
Mr. Zandi. Sure. I do think it is very important that you
have hearings like this to shine a bright light on these
practices. In fact, you may want to dig deeper into each of
these industries where concerns are raised about competition in
the meatpacking industry or the energy industry. I think that
is a very fundamental role of government, to make sure that
everyone is playing by the rules, particularly in a time of
crisis. And we are deeply in crisis. So, I think that is very
key.
And then, making sure that the antitrust laws are in the
shape they need to be in, and I know there has been a lot of
work, both in the Senate and in the House, around taking a good
hard look at our antitrust laws and making sure they are up to
the challenges that exist today. So, I think those are very
important things to do, just to make sure that businesses are
playing by the rules in these markets in a time of stress.
Ms. Dean. And following up on the American Rescue Plan that
I was very proud to be a small part of with a yes vote about a
year ago, sadly, some of my friends on the other side of the
aisle have been spinning about the American Rescue Plan and
inflation as though it were entirely to blame for the inflation
that we are seeing in this country, and we all know that it is
a global phenomenon. Can you speak to that set of myths?
Mr. Zandi. Yes, the American Rescue Plan did help demand,
but that was a year ago and that coincided with the
vaccinations in the reopening of the economy, so inflation
picked up. But that was deemed to be okay because we have been
through a decade or more of low inflation, suboptimal
inflation. The really difficult inflation came well after the
American Rescue Plan and its impact on demand waned, and that
was due to the pandemic and the Delta wave and disruption to
supply chains and--
Mr. Auchincloss. The gentlewoman's time has expired.
Mr. Zandi. --the complicated question we are experiencing
now is not due to the American Rescue Plan.
Mr. Auchincloss. The gentlewoman's time has expired.
Ms. Dean. Thank you for that clarity, and I yield back.
Mr. Auchincloss. The gentleman from South Carolina, Mr.
Timmons, is now recognized for 5 minutes.
Mr. Timmons. Thanks, Mr. Chairman. I have to say the
evolution of the so-called experts and the leftist politicians
on inflation over the last year has been absolutely incredible
to behold. When Republicans warned of inflation last year while
Democrats were spending like drunken sailors, we were shooed
away and told that was crazy talk. Inflation was a thing of the
past, et cetera. My, how their tune has changed, after calling
it crazy, then it was transitory. And then, it was only used
cars, lumber, and gas. And then it was, and this is my
favorite, a first-class problem. The White House chief of staff
literally described inflation as a first-class problem, but
nothing could be further from the truth. And we aren't done
yet. That wasn't the end of the evolution.
Once my colleagues across the aisle started polling the
issue and realized what we have been saying all along, that
inflation functions as a tax, a regressive tax, primarily
hurting folks living paycheck to paycheck on fixed incomes, who
are just trying to make it until payday. Once they realized
they could not wish away this problem, they had to start
blaming it on something. There has been no introspection to
speak of friends across the aisle. Instead, they are blaming
their tried-and-true boogeyman, corporate America. Never mind
the easy money policies of the Federal Reserve over the last 2
years. Never mind trillions of dollars of unneeded Federal
deficit spending poured into an otherwise healthy economy that
was emerging from the pandemic.
Last year, Democrats ignored Larry Summers when he joined
Republicans and warned of the risk of inflation that the so-
called American Rescue Plan posed. So what is our friend, Mr.
Summers, former Treasury Secretary to President Clinton, and
Director of the National Economic Council to President Obama,
saying about the Democrats new plan to, ``break up the evil and
greedy corporate overlords inflation.'' ``The emerging claim
that any trust can combat inflation reflects science denial.
There are many areas like transitory inflation, where serious
economists defer any trust as an anti-inflation strategy is not
one of them.''
One of the last favorite boogeyman is the meatpacking
industry. What does Larry Summers have to say about that?
``Breaking up meat packing would in the short run lead to
reduced supply, which would further increase prices. In
general, when government goes to war with industries, that
discourages investment in subsequent capacity.'' I am going to
say that again. ``When government goes to war with industries,
it discourages investment in subsequent capacity.'' So in plain
English, what my friends on the other side of the aisle were
proposing as a solution would only make things worse.
Subsequently, making goods and services even more expensive
for the American consumer, they ignored so much once. They will
be wise not to ignore him again. So, where do we go from here?
Obviously, the Fed is the government's institution with the
greatest ability to curb inflationary pressures across the
economy. And I am glad to see that they are finally beginning
to use their tools to address rising prices. Better late than
never, I guess.
Dr. Goodspeed, obviously in the energy sector, there are
many steps Congress can take to address runaway inflation,
namely increased production here at home. But looking at the
big picture, besides immediately halting wasteful spending,
what can Congress do to address this problem and provide relief
to the American people? It is the least we could do given
actions of my colleagues across the aisle this last year.
Mr. Goodspeed. Thank you, Congressman Timmons. I think
three important things would be not only slowing the growth of
Federal spending, but also providing some certainty on the
future direction of both personal and corporate income tax
rates so that we can incentivize increased labor force
participation, particularly among those of retirement age or
near retirement age, 1.5 million of whom have exited employment
early. And also by giving some certainty on the business tax
side to incentivize increased business investment to increase
capacity.
And if I may, a policy situation that seemed eerily
familiar to me to the last time that we saw demand excess from
fiscal policy and a constrained labor force, and this is from
Alan Meltzer, writing about the origins of the great inflation
in the 1960s: ``Policymakers denied for several years that
inflation had either begun or increased, they did not deny the
numbers they saw, but like Jeff Gardner, the chairman of
Janssen, they gave special explanations.''
Mr. Timmons. Thank you, Dr. Goodspeed. Thank you, Mr.
Chairman. I yield back.
Mr. Auchincloss. The gentlewoman from Texas, Ms. Garcia,
who is also the Vice Chair of our Subcommittee on Diversity and
Inclusion, is now recognized for 5 minutes.
Ms. Garcia of Texas. Thank you, Mr. Chairman, and thank you
to all the speakers who are here today to join us in a
discussion of such a very important topic.
It is important that we address the issue of inflation. But
first, we must identify the issues correctly. We cannot produce
targeted strategic solutions without identifying the problems
and where they are coming from. I know it is fun for some to
blame the Biden Administration for economic problems, but these
problems, as you know, are global and far-reaching. We must dig
deeper to understand some of the fundamentals, the economic
structures we operate that rigged the game against lower- and
middle-class Americans.
My colleagues across the aisle have talked about upgrading
America's aging infrastructure for years, with no action.
Instead of fixing and investing the American infrastructure,
they spent $1.9 trillion in tax cuts to the wealthy, but while
the previous Administration only talked about infrastructure,
we did it. Under the Biden Administration, we have invested
$550 billion in new infrastructure development, including $17
billion for ports and waterways, bringing it home. I have
always been a vocal supporter of the strategic significance my
city places and why I fought for us to invest in widening,
deepening, and dredging our port, the Port of Houston, so you
can expeditiously move goods, keeping up with shipping
containers becoming larger and heavier, and shipping activity
moving more frequently. That is critical American
infrastructure work.
Dr. Zandi, in your testimony, you referenced the supply
chain bottlenecks as a major factor in contributing to the
shortage of goods, thus causing prices to rise. Do you agree
that it is important that we invest in American ports and
waterways, and how are the projects funded by the
infrastructure law reducing supply chain backlog?
Mr. Zandi. Thank you for the question, Congresswoman.
