[Senate Hearing 117-236]
[From the U.S. Government Publishing Office]
S. Hrg. 117-236
CORPORATE PROFITS ARE SOARING AS
PRICES RISE: ARE CORPORATE
GREED AND PROFITEERING FUELING
INFLATION?
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HEARING
BEFORE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
APRIL 5, 2022
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Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
47-315 PDF WASHINGTON : 2022
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COMMITTEE ON THE BUDGET
BERNARD SANDERS, Vermont, Chairman
PATTY MURRAY, Washington LIINDSEY O. GRAHAM, South Carolina
RON WYDEN, Oregon CHARLES E. GRASSLEY, Iowa
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
SHELDON WHITEHOUSE, Rhode Island PATRICK TOOMEY, Pennsylvania
MARK R. WARNER, Virginia RON JOHNSON, Wisconsin
JEFF MERKLEY, Oregon MIKE BRAUN, Indiana
TIM KAINE, Virginia RICK SCOTT, Florida
CHRIS VAN HOLLEN, Maryland BEN SASSE, Nebraska
BEN RAY LUJAN, New Mexico MITT ROMNEY, Utah
ALEX PADILLA, California JOHN KENNEDY, Louisiana
KEVIN J. CRAMER, North Dakota
Warren Gunnels, Majority Staff Director
Nick Myers, Minority Staff Director
C O N T E N T S
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TUESDAY, APRIL 5, 2022
Page
OPENING STATEMENTS BY COMMITTEE MEMBERS
Chairman Bernard Sanders......................................... 1
Ranking Member Lindsey O. Graham................................. 10
WITNESSES
Statement of the Honorable Robert B. Reich, Carmel P. Friesen's
Professor of Public Policy, Goldman School of Public Policy,
University of California, Berkeley............................. 4
Prepared Statement of........................................ 26
Statement of the Ms. Lindsay Owens, Ph.D., Executive Director,
Groundwork Collaborative....................................... 6
Prepared Statement of........................................ 36
Statement of the Honorable Michael Faulkender, Ph.D., Dean's
Professor of Finance, Robert H. Smith School of Business,
University of Maryland......................................... 8
Prepared Statement of........................................ 47
CORPORATE PROFITS ARE SOARING AS PRICES RISE: ARE CORPORATE GREED AND
PROFITEERING FUELING INFLATION?
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TUESDAY, APRIL 5, 2022
U.S. Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 11:03 a.m., via
Webex and in Room SD-608, Dirksen Senate Office Building, Hon.
Bernard Sanders, Chairman of the Committee, presiding.
Present: Senators Sanders, Whitehouse, Kaine, Van Hollen,
Padilla, Graham, Grassley, Crapo, Braun, and Scott.
Staff Present: Warren Gunnels, Majority Staff Director; and
Nick Myers, Republican Staff Director.
OPENING STATEMENT OF CHAIRMAN SANDERS
Chairman Sanders. Let me call this hearing to order.
There is some confusion on the floor about when the next
vote is going to take place, so we will see what happens. But I
do want to thank our panelists for being with us. I am going to
get to them in a moment.
I believe Senator Graham should be here in a while, and I
have the feeling that other members will be floating in and out
depending on the votes on the floor. This is an important
hearing, and I want to thank everybody for being here.
The truth is that corporate greed is nothing new. It has
been going on for a very, very long time, and it manifests
itself in the extreme wealth and income inequality that we are
seeing in this country now. And this is one of the issues which
gets far too little discussion, but the American people have
got to determine whether or not we are comfortable with 2
people owning more wealth than the bottom 42 percent of
Americans, whether we are comfortable with the top 1 percent
owning more wealth than the bottom 92 percent.
And I have said this a million times. You know, we focus on
the oligarchy in Russia, which should be focused on, and
Putin's allies there led him into this and worked with him on
this terrible war. The truth is we have an oligarchy in this
country, and we might want to be focusing on that as well.
When we talk about why the American people are angry, why,
among other things, we are seeing a spurt in the growth of
trade unionism in this country, it has a lot to do with the
fact that CEOs in large corporations now make 350 times more
than their average workers. In addition to that, they receive
stock options, golden parachutes, and a wide range of perks go
to the CEOs. And meanwhile, working families are struggling to
pay their bills, to feed their kids, to take a few weeks'
vacation, and to save up for retirement. So what we are seeing
now is more income and wealth inequality in this country than
we have seen in a hundred years, and this is an issue that if
nobody else wants to talk about we will talk about in this
Committee.
But it is not just income and wealth inequality. Corporate
greed manifests itself in the massive amounts of union busting
that we have been experiencing in which large corporations
spend millions of dollars to deny workers their constitutional
rights to organize while, in many cases, forcing workers who
belong to unions to make unacceptable concessions like
eliminating pensions and major pay cuts. I have been involved
in a number of strikes in the last year, and it is astounding
to me to see the degree to which large, profitable corporations
go out of their way to try to take away health care, take away
pension benefits, lower wages. It is really rather astounding.
And today, when we talk about corporate greed, it manifests
itself in corporation after corporation using the pandemic and
all of the instability caused by the pandemic, using the
terrible war in Ukraine, as a specter, as an attempt to raise
prices for the average American higher and higher. And that
obviously deals with gas prices. It deals with housing. It
deals with food.
And what we are seeing is during this pandemic this is an
issue we have to deal with, and we are going to deal with it
today. Is it appropriate that during this pandemic, during the
war in Ukraine, during all of this instability, that this be a
moment in which large corporations continue to enjoy huge
profits? And I think the American people, based on the polling
that I have seen, have had enough. They are outraged at the
unprecedented level of corporate greed that is taking place all
around them.
And today, while the average worker is making $40 a week
less in real wages than he or she made nearly 50 years ago,
corporate profit margins are a 70-year high, and CEOs are
seeing huge increases in their compensation package. So let me
just give you a few examples though I do not know that I have
to because the American people are seeing this every day right
in front of them.
Yesterday, at a time when gasoline in America is now at a
near record high of $4.17 a gallon, guess what? We have seen
yesterday ExxonMobil reported that its profit from pumping oil
and gas alone in the first quarter will likely hit a record
high of $9.3 billion. Meanwhile, big oil CEOs are on track to
spend $88 billion this year, not to decrease supply
constraints, not to address the climate crisis, but to buy back
their own stock and hand out dividends to enrich their wealthy
shareholders. That is for oil and gas.
And let us talk about more examples of corporate greed.
Amazon recently raised the price of its Prime Membership by
16.8 percent while increasing its profits by 56 percent last
year to a record-breaking $33 billion, and by the way, they
avoided over $5 billion in Federal taxes. Meanwhile, the
founder of Amazon, Mr. Bezos, became $83 billion richer during
the pandemic and is now worth almost $200 billion, making him
the second wealthiest person in America.
Other examples of corporate greed, let us talk about food.
Tyson, a major meat producer, has increased the price of beef
by 32 percent, the price of chicken by 20 percent, and the
price of pork by 13 percent. Meanwhile, Tyson Foods has
increased its profits by 140 percent last quarter to $1.1
billion and gave its CEO a 22 percent pay raise last year, to
$14 million, while its owner, John Tyson, doubled his wealth
during the pandemic and is now worth $3 billion.
Another example about corporate greed in terms of products
desperately needed by the American people, let us talk about
prescription drugs. Last year, Pfizer, Johnson & Johnson, and
AbbVie, three giant pharmaceutical companies, increased their
profits by over 90 percent to $54 billion. Meanwhile, the CEOs
of just 8 prescription drug companies made $350 million in
total compensation in 2020.
In other words--and these are just some examples. We can go
on and on. But in other words, the problem is not that a low
wage worker got a 50-cent raise 2 weeks ago and a $1,400 check
from the government last year, as some of my Republican
colleagues will suggest. The problem is that corporations are
making record-breaking profits and over 700 billionaires in
American became nearly $2 trillion wealthier during the
pandemic while engaging in obscene levels of price gouging.
Now the American people want us to take action. They are
sick and tired of prices going up, corporate profits going up,
CEO compensation going up. They want us to represent them, not
the corporate world. They are sick and tired, among other
things, of billionaires paying a lower effective tax rate than
a teacher, a nurse, a truck driver, or a firefighter. They want
Congress to address corporate greed and make sure that the
wealthiest people in our country and the most profitable
corporations pay their fair share of taxes.
In order to address the current crisis, I have introduced
legislation to enact a windfall profits tax modeled off a bill
signed into law during World War II. During World War II, our
country, the people of our country, understood that it was
unacceptable for companies to make obscene profits when young
men and women were dying in Europe and in Asia. That is not a
time to make huge profits.
Now I am not here to suggest that this moment is equivalent
to the 1940s and World War II, but I will tell you that during
this terrible pandemic, which has caused so much pain and so
much economic instability, during Putin's murderous invasion of
Ukraine, it is at this moment not acceptable to me for
corporate America to make huge profits by ripping off Americans
at the gas station, at the grocery store, or any other sector
of our economy.