Absolutely, I think that infrastructure legislation was a
critical piece of legislation, both in terms of addressing near
term inflationary issues related to supply chain disruptions,
and that is roads and bridges, seaports, and airports. There
are significant amounts of new funding for all of those things
in that infrastructure legislation. I also think it is very
important for long-term economic growth because I do think it
lowers the cost of doing business, makes U.S. businesses more
competitive globally, and will lift overall productivity
growth, which raises the standard of living for all Americans
and it lowers inflationary pressures going forward.
The only criticism I would have is it is too small. We have
been underinvesting in our infrastructure, in everything from
water systems, to broadband to, you name it. We have been
underinvesting for a decade, and there is a big shortfall, and
we need to invest even more. And I think the benefits of that
are very obvious.
Ms. Garcia of Texas. Dr. Mabud, from auto companies, to
hotels, to restaurants, to retailers, earnings calls show that
many corporations are looking to their competitors and taking
advantage of unusual pandemic conditions and supply chain
challenges to pass on the higher prices. Some speakers before
me mentioned that last year, Kroger's CEO said, and this is a
direct quote, ``A little bit of inflation is always good in our
business, pass off costs to consumers when it makes sense to do
so.'' Can you share examples from these earnings calls or price
gouging or profiteering?
Ms. Mabud. Yes, thank you for that question. Johnson &
Johnson is actually a great example. The company expects to
make more than $3 billion from its COVID-19 vaccine in 2022,
which I think is worth noting is the result of more than $1
billion of Federal funding for research and development. And
these vaccine profits are on top of the price increases it has
set for 29 other prescription drugs in this year alone. And on
these earnings calls, Johnson & Johnson's CEO is really candid
about the company's potential to profit from future human
suffering. He noted, ``We remain optimistic on the fact that
strong underlying demand for health care is there. And there is
still a lot to do in multiple diseases in order to address
suffering and death. In other words, future opportunities to
profiteer from public health crises.'' And as I have testified,
this is not something that is limited just to the grocery
sector or the health care sector. These are really widespread
issues.
Ms. Garcia of Texas. Thank you. Back to Dr. Zandi, our
colleagues on the other side of the aisle here really focused
on Federal spending as the biggest driver of inflation.
However, they seem to forget the deficits went up every single
year under the Trump Administration, as they passed multi-
trillion-dollar tax breaks for corporations and the wealthy. Do
you feel that the American Rescue Plan of 2021 raised or
lowered deficits in this last year?
Mr. Auchincloss. The gentlewoman's time has expired. Please
be brief, Dr. Zandi.
Mr. Zandi. Initially, it raised deficits because it was
deficit finance, but without it, the economy would have been
significantly diminished. And if you look out towards the
middle to the end part of the decade, it would actually have
resulted in the same deficits in debt, if we had not done the
American Rescue Plan.
Mr. Auchincloss. The gentlewoman's time has expired.
Mr. Zandi. I don't think there was a choice here.
Ms. Garcia of Texas. Thank you. I'll yield back, Mr.
Chairman.
Mr. Auchincloss. The gentleman from Arkansas, Mr. Hill, is
now recognized for 5 minutes.
Mr. Hill. Thank you, Mr. Chairman. I appreciate our panel
bringing your expertise to the committee. Rising prices and
ongoing labor shortages are leading to substantial wage growth
across many industries. The latest data shows that average
hourly wages grew at 4.5 percent in the 12 months ending in
December.
Of course, this is not real wage growth, which is at a loss
since inflation is running at 7.9 percent. While wage growth
alone can be positive, it can lead to a vicious wage price
spiral, like we saw when I began my career in the 1970s.
Particularly, if higher prices and pay in excessive
productivity feed into each other, drive up inflationary
expectations, and lead to persistent inflation, even after this
supply chain issues abate. Further, these wage gains have been
outpaced, as I noted, by the rising cost of everything from
groceries to housing, meaning real wages were negative, and in
fact, Mr. Chairman, real wages were negative in 8 of the last
12 months.
Dr. Zandi, in your testimony, you talk about inflation
expectations, of which this is a key component. You described
them as appearing fragile, and said that they bear close
watching. You suggest that it is hard to see how the Fed can
tolerate this for long, knowing that, based on the experience
of the 1970s and 1980s, that the economic cost of waiting too
long to short-circuit wage price spirals is extraordinary high.
What do you expect the inflation number to be, the CPI on
Thursday, ballpark? Let me ask you, if you don't want to give
an answer, what are analysts suggesting is the range for CPI
for Thursday?
Mr. Zandi. It is somewhere between 7.5 percent, and 8
percent, year-over-year, Congressman.
Mr. Hill. Right. Thank you, Dr. Zandi. And I am concerned
that when you see this kind of issue, when I talk to HR
directors and chief financial officers and company presidents
all over the country, you are really getting this inflation
embedded into their infrastructure, not just through costs, but
through labor shortages.
And let me ask you, Dr. Goodspeed, if we make it harder to
hire people through additional regulatory burdens on small
businesses, vaccine mandates, getting into an argument about
how old you have to be to drive a truck, and all these kinds of
things and how many others, does this drive up wages when you
have these kinds of severe shortages?
Mr. Goodspeed. Thank you, Congressman. I think what it
means is that for any given level of unemployment, there is
going to be a greater degree of inflationary pressure. When we
look at the efficiency of labor market matching in the United
States, the efficiency with which unemployed workers are
matched to vacant jobs, the U.S. labor market has not been
performing this poorly since the late 1970s. This is the
beverage curve relationship.
Mr. Hill. Yes. And that is very concerning to me and to my
colleagues who keep trying to rewrite history. Deficit spending
during the CARES Act was bipartisan. There is no doubt about
that. We didn't know what was going to happen in 2020. And we
spent $6 trillion in addition to the money that we also spent
by way of the Federal Reserve. And so, the logic I think Larry
Summers laid out was, ``Don't spend more,'' and that is the
American Rescue Plan argument. You have already stimulated the
economy way too much, plus the monetary policy issue.
Dr. Goodspeed, let me turn to you now about the components
of CPI. I am very pessimistic that somehow we are going to get
a break and that number is going to go down. And I want to ask
you specifically about the housing component. Housing is 30
percent of CPI, and about 40 percent of core CPI, but the
method of calculating housing, both rental and single-family
ownership, in my view, understates the real experienced
inflationary cost in the economy. Is that how you understand
the CPI calculation?
Mr. Goodspeed. The CPI calculation does understates the
inflation in housing that I think ordinary Americans feel,
because for the rental component, it only measures continuing
leases.
Mr. Hill. Yes.
Mr. Goodspeed. Whereas, it is in new leases that we have
seen double-digit increases in rent, right?
Mr. Hill. Yes, correct. So with that understanding, I think
my colleagues need to understand we are going to have higher
CPI numbers coming as a result of this increase in demand and
wage pressure. For example, house price inflation--the CPI from
December 2020 to 2021 was stated at 5 percent. But when you
look at the new home price index, it was up 18 percent, and
when you look at single-family rent prices on this point of
new, it was up 12 percent. So, I think we are going to continue
to see inflation. And I think it is driven, just as Milton
Friedman promised us, as a monetary phenomenon, and we have
overstimulated the economy and fiscal policy, and we have
mishandled our monetary policy. And I yield back.
Mr. Auchincloss. The gentleman from Guam, Mr. San Nicolas,
is now recognized for 5 minutes.
Mr. San Nicolas. Thank you, Mr. Chairman. I want to begin
by clearly acknowledging that the inflation that is devastating
this country and everyday hardworking Americans is just
terrible. It is terrible. And the circumstances that we are all
dealing with here today is something with which we all need to
grapple.
I wanted to first open, however, Mr. Chairman, with a
question to Dr. Zandi. We are dealing with inflation today, but
isn't it true that the actions we took with respect to the
fiscal policy that we initiated actually prevented a worse
circumstance happening, which is stagflation; would you agree?
Mr. Zandi. Yes, I think the odds that we would get into a
stagflationary environment, which just for everyone's
edification is very weak growth and high inflation, would be
much higher. Right now, we have high inflation, but we have
very, very strong growth, with lots of jobs, and we are getting
back to form very quickly. So, I would agree with that.
Mr. San Nicolas. And just to clarify, from an economist
perspective, stagflation's impact on society would be
materially worse than inflation, is that correct?
Mr. Zandi. Yes, because that means both higher inflation
and higher unemployment. Right now, obviously, the high
inflation, as you point out, is very painful for Americans, but
fortunately, we have a low unemployment rate that is falling
very rapidly and that is good for all Americans. But in a
stagflation environment, you have both rising inflation and
rising unemployment, and there's nothing worse than that; that
is what we had in the 1970s and 1980s, and that is what we need
to avoid.
Mr. San Nicolas. And just to really put into context the
circumstances we are dealing with, the Fed rate was at or near
zero when the pandemic hit. And so, the monetary policy options
that we had were very limited with respect to its comparative
alternative, which was a fiscal policy that we initiated here
in the Congress.
Would you agree that the fiscal policy initiative that we
undertook to really fund us out of this pandemic was materially
responsible for preventing us from entering into a
stagflationary scenario?
Mr. Zandi. Yes. I think that is fair to say. I think the
very aggressive fiscal policy response beginning with the CARES
Act 2 years ago in March of 2020, and there were a number of
other pieces of legislation: a piece of legislation that was
deficit-financed in December of 2020; and then, the American
Rescue Plan, which was in March of 2021; and all of that
together was critical to ensuring that this economy has been
able to recover as fast as it has.
And just to give you a sense of that, we are going to be at
full employment 3 years after the pandemic hit us. And
obviously, remembering back, that was a harrowing period, and
we have made our way back in 3 years, typically coming out of
recessions, since World War II, it takes double that, more than
6 years. And of course, after the financial crisis, which hit
us over a decade ago, it took us 10 years to move on.
So from that prism, because of the fiscal policy response
and including the American Rescue Plan, we have recovered very,
very dramatically. There is nothing but good news as a result
of that.
Mr. San Nicolas. Thank you. Thank you for that. There is
bad news, and the bad news is we are still dealing with
inflation. I think that the American people demand that we
tackle that, and I very much agree. The inflation that we are
dealing with, we have been arguing back and forth about all the
different component parts, and one of the really main points
that has been brought up over and over again is the indication
that the increase in profits that is being realized by
corporations is a sign that corporate profiteering is
contributing to the inflationary calculation.
I want to contextualize it more specifically, though,
because profits could be as a result of market share
accumulation due to pandemic circumstances. I think the more
important question is, have margins increased? Have the margins
of these corporations increased dramatically pre-pandemic,
pandemic, and post-pandemic, as we get into post-pandemic?
And so, I wanted to pose that question to Dr. Mabud. Are we
seeing significant margin increases, because that would be
indicative of profiteering, because then the input prices,
although they may be increasing due to supply constraints, they
are actually not translating on a dollar-for-dollar basis onto
the actual price points. Would you be able to comment on that,
Dr. Mabud?
Ms. Mabud. Yes. That is spot on. In the past two quarters,
U.S. corporations outside of the financial industry posted
their fattest profit margins in 70 years. And when we
contextualized that within 2 years-plus of a global pandemic,
when so many people are suffering around the country, it really
points to the fact that we have way too much corporate power,
and they are able to--as the CEO from Kroger said, `` A little
bit of inflation is good for business,'' and they are taking
advantage of that.
Mr. Auchincloss. The gentleman's time has expired. The
gentleman from Wisconsin, Mr. Steil, is now recognized for 5
minutes.
Mr. Steil. Thank you very much, Mr. Chairman. I appreciate
you holding today's hearing. People are getting clobbered with
inflation. When I am home in Wisconsin, people are going to the
gas pump, and they are feeling it. People go to the grocery
store, and they are feeling it. People are getting clobbered
day in and day out. And inflation impacts everybody, but it
really clobbers seniors on fixed-incomes and low-income
workers.
And low-income workers are taking it on the chin right now.
It was suggested by one of my Democratic colleagues that
Republicans were having fun blaming Biden. This isn't fun at
all. People are getting clobbered by higher prices. They are
getting clobbered by higher prices, and we have to get to the
answer of the policies that are driving it.
And I think it is very interesting. We have heard about
corporate concentration. I am guessing that polls pretty well.
Do you think that polls pretty well, Mr. Goodspeed, to blame it
on corporate concentration and corporate greed?
Mr. Goodspeed. The polling and politics are outside my area
of expertise. I would imagine if the claim is being made, then
presumably someone sees some--
Mr. Steil. Yes. That would be my guess. It was interesting.
I was looking at your presentation in following along kind of
the Eurozone against the United States, inflation between the
Eurozone and the United States tracked pretty closely over the
past 15, 20 years. Is that accurate?
Mr. Goodspeed. That is accurate.
Mr. Steil. And then all of a sudden there was this massive
deviation between the Eurozone and the United States. Is that
accurate?
Mr. Goodspeed. Correct.
Mr. Steil. Roughly when did that break start to occur?
Mr. Goodspeed. In March 2021.
Mr. Steil. In March 2021. So then the question becomes,
what occurred roughly around March of 2021 that might have
driven this? The proposal that I have been hearing earlier is
that all of a sudden, corporate greed in the United States took
off. But interestingly, the data might suggest that it didn't
take off in the Eurozone. Would that be a reasonable inference,
Mr. Goodspeed?
Mr. Goodspeed. Yes, it would.
Mr. Steil. Interesting. What would be the Biden
Administration's policy that was allowing corporate greed in
the United States, that wasn't taking place in the Eurozone at
this time? Because previously, inflation between the United
States and the Eurozone was tracking pretty consistently, then
we have a break, a huge deviation, triple the inflation in the
United States than the Eurozone has been experiencing. Is that
correct?
Mr. Goodspeed. That is correct.
Mr. Steil. Then, the logic would say, okay, if corporate
greed and concentration is driving this in the United States,
why did the corporations, all of a sudden decide once the Biden
Administration came in, the Biden Department of Justice--do you
think these corporations sat down and said, ``We have a Biden
Department of Justice. We have one-party Democratic rule in
Washington, D.C. Now's the time to go and drive greedy profits
up.'' Do you think that occurred?
Mr. Goodspeed. I have seen no evidence to suggest it
occurred.
Mr. Steil. Were there any policies that shifted in the
Biden Administration or under one-party Democratic rule
specifically as it relates to corporate greed in profits that
would have driven these corporations to drive up profits?
Mr. Goodspeed. No.
Mr. Steil. Did they say, we are going to stop enforcing
some certain policy, that they are going to have a massive
change on anti-trust regulation that would have meant these
corporations would have said, boom, now's the time to go?
Mr. Goodspeed. None that I am aware of.
Mr. Steil. Yes. And the data shows that consistency in the
Obama Administration, and the Trump Administration, and then
all of a sudden, this massive deviation--you'd almost think
that spending suddenly took off in Washington D.C., this year.
Mr. Goodspeed. I think that is the $1.9-trillion elephant
in the room.
Mr. Steil. Did the Eurozone have a massive ginormous
increase in spending that paralleled the United States?