And let us be clear. When we talk about corporate greed, we
are also talking about the enormous concentration of ownership
that exists in America today and the lack of competition which
has allowed companies to drive prices higher and higher. So it
is not just the reality of income and wealth inequality, and
corporate profits, it is an economy in which a handful of giant
corporations control sector after sector after sector and can
control the pricing that goes on.
In terms of agriculture, just 4 firms in America control 85
percent of the corn seed market, 82 percent of the beef packing
market, 76 percent of the soybean seed market, 66 percent of
the pork processing market, and 54 percent of the poultry
processing market. All right, that is agriculture; that is
food.
In terms of transportation, 4 large companies control 67
percent of our airlines and 83 percent of our railways while
just 3 companies control 80 percent of cargo shipping.
In terms of health care, over the past 20 years, there has
been approximately 1,600 hospital mergers while 90 percent of
metropolitan hospital markets are considered highly
concentrated.
And maybe most important--and we had a hearing on this, and
we are going to come back to this issue over and over again. In
terms of our entire economy--and I want everybody to hear
this--we should all understand that just three Wall Street
firms, three, one, two, three, BlackRock, State Street, and
Vanguard, control $22 trillion in assets, which is roughly the
equivalent of the entire gross domestic product (GDP) of the
United States of America. Three companies. And when you have
that kind of power, you are impacting hundreds and hundreds of
corporations, where you are a major stockholder in the lives of
millions and millions of workers.
If we are serious about combating inflation and lowering
prices, we must aggressively use the antitrust laws that are on
the books and introduce new ones as necessary to break up
behemoth corporations and increase competition.
Now is corporate greed the only reason for inflation? The
answer is obviously not. The severe supply chain crisis and the
microchip shortage are also contributing to higher consumer
prices.
But let me remind my colleagues that over the last 30
years, as a result of our disastrous, unfettered free trade
policies, corporate America has shut down many thousands of
factories and shipped millions of good paying American jobs to
low-wage countries. Maybe, just maybe, if we did not make it so
easy for corporations in America to move abroad, our supply
chain crisis and microchip shortage would not be as serious as
it is today.
Bottom line, we need an economy that works for all
Americans, not just a handful of people on top.
Senator Graham is not here, so we go to the--okay, let us
go to our panelists, and let me begin with Robert Reich, who is
a former Secretary of Labor, U.S. Secretary of Labor, and is
the Carmel P. Friesen Professor of Public Policy at the Goldman
School of Public Policy at the University of California,
Berkeley.
Professor Reich, are you there?
Mr. Reich. Yes, I am right here. Senator, I hope you can
see me. I can see you.
Chairman Sanders. Loud and clear.
STATEMENT OF THE HONORABLE ROBERT B. REICH, CARMEL P. FRIESEN'S
PROFESSOR OF PUBLIC POLICY, GOLDMAN SCHOOL OF PUBLIC POLICY,
UNIVERSITY OF CALIFORNIA, BERKELEY
Mr. Reich. Okay. Good. Mr. Chairman and members of the
Committee, I am going to submit my formal testimony for the
record, and I will simply summarize.
The Commerce Department reported last Wednesday that
corporate profits are at a 70-year high, which raises an
obvious question about inflation. When corporations are so
flush with cash, why are they raising prices? Not because of
the increased cost of supplies and components or of workers who
are beginning to get raises because they are in demand. Yes,
there are increased costs, but in a competitive economy,
corporations enjoying record profits would absorb these costs.
They would keep their prices down to prevent competitors from
grabbing away customers, but instead, they are passing these
costs on to consumers in the form of higher prices.
Why? Because they can. They can because they do not face
meaningful competition. Since the 1980s, two-thirds of all
American industries have become more concentrated. This
concentration gives corporations the power to raise prices
without risking the possibility of losing customers who have no
other choice.
Now, Mr. Chairman, you went through a number of examples.
Many people see it every day. Starbucks is raising its prices
to consumers, blaming the rising costs on supplies, on
increasing supply costs, but Starbucks just reported a 31
percent increase in yearly profits.
Proctor & Gamble is charging more for consumer staples,
also citing rising costs, but Proctor & Gamble has reported a
whopping 24.7 percent profit margin. It even spent $3 billion
during the fourth quarter buying back its own shares of stock.
Meat prices are soaring because the four giant meat
processing corporations that dominate the industry are using
their market power to extract bigger and bigger profit margins
for themselves, and this is according to a report from the
White House National Economic Council.
Although major oil companies have faced increasing costs
for crude oil, they posted near record profits last year. So
they are passing those costs on to consumers in the form of
higher prices at the pump and for heating oil, and they are
keeping record profits. And now they are using Putin's invasion
of Ukraine as an excuse to raise prices even further.
The New York Times, two weeks ago, pointed out that
corporate executives have spent recent earnings calls with Wall
Street analysts, bragging about their newfound power to raise
prices, often predicting that it is going to last.
Now what are large corporations doing with their near
record profits? They are buying back their own shares of stock
in order to deliver higher returns to their shareholders. Stock
buybacks hit a new record last year, this year is on track to
exceed it. The oil giants alone are planning to buy back at
least $22 billion of their own stock.
So here we have corporations with record profits not seen
in 70 years. They are raising their prices. This means
consumers are paying more. Wages are rising, but almost all of
the increase in wages is being wiped out by price increases.
And, corporations are using their profits to buy back their
shares of stock. All of this--what is all of this? Connect
these dots. This amounts to an upward transfer of income and
wealth from consumers and workers, many of whom live from
paycheck to paycheck, to shareholders, half of whom are in the
richest 1 percent of the population and more than 80 percent of
whom are in the richest 10 percent.
Now what to do about this? The Fed is battling inflation
the old fashioned way, by raising interest rates to slow the
economy. But here is the point; higher interest rates are not
going to stop corporations from using their pricing power.
Higher interest rates are just going to slow the economy and
potentially cause millions of lower-wage workers to lose their
jobs and forfeit long overdue real wage increases.
There is a far better way to battle this corporate-induced
inflation that would not hurt average working Americans. It is
for Congress and the Administration to apply tougher antitrust
enforcement and enact a windfall profits tax and price
controls.
Inflation is intimately connected to record corporate
profits and widening inequality. Average working people in
America are being shafted. They need and deserve action.
Thank you.
[The prepared statement of Mr. Reich appears on page 26]
Chairman Sanders. Professor Reich, thanks very much.
Let us now go to Senator Graham, and then we will go back
to the other two witnesses.
Senator Graham. If you want to do the witnesses, I am okay
with that, Mr. Chairman.
Chairman Sanders. All right. Very good. Then let us go to
Dr. Lindsay Owens. Dr. Owens is the Executive Director of the
Groundwork Collaborative and an award-winning sociologist and
policy researcher.
Dr. Owens, thanks for being with us.
STATEMENT OF LINDSAY OWENS, PH.D., EXECUTIVE DIRECTOR,
GROUNDWORK COLLABORATIVE
Ms. Owens. Chairman Sanders, Ranking Member Graham, members
of the Committee, thank you for inviting me to testify today.
My name is Lindsay Owens, and I am the Executive Director of
the Groundwork Collaborative, a think tank working to produce
broadly shared prosperity and abundance for all.
My testimony today will focus on three key points. First,
corporate profiteering and price gouging are accelerating price
increases and squeezing consumers and small businesses while
corporate executives and shareholders cash in. Second, Wall
Street's presence in every corner of our economy is putting us
at risk for a profit-price spiral; in contrast, the share of
economic output going to labor is declining inconsistent with a
wage-price spiral. Finally, today's price increases are the
direct result of the outsized market power that giant
corporations hold over our supply chains and our economy more
broadly.
There are a range of factors driving inflation right now,
from increasing and shifting demand to supply chain disruptions
and even conflict abroad, but last week's Bureau of Economic
Analysis's data release laid bare another culprit behind recent
price hikes: plain old profiteering. Corporate profits of
nonfinancial firms surged 35 percent in 2021, and overall
profit margins reached their highest level since 1950. In all 4
quarters of 2021, the overall profit margins stayed above 13
percent, a level reached in just one other 3-month period
during the past 70 years.
The 2021 profit data confirms what CEOs have been telling
shareholders for months. Inflation has been very, very good for
business.
My team at the Groundwork Collaborative has combed through
hundreds of quarterly earnings calls to understand why profit
margins are at record highs despite the rising costs of energy,
raw materials, and other inputs. In these calls, executives
tell investors about last quarter's performance and discuss
what they can expect going forward. Over and over, the message
from corporate America is clear. They are not just asking
consumers to pay for their rising costs; they are going for
more.
Whereas, the CEO of Constellation Brands, the parent
company of popular beers Modelo and Corona, put it in their
January earnings calls, ``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.''
Giant corporations are able to get away with this kind of
aggressive and extractive pricing precisely because of the
current inflationary environment. As the CEO of Hostess said in
an earnings call last month, ``When all prices go 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 the result of price
hikes, so too does investor demand for those profits.