Mr. Goodspeed. Neither of the same magnitude in 2020, nor
anywhere close to the same magnitude in 2021.
Mr. Steil. Interesting. So, we have this massive deviation
that occurs. You have not identified any policies that would
have allowed corporate greed to take off uniquely under the
Biden Administration. We have problems with corporate greed on
occasions, right? And we should dig into that. We don't want
that to occur. But you haven't identified any unique policies
in the Biden Administration that are uniquely weak, as it
relates to corporate greed or enforcement?
Mr. Goodspeed. I have no idea.
Mr. Steil. And I haven't heard any of my colleagues suggest
a specific policy of weakness in the Biden Administration on
that, that we need to dive into. But we have noted all of a
sudden a massive, fiscal policy change once we had Democratic
one-party rule here in Washington, D.C., driving huge demand
increases, more money chasing the same number of products can
lead to inflation. And at the same time, we have had a monetary
policy that has been pushing easy money. The balance sheet at
the Fed has increased over $4 trillion over the last 2 years.
The Fed's balance sheet continues to increase.
So, we have easy money policy rather than sound money
policy. We have massive fiscal spending, and I think we have
identified the problem that is occurring, that is clobbering
people in the pocketbooks in Washington, and I think we should
wake up and change the policies here in Washington.
Thank you very much. Mr. Chairman, I yield back.
Mr. Auchincloss. The Chair now recognizes himself for 5
minutes.
Dr. Mabud, Dr. Goodspeed, Dr. Zandi, in that order, I have
an energy question for you. This morning, President Biden
announced a U.S. ban on Russian oil imports. This is a welcome
step in ratcheting up pressure on the Kremlin, as I have been
saying for weeks, although to be effective, this action must be
global. Working with our allies in NATO and beyond, the United
States must cut off Russia from the world's oil market. The
fossil fuel industry is not going to lead the free world;
Americans need to. This ban will deprive the Kremlin of vital
hard currency to sustain the Rubal and fund its military and
government. It will also remove up to 5 million barrels a day
from energy markets that are already surging in price; a
primary driver of inflation here in the United States.
To backfill these 5 million barrels in the short term as we
transition into a long-term clean-energy economy, the
Organization of the Petroleum Exporting Countries (OPEC) could
expand production by up to 2 million barrels, America by 1
million barrels, Canada, Brazil, and other smaller producers
buy up to 1 million barrels, and should a deal be reached, even
Iran by up to 1 million barrels. It is also likely that some
portion of the 5 million Russian barrels will end up on the
market, sold to buyers not complying with sanctions, although
at a significantly discounted price. And finally, of course,
the Biden Administration and its allies can continue to use
their strategic petroleum reserves to smooth out supply.
Although that is only 60 million barrels in a market that
consumes 100 million daily, that is going to have a marginal
impact.
As I said, starting with you Dr. Mabud, then Dr. Goodspeed,
and then, Dr. Zandi, if there were a global embargo on Russian
oil, that was accompanied by the supply response that I have
just outlined, would you expect that gasoline prices in the
United States would rise beyond the highs they have hit in
January?
Ms. Mabud. Thank you for that question. Any hits to supply
are going to raise prices. But I think what is really critical
to remember is that our dependence on fossil fuels is keeping
us tied to volatility. And so, yes, it is going to take a long
time, but transitioning to and investing in a green economy is
not only important for people and maintaining low energy prices
for folks around the country, but also in ensuring that we have
a planet that works for our economy.
And I'll also harken back to what I said earlier, which is
that we know that oil company executives are not immune from
the type of profiteering that we have been talking about across
the course of this call. First, they use pandemic disruptions
to massively boost their profits, and unfortunately, now the
conflict in Eastern Europe is providing another opportunity to
pad their bottom lines. So again, going after profiteering in
the fossil fuel industry is an important short-term imperative.
And over the long term, we must not delay in making the long-
overdue investments in a clean-energy economy.
Mr. Auchincloss. Dr. Goodspeed?
Mr. Goodspeed. I was keeping track, in my head, the
specific barrel amounts to which you referred. But I will say
that roughly 12 percent of global oil production is from the
Russian Federation, and about 17 percent of gas production. I
think even if in theory, we increased production from the
United States, increased production from the kingdom of Saudi
Arabia and other OPEC members can compensate that, I think that
there is going to be an adjustment period.
Mr. Auchincloss. Right.
Mr. Goodspeed. And production, because production of
different types of oil in different regions of the world is not
immediately substitutable; the infrastructure just isn't the
same.
Mr. Auchincloss. Have the markets priced in those 2022
disruptions into the January price, or would you predict
further inflation in gas prices?
Mr. Goodspeed. I think, as of a few weeks ago, even perhaps
as recently as a week ago, markets were probably underpricing
the risk, the upside risk. I haven't checked today what they
are doing, but I would imagine that they are substantially
revising their price expectations.
Mr. Auchincloss. So you would expect that the January
prices would reflect, would have internalized much of the
disruption risk of 2022 and also the potential to backfill?
Mr. Goodspeed. I think throughout January into February
markets, we are substantially underpricing the risk of conflict
and conflict escalation, including the oil market implications.
Mr. Auchincloss. And Dr. Zandi?
Mr. Zandi. I don't think markets are fully discounting what
we are talking about. If there are broad-based sanctions on
Russian oil, and the U.S. stops buying, and Europe stops
buying, and other advanced economies stop buying, I think we'd
see prices closer to $150 per barrel, which means the cost of a
gallon of regular unleaded is going to $5. If, however, it is
just the U.S., and the Europeans don't go along, and there is a
lot of discussion about that, then $125 is probably where we
are going to land. And that would mean that we are going to see
gasoline prices of $4.50, or $4.75 nationwide.
Mr. Auchincloss. But Dr. Zandi, are you incorporating the
supply response that I outlined where there is coordination to
backfill?
Mr. Zandi. Yes.
Mr. Auchincloss. You are? Okay.
Mr. Zandi. Yes, because that is going to take time.
Mr. Auchincloss. Yes.
Mr. Zandi. That will not happen immediately.
Mr. Auchincloss. Dr. Mabud, as a final request, would you
be willing to offer into the record at a later date the short-
term proposals that you have alluded to, to crack down on any
war profiteering by big oil? I would be interested in any of
the specifics you have there.
Ms. Mabud. I can follow up. Thank you.
Mr. Auchincloss. The Chair now recognizes the gentleman
from North Carolina, Mr. Budd, for 5 minutes.
Mr. Budd. I thank the Chair, and I want to continue on with
this theme. Dr. Goodspeed, again, thank you, and I thank the
whole panel for being here.
I have heard a lot of my colleagues across the aisle claim
that the 40-year high inflation spike that we are currently
experiencing is a result of corporate profiteering. Now, you
would think that the nearly $2 trillion that the Democrats
injected into the economy would be more of a culprit. The
economist, Milton Friedman, would say, ``There are just too
many dollars chasing too few goods.'' Businesses are forced to
accommodate the increased cost of production to meet demand
needs, which is simply Econ 101. I think some of my colleagues
should reeducate themselves on how basic supply and demand
works.
I have a bill, H.R. 5968, that addresses this. It would
require certain White House employees to receive training on
economic literacy, and it is clear that they badly need it. I
am even thinking about expanding the bill to include Members of
Congress.
So, Dr. Goodspeed, is there any compelling evidence to
suggest that inflation has hit this 40-year high because
businesses are conducting so-called profiteering?