Take an example from the energy sector. Last month, the CEO
of Texas-based Pioneer Oil was asked whether Pioneer would
consider increasing production to make up for any shortfall
resulting from Russia's invasion of Ukraine. His answer,
``No.'' When asked to explain, he said, ``It is all about the
shareholders. Our shareholders own this company. They want a
return of cash.''
But it is not just Pioneer. Fifty-nine percent of oil and
gas executives recently told the Dallas Fed in a survey that
investor pressure to maintain capital discipline is the primary
reason publicly traded oil companies are throttling supply
despite high prices.
Shareholders across sectors are not hiding the ball. They
expect buybacks and dividends, not investments in production,
and their strategy is paying off. In 2021, S&P 500 firms spent
nearly $900 billion on stock buybacks, and U.S. companies paid
out nearly $1.5 trillion in dividends to shareholders, both
record highs.
Over the last 50 years, corporate America's ruthless
pursuit of efficiency and short-term profit set the stage for
today's high prices by ushering in a wave of corporate
consolidation that left us vulnerable to profiteering and price
increases in two ways. First, it hollowed out and nearly
eliminated diversity in our supply chain, leaving us without
any fail-safes to withstand significant shifts in demand
without shortages. Second, without competition to undercut
companies who are charging excess prices, those companies with
market power can continue raising prices virtually unabated.
Giant corporations' control over our supply chain has
supplanted the functioning, resilient system we could have
built through robust public investment and free and fair
competition. But it is not too late. We have many policy tools
at our disposal. First, Congress should tax excess and windfall
profits to encourage productive investment instead of
profiteering. Second, regulators should enforce the laws
already on the books to make markets more competitive and
prevent collusion and price fixing. Third, Congress should
pursue a Federal price gouging standard to protect against
excessive price hikes during periods of economic transition.
And finally, Congress should make long overdue investments in
our supply chain.
Importantly, interest rate hikes, which slow inflation by
tamping down demand and making people poorer, will not address
any of the underlying causes of our supply shortages and do
nothing to address profiteering.
Thank you for inviting me to testify today, and I look
forward to your questions.
[The prepared statement of Ms. Owens appears on page 36]
Chairman Sanders. Thank you very much.
Our third witness is Dr. Michael Faulkender, the Dean's
Professor of Finance at the University of Maryland's Smith
School of Business. Dr. Faulkender served as the Treasury
Assistant Secretary for Economic Policy during the Trump
Administration.
Dr. Faulkender.
STATEMENT OF THE HONORABLE MICHAEL FAULKENDER, PH.D., DEAN'S
PROFESSOR OF FINANCE, ROBERT H. SMITH SCHOOL OF BUSINESS,
UNIVERSITY OF MARYLAND
Mr. Faulkender. Chairman Sanders, Ranking Member Graham,
Senators on the Committee, thank you for the opportunity to
speak with you today on the impact of inflation on the American
people and its root causes.
I had the honor of serving as Assistant Secretary for
Economic Policy at the Department of Treasury in the previous
administration. In that role, I worked with Senators on both
sides of the political aisle and the Small Business
Administration to quickly implement the Paycheck Protection
Program (PPP) and ensure that the economic devastation that
might have resulted from the pandemic was not realized.
The excessive inflation currently harming America's
families is primarily the result of unnecessary fiscal stimulus
passed by Congress and implemented by this administration,
bolstered by excessively accommodative monetary policy by the
Federal Reserve.
At the onset of the pandemic, prices declined. When the
economy reopened, prices started rising with inflation from
June 2020 to February 2021, averaging 32 basis points per
month.
The $1.9 trillion American Rescue Plan (ARP) was signed
into law in March of 2021. Since then, monthly inflation has
doubled to 64 basis points per month, resulting in a 7.9
percent annual inflation rate.
Due to a fundamentally strong economy prior to the
pandemic, Americans had aggregate balances in their checking
and savings accounts of just under $11 trillion. Following
ARPA's disbursements, that amount had risen to over $14.2
trillion, nearly a 30 percent increase.
The entirely predictable result was inflation, running the
highest we have seen in 40 years. Even former Clinton Treasury
Secretary Larry Summers characterized enactment of such policy
as ``the last responsible macroeconomic policies we have had in
the last 40 years.''
Last week, researchers at the San Francisco Federal Reserve
published findings that stated, ``Fiscal support measures
designed to counteract the severity of the pandemic's economic
effect may have contributed to this divergence by raising
inflation about 3 percentage points by the end of 2021.''