Mr. Goodspeed. Thank you, Congressman. I have seen no
evidence as to why corporate profiteering would have increased
in 2021 relative to previous years, and why corporate
profiteering would have increased in the United States versus
Europe. I have seen no evidence as to why we should observe not
just an increase in prices, but an increase in the rate of
change in prices. And I have also not seen any evidence for why
we should see general price inflation rather than simply
relative price inflation in sectors with greater concentration.
Mr. Budd. Thank you. Both the Obama and the Biden
Administrations blocked the development of the Keystone
Pipeline. President Biden has also established a policy of
opposing funding of oil and upstream natural gas projects
through Multilateral Development Banks (MDBs). Oil prices are
currently sitting at a 7-year high. The unjust invasion of
Ukraine by Russia has also led to additional impacts on oil
prices. And the New York Fed has been working on developing
climate stress testing.
Are there any concerns that additional regulations and
stress testing that is hyper-focused on oil in particular can
make the price concerns that we are currently seeing even
worse? I'll just leave it at that. Do you think that what the
Biden Administration is doing, and the Obama Administration has
done, could make things worse?
Mr. Goodspeed. As I noted in some of my earlier remarks,
one very striking aspect of 2021 was the breakdown in the
historic relationship between the price of oil and Oil Rig
Counts in the United States. As Dr. Zandi pointed out, we might
expect that to recover in 2021, given the considerable upward
pressure on oil prices. But that relationship broke down and I
think that has something to do with the increased regulatory
burden on the domestic energy industry and possibly some
effects on capital allocation.
Mr. Budd. Continuing on, doesn't restricting the supply of
oil and natural gas internationally increase the risk of
inflation even further?
Mr. Goodspeed. Yes.
Mr. Budd. I yield back. Thank you.
Chairwoman Waters. The gentleman yields back.
The gentleman from New York, Mr. Torres is now recognized
for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman. Inflation is
deeply regressive, imposing a disproportionate burden on the
poorest families. The families who are hit hardest by inflation
are the same families who would benefit the most from an
expanded Child Tax Credit. The regressive impact of inflation
underscores the need to restore a progressive Child Tax Credit.
Mr. Drummer, do you believe, as I do, that the Child Tax
Credit could be a tool for mitigating the impact of inflation?
Mr. Drummer. In short, absolutely. These investments in our
economy are what saved our country from falling into a
depression, and they lifted millions of children out of
poverty. Absolutely.
Mr. Torres. And as you know, inflation is not equally
distributed across the economy, some sectors of the economy are
more inflationary than others. And according to an analysis by
the Center for Budget and Policy Priorities, the CTC monthly
payments were most commonly spent on food, utilities, and
housing. Food, utilities, and housing are among the most
inflationary goods and services in the U.S. economy. Is that
correct, Mr. Drummer?
Mr. Drummer. That is right. And energy is particularly
volatile.
Mr. Torres. And so, the Child Tax Credit would essentially
enable the families most affected by inflation to afford the
life necessities of food, utilities, and housing?
Mr. Drummer. That is right. The more money they have, the
more they can absorb these fluctuations.
Mr. Torres. Mr. Zandi, in March of 2021, you coauthored a
report entitled, ``Overcoming The Nation's Daunting Housing
Supply Shortage.'' The report, as I understand it, found that
the annual demand for housing exceeds the annual supply of
housing by 100,000 units, representing the largest shortfall in
nearly half a century. The report also found that over a 10-
year budget horizon, an annual investment of $50 billion in
affordable housing could boost affordable housing construction
by 275,000 units per year. It is a common refrain among
Republicans that government is not the solution; government is
the problem. But in your professional opinion, as an economist,
can we even come close to solving the housing supply problem in
America without government investments like the Build Back
Better Act?
Mr. Zandi. Not anytime soon, Congressman. It is a very
pernicious problem that has developed over a period of more
than a decade, since the financial crisis. And the root causes
of that are very, very pernicious and difficult to address
around zoning, permitting, global supply chain issues, building
materials and labor supply issues, and construction land, and
development lending, very complex issues. I think markets are
starting to work, home builders can make a return and they are
now starting to build homes that are more affordable at lower
price points.
The way it is going, it is going to take a long, long time,
and inflationary pressures are going to continue to develop
because again, housing is such a key component of overall
inflation.
I would strongly recommend that lawmakers take this up. And
I think there are a lot of good proposals that are bipartisan
that can help to lower the cost of construction, particularly
for affordable housing around light tech, neighborhood home tax
credits, new market tax credits, HOME, and the Housing Trust
Fund. These are things that could go a long way to quickly
addressing this housing shortage and addressing one of the most
significant contributors to inflation beyond the current
period.
Mr. Torres. And as you know, when it comes to housing,
there is one sense in which government is indeed a problem:
zoning. Local zoning codes have essentially made it illegal to
build affordable housing, multi-family housing in much of the
country. And so, the housing affordability crisis must be
solved, not only with greater investment from the Federal
Government, but also greater land use reform from State and
local governments.
I have a question about the American Rescue Plan. Among the
wealthiest countries, the U.S. has seen the strongest economic
recovery from COVID-19. The U.S. has seen historic highs in job
creation, economic growth, and wage growth.
Mr. Zandi, to what extent can the exceptionalism of
America's recovery be attributed to the American Rescue Plan?
Mr. Zandi. I think it is a very significant contributor. If
you are interested, I just wrote a paper that I published last
week. Just Google, ``Zandi and the macroeconomic consequences
of global fiscal policy.'' I go through the contribution that
the American Rescue Plan has made to our economic recovery and
our economic success compared to other parts of the world. And
again, just to reiterate, I think it is clearly why we are back
getting back to full employment very rapidly, much more quickly
than the rest of the world, and much more quickly than we have
historically coming out of recessions. And again, I do not
think you could connect the dots between the uncomfortably
high, painfully high inflation we are suffering right now, back
to the American Rescue Plan is related to the pandemic and now
of course related to Russia and Ukraine.
Ms. Garcia of Texas. [presiding]. The gentlewoman from
North Carolina, Ms. Adams, is now recognized for 5 minutes
Ms. Adams. Thank you very much. And thank you very much to
Chairwoman Waters and Ranking Member McHenry, and thank you to
our witnesses for your testimony. Let me drill down on
[inaudible] opponents of the phase [inaudible] that we are
currently experiencing, the housing shortage. You don't need to
take my word for it; economists across the nation are saying
the same thing. We need to increase our housing supply of new
units, of affordable units, of all kinds of units, and we need
to do so immediately. I am proud that under Chairwoman Waters'
leadership, this committee has advocated for the most-robust
investment in public and affordable housing in our nation's
history.
So Dr. Zandi, in my district, research by the University of
North Carolina, Charlotte [inaudible] 11,000 family homes are
now owned by private equity firms, or other Wall Street-backed
entities. So, with 4 percent of the single--
Ms. Garcia of Texas. Ms. Adams, if you could raise the
volume. You are a little low.
Ms. Adams. Okay. Dr. Zandi, to what extent has the current
housing supply crunch been exacerbated by the excess of Wall
Street and private equity firms?
Mr. Zandi. Private equity firms and investors broadly
including institutional investors and mom-and-pop investors--
Americans buying homes for investments has risen quite
significantly, particularly over the last year. So, almost a
little over one-fourth of the home sales at the end of last
year were to investors, which is up about 10 percentage points
from the year before. They are all playing a more active role
in the housing market, particularly in different parts of the
country, the South and the West come to mind relatively
quickly. They are having an impact on house prices, on
affordability, and on homeownership. And it's really having a
meaningful impact on the dynamics of the housing market, and
just making it more difficult for low-income Americans, and
first-time homebuyers to afford their first home.