Some are, instead, blaming the recent inflation on
corporate greed and the exercise of market power. There are
many problems with this conclusion. From January 2010 through
January 2020, the 12-month average inflation rate averaged 1.8
percent. Over the last 12 months, inflation has been 7.9
percent, more than quadrupling recent increases.
Were corporations not greedy in the 2010s? What changed in
March 2021 such that corporations suddenly became greedy? As
someone who has researched corporate financial decision making
for the last 20 years, I am not aware of any finding that
corporations only recently desired profits.
It is true that corporate profits have risen during the
recovery. Just as corporate profits fell at the beginning of
the pandemic, when there was extra supply relative to suddenly
diminished demand, corporate profits will rise when demand
significantly outstrips supply. This outcome is caused by a
shortage caused by policies that have inflated demand while
discouraging supply. It also appears to be the case that PPP
expenses in 2020 that were forgiven in 2021 helps explain the
vast majority of the increase in corporate profits.
To curb the 40-year high rate of inflation the American
people are enduring, Congress must reverse course. Continuation
of irresponsible fiscal policy would only accelerate the
Federal Reserve's already aggressive plans to hike interest
rates. Instead, we need to encourage more domestic supply by
reducing the regulatory burdens on companies, cease the
constant threats of higher taxation, remove barriers to work,
and declare an end to pandemic restrictions. Following those
policies prior to the pandemic, our nation saw low inflation, a
50-year low in the unemployment rate, historic gains in
household income, reductions in income inequality, and record
low poverty rates across all races.
The Chairman's proposal would have devastatingly
counterproductive effects. The proposal would apply a 95
percent tax rate on any profits realized by large companies
above their pre-pandemic 5-year average profit level adjusted
for inflation. Any company that created new products,
successfully entered new markets, or shifted their offerings in
response to changes in consumer preferences following the
pandemic would be punished. Companies whose product prices rose
with inflation but who merely served more of their fellow
Americans would have their increased results deemed excess
profits and taxed at 95 percent.
If enacted, this proposal would nearly eliminate domestic
economic growth. Today's punishment becomes tomorrow's
extremely strong disincentive. Profits from successful
innovation that better serve the needs of fellow citizens would
be forcibly taken by government, but losses from failed
innovation would be borne by the businesses. Why would American
companies innovate, respond to changes in the economy,
supplement supply when there are shortages, or engage in
research and development under those kinds of conditions? I
urge the Senate to reject such destructive proposals.
I look forward to participating in today's conversation.
Thank you.
[The prepared statement of Mr. Faulkender appears on page
47]
Chairman Sanders. Thank you very much.
Senator Graham.
OPENING STATEMENT OF SENATOR GRAHAM
Senator Graham. Thank you, Mr. Chairman. I am sorry, I
voted. There is another vote on, so . . .
Chairman Sanders. Is there one?
Senator Graham. Yeah, so you might--we will figure out how
you want to do this.
So anyway, very well done, sir. I agree with everything you
said.
I want to remind the Committee and the American people that
basically before the pandemic hit we had a 50-year low
unemployment rate. We had among--African Americans and Hispanic
Americans and Americans with disability hit their lowest levels
on record. American workers saw their paycheck rise at the
fastest pace in years, and they were rising faster for low
earners. The official poverty rate in 2019 hit an all-time low.
We cut taxes in 2017 through the reconciliation process. We
reduced the corporate rate to make it competitive. Before the
tax reduction, from 35 percent to 21 percent, America had the
fourth largest corporate tax rate in the world.
What you saw from 2017 to 2019 was economic growth that
touched every sector of the economy. Making our corporate tax
rate competitive is important in my view because we live in a
global economy and people can go where capital is most well
received. And if you want to create jobs in America, the
American corporate tax rate has to be competitive with the rest
of the world.
Now we find ourselves here talking about how to fix
inflation and who to blame. And all I can say to my Democratic
colleagues, you have an insatiable desire to take money from
the private sector, build the government bigger, and I assume
you do this because you think that is the best way to help
people.
My view is that the best way to help people is have a
competitive tax code, take money from the American people to
run the government in a professional manner, not overly expand
the role of government, but whatever you do, do it well, and we
have to be competitive. If you have ever been in the private
sector, tax policy really does relate to who you hire and how
many people you can hire.
So the idea of a windfalls profit tax in the middle of this
would be a disaster. We are trying to get our economy back on
its feet after dealing with COVID throughout the world. And,
what I would say is that the best cause for inflation lies in
the policy choices of this administration more than any single
thing.
So that is kind of an inventory of where we are at.
Here is the tale of the tape. If you are buying a used car,
it is up 41.2 percent since the Administration took over, 38
percent increase in gas prices, 12.7 percent increase in
airfare; meat, poultry, fish, eggs, 13 percent; fruits and
vegetables, 7.6; milk, 11.2; electricity, 9 percent from
February 2021 to February 2022. So people get what I am saying
because they are living this.
You can see the 7.9 percent surge in inflation from October
2021 to January 2022. We are going in the wrong direction at a
fast rate. So if you got a 5 percent pay raise, it does not go
very far.
You can see this chart, the tremendous spike in inflation
from basically January 2021 till now. It has just gone through
the roof, and the question is, why?
On the energy side, every time you go to the pump, you are
reminded of the dramatic increase in gas prices, and inflation
is a nightmare for working-class people. It is the enemy of the
middle class.
So let us see if we can figure out what happened here. Why
are gas prices so high? Well, there is a supply and demand
component for sure. Demand was down during COVID because most
of us were not traveling. Demand is up, so you would expect
some increase.
But what happened here? Remember the 2020 election? I do.
This is Biden's campaign promise, President Biden on energy:
``We are going to end fossil fuel,'' September 2019. No more,
no new fracking, March 2020. ``No more drilling, including
offshore,'' March 2020.
So how can you be surprised that American energy production
is down? The policies that he campaigned on were basically to
declare war on the fossil fuel industry in the United States.
And, guess what? It worked.
Top five Biden actions that impede energy production:
Revoked the Keystone Pipeline, which would have had a supply
coming out of Canada. Paused new oil and gas leases on Federal
lands and waters. Halted drilling in Alaska's Arctic National
Wildlife Refuge. Stifled new energy infrastructure projects in
the name of climate change. Included $45 billion in new taxes
on domestic energy production.
Now when you look at all this, if you are surprised that
gas prices are up, you should not be.
So what is driving all this? I think, Mister--what is your
name, sir?
Mr. Faulkender. Faulkender.
Senator Graham. Okay. I think you and Larry Summers agree
that this is not from profiteering; this is from policy.
So what I want the Committee to understand is that we have
a vastly different view in this Committee of how to fix this
problem and the role of government and tax policy. Our
Democratic colleagues spent $1.9 trillion by themselves, and I
think you see from the passage of that bill to now a dramatic
increase in inflation. We poured a bunch of money into the
system, and you have got demand chasing money.
They proposed Build Back Better, which would have made all
of our problems 10 times worse. So the people telling you how
to fix this inflation problem were trying to sell you a bill on
top of the $1.9 trillion, the American Rescue Plan, called
Build Back Better. Democrats said it would cost $1.75 trillion
over a decade. CBO scored the cost, and it is $4.9 trillion
because all the gimmicks in the bill limiting programs to 1 or
2 years. If you actually look at reality, they never go away.
So it over doubled the cost of the bill. In terms of deficit
impact, Democrats told us it was $365 billion over 10; it is
actually $3 trillion over 10.
So I remind the American public that they have been selling
policy proposals that really do not pass the smell test.
So this Committee is designed to debate where should we go
and how we get there when it comes to budgets. To the American
people, if we impose new taxes now on businesses who have
changed their business model in light of COVID, we are going to
make a huge mistake. It is hard enough in America to create a
job as it is. Every time we turn around, there is a new desire
by my Democratic colleagues to take more money out of the
economy, to make villains out of people who work and produce
jobs, to grow this government, and this will be on the ballot
in November 2022.
It is not Putin's fault. It is not corporate greed. As you
said, in March, did they suddenly get greedy before then? What
changed was the big spending package in March and a destruction
of American oil and gas supply.
So if you spend a bunch of money at the Federal level and
you reduce the ability of America to produce its own oil and
gas, you will wind up one day with gas prices like we have. If
we do not change our policies, it is going to get worse, and
the only policy change I see is to double down on the policies
that are not working.
So all of us on this side will oppose a windfall profits
tax as designed by the Chairman, and we will take this issue to
the voters in November and argue that when somebody campaigns
in 2020 of destroying American energy production you should not
be surprised in 2022 your gas bill was through the roof.
Thank you, Senator Kaine.
Senator Kaine [presiding]. We will now move to five minute
rounds of questions, and I am the only Democrat here, so I will
start. I feel lonely in this body. I feel like there is a
hundred people here and most people in the Senate only have
broad brushes in their paint kit.
So inflation is Biden's fault----
Senator Graham. Well, I will take you to lunch if you are
lonely. I like you, you are a nice fella.