I do think this goes back to supply. I think we need to
encourage investors to work to increase the supply of housing.
For example, going back to investors, one thing they are doing
now is they are buying homes and then renting them. We can
design policies to incent them to build homes, to rent them, or
for homeownership. And if we can do that, then we can address
this problem, but it is increasingly an issue that is beginning
to affect more and more housing markets across the country.
Ms. Adams. Okay. Another aspect has to do the across the
nation [Audio malfunction.] is feeling the crunch? So do you
believe that Congress should enact [inaudible] State and
localities to tap into the State and Local Fiscal Recovery
Funds (SLFRF) dollars to help shore up affordable housing
developments that are currently in the pipeline?
Mr. Zandi. I am having a hard time hearing you. I think you
are referring to the money in the American Rescue Plan (ARP).
It has gone to State and local governments in helping
facilitate the direction of that funding to housing. I think
that is what you were saying.
Ms. Adams. I said--
Mr. Zandi. Yes, absolutely. I keep mentioning the Low-
Income Housing Tax Credit (LIHTC), which is an incredibly
effective way of increasing the supply of affordable rental
housing in communities across the country. It is a tried-and-
true program and we know how it works. And all we have to do is
turn the dials here a little bit. I think we can really juice
that up and get a lot more supply into the housing market. It
is not going to be next month or next quarter, but by this time
next year, going into 2024, it will be very significant. And
taking some of that State and local relief funding that was
part of ARP, that is sitting out there, and directing that,
changing the rules a little bit to direct it towards juicing up
LIHTC and other forms of funding for housing, I think would be
highly effective.
Ms. Adams. Thank you very much, ma'am. I yield back.
Ms. Garcia of Texas. Thank you. The gentlewoman yields
back.
Mr. Goodspeed. I think there is an important point here on
this. There are two things that really substantially contribute
to housing prices in the United States. One is the State and
Local Tax (SALT) deduction, and the other is the mortgage
interest deduction, both of which tend to be fully capitalized
into housing prices, particularly.
Ms. Garcia of Texas. Sir, you are out of order. I don't
think anyone addressed a question to you, sir.
Ms. Adams. Thank you very much, Madam Chairwoman. I yield
back.
Ms. Garcia of Texas. The gentlelady yields back.
The gentlewoman from Michigan, Ms. Tlaib, is now recognized
for 5 minutes.
Ms. Tlaib. Thank you so much, Madam Chairwoman. And thank
you for this critically important hearing. As you know, the
pandemic has been great for the richest Americans, who have
lined their pockets and doubled their wealth during the
pandemic. As we all know, corporations have the nerve to blame
inflation, while consolidating their market power and raising
the price of essential goods and services, while working people
foot the bill. For me, this is not inflation, it is extortion.
Meanwhile, the same corporations who are gouging prices on
consumers, on our neighbors, have been engaging in what we call
major stock buybacks. When corporations funnel record earnings
into stock buybacks, Madam Chairwoman, that is money that they
are not allocating towards capital investment in research and
development.
Dr. Mabud, just listening to your testimony has been really
interesting, to understand some of these trends. One of the
things that I think we haven't looked at, and I would love your
opinion on is, what trends have we seen with regards to the
major corporations and stock buybacks, particularly since the
Trump tax cuts were enacted?
Ms. Mabud. Thank you for that question. We are in a period
where we are seeing record stock buybacks, and that is really
important because that is money that is going out to
shareholders, and all ofour prices are going up. And these
companies are not making productive investments in their firms.
They are not investing in making the company work better. They
are just grabbing as much profit as they can and sharing out
the shares to their shareholders. And tax policy is critical to
this, because if raising corporate tax rates, or taxing excess
profits is a real way to curb the amount of money that flows to
shareholders and executives over productive investments in our
economy.
Ms. Tlaib. Thank you so much.
Dr. Zandi, are stock buybacks making our supply chains more
resilient, or bringing down prices for consumers in any way?
Mr. Zandi. It is hard to connect the dots, I think, between
stock repurchases and what is going on with supply chains and
inflation.
Ms. Tlaib. But we have a record number of stock buybacks.
Mr. Zandi. But that money does go to investors that
reinvest. I think that is a very tenuous kind of blanket, in my
view.
Ms. Tlaib. Okay. One of the things I always say is, we
obviously didn't predict the pandemic would be around the
corner in 2019. But today, we all know that the next crisis
that will pose an existential threat to our economy is our
planet. If our planet warms 2 degrees Celsius, the damage will
be irreparable. Extreme weather events will be the new normal,
our communities will flood, and our economy will be underwater.
And these are real facts for many scientists across the world.
Dr. Zandi, we know extreme weather events like floods,
wildfires, and droughts are occurring with alarming frequency
due to the climate change. Can you explain the impact climate
change will have on our supply chains and on prices, for
example, in the energy and food sectors?
Mr. Zandi. Yes, it already has, Congresswoman. For example,
we talked about lumber. One of the reasons for the severe
problems we are having in that industry is because of
extraordinary weather events in the Pacific Northwest,
particularly in British Columbia, where a lot of the timber
that is produced goes into U.S. homes. So, it is already having
a major effect, and it is affecting timber supplies, where
forests are growing, and where they are not growing. It is a
major adjustment that is adding to our costs and contributing
to our global supply chain issues. It is not one of those
things that matters a lot in any given year, but when we look
back a decade from now, certainly.
Ms. Tlaib. Yes, when they do nothing now, of course, the
impact will be there later. Look at the lack of safety nets
before the pandemic: we didn't have child care; and we have a
preexisting condition because of environmental racism. So, I
totally hear you. But I think much of what is happening, and
the fact that we weren't able to save more lives during this
pandemic, is because of some of these broken systems and not
thinking forward. Last year, a handful of dominant shipping
container firms reaped record profits, while passing those
costs directly on to the consumer; raising prices here by 1
percent, according to Kansas City Fed and the European Central
Bank. Based on this evidence, I am credibly concerned that big
corporations will simply look at the climate crisis in the same
way they viewed the pandemic, as just another chance to make a
quick buck.
Dr. Mabud, are we doing enough to address our supply chain,
for fragility and exposure to climate risk? If not, what sorts
of investments should our country, our Federal Government be
looking at?
Ms. Mabud. That is absolutely critical, because every new
climate shock across the--a storm halfway across the world,
when we have such a brittle supply chain, can bring the whole
system crashing down. So, it is really critical that we check
our corporate power by using tax policy--
Ms. Garcia of Texas. The gentlewoman's time has expired.
Ms. Tlaib. Thank you, Madam Chairwoman. I yield back.
Ms. Garcia of Texas. The gentlewoman from New York, Ms.
Ocasio-Cortez, is now recognized for 5 minutes.
Ms. Ocasio-Cortez. Thank you so much. Thank you, Madam
Chairwoman, and thank you to all of our witnesses for being
here today. I want to explore a little bit about the role of
corporate profiteering and its contributions to inflation as we
have kind of been discussing today, particularly in two areas:
rent and groceries.
Now, in terms of housing, big corporations are exacerbating
what is already a major housing supply crisis in the United
States. We have these major, often private equity-backed
companies that are gobbling up homes in our housing market,
which is already creating excess scarcity on top of the housing
scarcity that already exists. And then by constricting that
supply, we are also seeing a lot of these major, huge, multi-
billion-dollar companies, then either flip those properties or
just resell them at a higher rate due to that artificially
inflated price, or they hold on and hoard this housing stock
and rent out at exorbitant prices.
Dr. Zandi, isn't it the case that the average American now
has to compete with major companies like Invitation Homes,
whose parent company is Blackstone, which is the largest
private equity company in the world, when they are in the
market for a home?
Mr. Zandi. Yes. I think obviously, the institutional
investors and mom-and-pop investors, as I mentioned earlier,
were one quarter of all home sales at the end of last year, so
they are big players, and that is nationwide. In some markets,
if you go to Atlanta or Phoenix or Boise, they are much higher;
they are at 30 percent to 40 percent of the market. So yes,
they are playing a very large role. They don't affect the
amount of housing stock. The home is still there. It is
changing. We are going from single-family homeownership to
rental, so it is making it more difficult, of course, for home
buyers--
Ms. Ocasio-Cortez. Yes. And available housing stock for
purchase, I should clarify.
Mr. Zandi. Yes, exactly.
Ms. Ocasio-Cortez. Yes.
Mr. Zandi. So, this is definitely having an impact there.
And that is why it is very critical, in my view, for lawmakers
to really focus on the kinds of things to increase the supply--
Ms. Ocasio-Cortez. Thank you.
Mr. Zandi. --so that becomes less of an issue.
Ms. Ocasio-Cortez. Thank you, Dr. Zandi. So to clarify, the
image that we have here is that you have a young couple, and
they try to do the right thing. They were told that if you go
to college, you will get a good job. They graduate with
hundreds of thousands of dollars, or tens of thousands of
dollars in student debt, but they worked through it. Perhaps
they have a young child, so they want to get a 2- or 3-bedroom
home. And they are competing against the largest private equity
firm in the world to purchase a home. In fact, companies like
Blackstone, Zillow, and Bedrock are buying up to 15 percent of
available homes. But what I find interesting here is that they
are purchasing them in minority and low-income neighborhoods,
specifically. Particularly, in metro areas like New York,
Atlanta, and Detroit, about 1 in every 7 homes in the United
States is being bought by a corporation at an inflated price.
Dr. Drummer, we are seeing here that even in communities
like mine in Queens, renters are now facing drastic rent hikes
as large as 30 percent to 50 percent up from what they were
paying last year. Can you expand a little bit on how this
concentration of corporate power and the skyrocketing costs of
housing are being disproportionately felt in low-income,
working-class, Black, and Latino neighborhoods?
Mr. Drummer. Thank you, Representative, for the great
question. This is the market that we have created for housing
in America. Right now, 6 million rental households are
currently behind on rent. Again, as stated previously, that is
double the pre-pandemic baseline, and two-thirds of these
people are people of color. In 2021 alone, rents increased by
at least 10 percent in 149 metropolitan areas. So what we are
seeing around the country is a failure of policy and law to
address the acute shortage of housing. If someone wants to make
the case that this is just how markets are supposed to work,
they can. My view is that our current housing crisis
constitutes a serious significant series of market failures
that require robust policy response at the Federal, State, and
local level.
Ms. Ocasio-Cortez. Thank you. Thank you, Dr. Drummer. I
have one more question as well. I want to explore a policy
possibility with you. There are a lot of ideas that are
explored. The United States has very different housing policies
than other countries and areas. What do you make of the idea of
a public institution that purchases distressed real estate and
finances it to transfer to the social housing sectors such as
cooperatives, committee land trusts, the nonprofits--
Ms. Garcia of Texas. The gentlewoman's time has expired.
Mr. Drummer. Yes. The Build Back Better bill actually has--
Ms. Garcia of Texas. The gentlewoman's time has expired. If
you'll just submit your answers, sir, for the record, that
would be great. Thank you.
The gentleman from Illinois, Mr. Garcia is now recognized
for 5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman. And
thanks to all of the witnesses who joined us today to discuss
the economic challenges our country faces. I represent a
working-class district, and my constituents are the hardest hit
by inflation, and the hardest hit by interest rate hikes. We
have to understand what is driving inflation in order to tackle
it, and from your testimony, it sounds like it is corporate
greed.
Dr. Mabud, in your testimony, you raised a pretty striking
quote that I just have to revisit. Earlier this year, the CFO
of Constellation Brands, a company that owns Modelo and Corona
beers, and I admit, I enjoy these frequently, said, ``As you
know, we have a consumer set that skews a bit more Hispanic
than some of our competitors and in times of economic downturn,
if you will, or weakness, they tend to get hit a little harder,
and they recover a little bit slower. So we want to make sure
that we are not leaving any pricing on the table. We want to
take as much as we can.''
I represent a Latino, largely immigrant district, and I can
confirm that our communities were hit hard by the pandemic, but
this is shocking. Our suffering is their excuse to raise
prices. Can you talk about how corporate concentration is
raising prices for some of the most basic goods that my
constituents buy, from diapers to beer?
Ms. Mabud. Thank you for that question, and that quote is
really striking. The truth of the matter is, we have heard over
and over and over on earnings calls across a range of sectors
that these big corporations simply have the power to raise
prices, particularly when they have the cover of inflation to
do so. And they are shameless about it. That quote is so bald-
faced about exactly what it is that they are going to do, which
is to exploit the pain of a community and pocket the profits as
a result. And we see that time and time again. We have seen
that with Johnson & Johnson, with Chipotle, with McDonald's,
and I can go on and on with the number of companies that we
have heard, really of this moment, to jack up prices and pocket
the profits.
Mr. Garcia of Illinois. Thank you. Mr. Vaheesan, the
corporations and local businesses faced similar challenges at
the start of the pandemic, but market concentration allowed big
businesses to reap record profits, while local businesses
struggled to recover. And as always, consumers pay the price
with inflation. In your testimony, you laid out that our policy
choices brought us here. I hope they can bring us out as well.
Can we reverse decades of corporate concentration to avoid what
we see happening today? What is the first step?
Mr. Vaheesan. Thank you, Congressman. You are absolutely
right. For 40 years, we have tolerated consolidation across the
economy, and it was a policy choice, and just as we initiated
certain pro-merger policy choices in the 1980s, we can undo
those. And I think a good place to start is by reversing some
of the mergers that have happened in recent years. Meatpacking
is a great industry to start with, since it is a driver of
inflation and we have seen extraordinary levels of
concentration in that industry, driven in large measure by
consolidation. So, I think the Department of Justice and the
Federal Trade Commission can actually unwind these mergers and
create more competitive market conditions. And going forward,
they can strengthen anti-merger laws to ensure that businesses
grow through investment in hiring instead of by acquiring
existing corporations and enhancing their pricing power.
Mr. Garcia of Illinois. Thank you for that. Mr. Drummer,
from what we just discussed, it is clear that corporate
concentration and price gouging directly contributes to
increased prices of goods and services. Corporate greed should
be addressed to mitigate inflation. But many policy experts are
only talking about raising interest rates. Can you talk about,
in the next 50 seconds, how raising interest rates hurts
working-class people?
Mr. Drummer. That is an excellent question. Yes, if we use
interest rates to curb inflation, what are we doing? We are
literally driving down the demand for labor, which
disproportionately affects the lowest-income workers, which
means that we are lowering their ability to bargain, right? And
to demand higher wages, which means we are taking money out of
their pocket in order to balance our economy. That is the most
inequitable way to handle this crisis. We believe that the best
way to address this affordability crisis is to turn our gaze
away from inflation and focus on deep structural changes to
rebalance our economy.
Mr. Garcia of Illinois. Thank you, sir. And, Madam
Chairwoman, I yield back.
Ms. Garcia of Texas. The gentleman from Indiana, Mr.
Hollingsworth, is now recognized for 5 minutes.
Mr. Hollingsworth. Good afternoon. I appreciate everyone
being here. Maybe I'll just talk about a constellation of
things I have heard today and observations about some of this.
Number one, I am frequently reminded of a famous economist,
John Kenneth Galbraith, who famously retorted, ``When given the
choice between changing one's mind and proving there is no need
to do so, almost everyone gets started on the proof.'' This
hearing is that proof.
It is embarrassing to hear policymakers try to claim that
it is anything but the policies that they have enacted that
have led to this inflation. And frankly, much of the,
``evidence,'' that has been asserted in some of these
testimonies isn't real evidence at all. I didn't see
significant data about the surfeit of demand. I didn't see data
about the wage gaps that existed 2 years ago that we overfilled
with trillions of dollars of stimulus and transfer payments.
No, I saw quotations from earnings conference calls with CEOs
who mentioned the word, ``price,'' and, thus, it must be
corporate greed and profiteering and not real inflation.
Second, during the course of this entire hearing, I have
been struck by the fact that no one here seems to understand
that every price increase is not inflation; inflation and price
increases are different and can be rooted in different things.
But I don't believe anyone here thinks that inflation doesn't
exist, being separate from price increases. I think some of you
can argue short-term supply chain issues have led to certain
price increases, but I don't think anyone can argue against the
tidal wave of evidence that inflation also exists.
Third, I think it is almost embarrassing that we would sit
here and say that inflation is not harming those at the lowest
end of the income deciles, the people we are most here to help,
but we have seen real wages decline month after month,
purchasing power declining month after month, because of these
policies. I want to ensure that inflation does not continue to
erode the purchasing power, especially of those that are least
able to cope with it.
Dr. Goodspeed mentioned earlier that those in the higher-
income levels can cope better with inflation. They have many
opportunities to substitute goods, they have many opportunities
to move to lower-cost locations. They have more exposure to
inflation hedges; those are not benefits afforded to those
lower-decile earners. I want to make sure that we tackle
inflation in order to empower them. What I have heard, however,
is that 40 years of failed policy has somehow led to a year of
the highest inflation in those 40 years, so the mistakes of 40
years have somehow come together. And all of these corporations
were sitting around biding their time for 39.5 years, and, by
God, they saw this was the opportunity for them to dramatically
raise prices. That was not the case.
And Dr. Zandi also said that we can't directly tie the
significant amount of stimulus that the Federal Government has
undertaken during those periods, because inflation didn't save
it for a couple of months after that. Certainly, he understands
that it takes time from the moment Federal legislation passes
until those dollars are spent in the economy. What I have seen
in table after table, chart after chart, data after data is the
tremendous growth in M2, and the tremendous acceleration in
inflation on account of that, which has led to significant
erosion in the purchasing power, especially of those at the
lower deciles. The reason Nobel Prize economists are not in
here testifying to the contrary is because that is the case--
pandemic profiteering cannot be the sole reason for this
dramatic increase. And even Mr. Vaheesan, at one point, said
that companies are beginning to take advantage of the
inflationary environment to raise prices. Well, which is it?
Did the inflationary environment preexist corporations taking
advantage of that to raise prices? It must have for them to
have used that, as you said, for cover, to do so.
This hearing is an embarrassment and a further proof of the
great dichotomy between Washington, D.C., that wants to engage
in political fallacy, and Hoosiers back home, who are picking
up the tab for these failed policies. With that, I yield back.
Ms. Garcia of Texas. The gentlewoman from Georgia, Ms.
Williams, who is also the Vice Chair of our Subcommittee on
Oversight and Investigations, is now recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Madam Chairwoman. And
now, we are in the homestretch with the last questions of the
day.
Our economy is built on our infrastructure and supply
chains. And in the decades before COVID, our infrastructure was
slowly crumbling. Our ports, airports, roads, and bridges kept
getting older, but year after year, infrastructure work
remained an empty promise. Before President Biden, we didn't
invest enough in the infrastructural modernization that will
help get products quickly to our people. At the same time, we
didn't invest enough in making critical products here at home.
Even though we need semiconductors for everything from credit
cards to cars, we haven't produced enough critical products
like this in the United States. Before President Biden, we got
by, but we didn't get ahead when it came to our infrastructure
and supply chains. Whether it is an economic shock like a
pandemic or an economic surge like we are seeing now, our
infrastructure and supply chains have to be resilient over the
long-term if we want our economy to respond well to rapid
change.
Ms. Mabud, how exactly does an economic surge stretch our
infrastructure and supply chains, and what is the connection
between the resilience of infrastructure and supply chains and
the prices of everyday goods?
Ms. Mabud. Thank you for this question, Congresswoman.
Corporations have the power to hike prices in a crisis like
this, because we spent half a century allowing business
executives and financiers to take control of every single piece
of our supply chain, from shipping to manufacturing, to
trucking, to rail. And so, over the last 50 years, these
companies have shaped our supply chains into the extremely
brittle system that we have today, which means that when we
experience shocks, whether it is a pandemic or a weather event
halfway across the world, we are going to see bottlenecks and
supply shortages. And big companies can use their dominance in
markets to hike up prices, because consumers don't know how
much of that is the rise in input costs, and how much of that
is just them padding their profits. That is particularly the
case when they have the cover of inflation.
Ms. Williams of Georgia. Under President Biden, GDP grew
nearly 6 percent in 2021 and the demand for goods has boomed as
consumption patterns have changed. Democrats know that we can't
build the economy of the future with the infrastructure of the
past. That is why we invested in long-term success with the
bipartisan infrastructure law.
Dr. Mabud, in what ways will the long-overdue
infrastructure investments from the bipartisan infrastructure
law address the supply side vulnerabilities currently impacting
prices, while fostering the continued record-breaking economic
growth that we have seen under President Biden?
Ms. Mabud. Shoring up our infrastructure and key modes of
our supply chains is absolutely critical to making sure that we
have functioning supply chains that can deliver goods on time,
and that doesn't allow these big corporations to really take
advantage of the situation. Furthermore, this bill has critical
investments in child care and other aspects of our economy that
have been putting strain on family budgets for decades. So,
these investments are long-overdue. And frankly, with the ARP,
I think we really saw how effective these investments are in
making sure that people can live a good life in this country.
Ms. Williams of Georgia. That led me to the next part of my
question. Under President Biden's leadership, we boosted our
economy from the brink with the American Rescue Plan, and
invested in our long-term success with the bipartisan
infrastructure law, but we know that we have more work to do.
Reducing inflation means advancing our global competitiveness
and investing in housing, child care, paid leave, health care
and more so that we can lower costs for working families. Dr.
Mabud, can you expand on how making these investments and
realizing President Biden's full vision for building a better
America and reduce rising costs that are impacting everyday
people?
Ms. Mabud. Absolutely. People are feeling this, right? They
are feeling the pressure of rising prices, but they are also
feeling all of the issues that you just talked about, rents
going up, child care being expensive and hard to get, and
access to health care taking a huge toll. So really, tackling
both sides of that equation and making sure that people have
the means to participate in the labor market and continue this
historic recovery is absolutely critical.
Ms. Williams of Georgia. Thank you so much, Dr. Mabud.
And Madam Chairwoman, I yield back the balance of my time.
Ms. Garcia of Texas. The gentlelady yields back.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned. We thank everyone for
participating today.
[Whereupon, at 2:07 p.m., the hearing was adjourned.]
A P P E N D I X
March 8, 2022
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]