Senator Kaine. Inflation is Biden's fault, or inflation is
because of corporate greed? I think most Americans understand--
and you acknowledge this, Dr. Owens, in your written
testimony--there is a lot of different causes for this.
Inflation is Biden's fault when nations all around the
world are experiencing it? Inflation is because of American
corporate greed when nations all around the world are
experiencing it?
I do think we made a big mistake. I want to focus on some
labor market issues. I think we made a significant mistake in
the tax bill in 2017. I voted against it. And in particular,
here was a mistake, the corporate tax rate. Did we need to
reduce it to make the corporate tax rate competitive? I think
we did.
And my Virginia companies were coming to me and saying,
reduce the rate to 26 or 27 percent. Were they greedy to ask
for that? I do not know whether they were or not. I think they
were trying to be competitive.
But Congress was stupid to take it to 21.5. My companies
were asking for 26 or 27, and Congress, in my view, stupidly
took it to 21.5.
I made an amendment on the floor during our--when we were
given the thousand-page bill to read immediately and we got a
one-minute opportunity to amend, I said, take it back up to 27
and you will dramatically reduce the deficit or give us the
opportunity to do some other things.
And Senator Toomey and all the Republicans opposed me.
Senator Toomey said he opposed me because it would be raising
taxes on corporations.
I felt like I was in Alice in Wonderland. No. It would have
been reducing taxes dramatically to what they were asking us to
do, but sadly, we went further.
I think one of the reasons for inflation--and there are
many reasons, but one of the reasons for inflation right now is
a tight labor market. We still have a lot of people out of the
labor market. It would be good if we could get people back in
the labor market. I believe we could get a lot of people back
in the labor market if child care was more affordable.
If we took the corporate tax rate back to what they were
asking for, the 26 or 27, I think it would dramatically fund
more affordable child care and universal pre-K.
Let me just ask that question. Would more affordable child
care and universal pre-K, in your views, get more people back
in the labor market?
Ms. Owens. Yeah, absolutely. According to the Washington
Post today, the second most common reason people cite for being
out of the labor force, aside from early retirement, is the
lack of child care options. And so providing robust child care,
bringing the United States closer to peer countries where
folks, you know, can assume that they will have child care, it
will be ready for them when they need it to go to work, will
absolutely pull people off the sidelines and help secure a
robust economic growth.
Senator Kaine. Here is a question that I would like all
three of you to answer. Would Congress working together in a
bipartisan way to do immigration reform, would that also open
up the labor market and maybe put some downward pressure on
prices? And I would like each of the witnesses to answer that
question.
Ms. Owens. Sure. We are absolutely overdue for immigration
reform, and it would be a great way to increase our labor force
participation.
Mr. Faulkender. I agree we need to reform the immigration
system. In particular, we need to look at more H-1B visas and
facilitating high-educated foreign workers to come into the
country legally to perform services and relax some of the labor
constraints we have.
Senator Kaine. Professor Reich.
Mr. Reich. Yes. And, Senator, I do agree as well. The
United States labor force is aging. I am a good example of
that. And the Baby Boomers are moving on. The Millennials are a
big generation, but the United States is going to need more
workers. Immigration is, and has always been, a source of
extraordinarily important labor market growth in America, and
there is absolutely no doubt that we need to have immigration
reform and we need to allow in more immigrants.
Senator Kaine. Thank you. I yield back, Mr. Chair.
Chairman Sanders [presiding]. Senator Graham.
Senator Graham. Well, thank you. On immigration reform--
number one, Senator Kaine is really good to work with.
The 21 percent rate that we picked was, I think, the world
average. Is that right, Doctor--how do you say your name again?
Mr. Faulkender. Faulkender.
Senator Graham. Okay. Was that correct, that 21 percent is
sort of the world average?
Mr. Faulkender. That brought us to the median within the
OECD (Organisation for Economic Co-operation and Development).
Senator Graham. Yeah. So when Senator Kaine says 25 versus
21, it is not an unreasonable debate to have. We just did not
pull 21 out of the air. So--but, no, he is always trying to
look for a way forward, and I appreciate that.
When it comes to immigration reform, I have been in the
Gang of Eight and about every other gang you can be. I will
just tell--you know, Dr. Reich, I know you have been involved--
that if we do not secure our border first there will be no
immigration reform.
Dr. Owens, does that make sense? If you legalized a bunch
of people now without securing your border, you would have even
more illegal immigration?
Ms. Owens. I think Dr. Reich was referring to the fact that
our aging population means that to get robust labor market
growth over the future we are going to need some population
growth and immigration reform is one way to take that on.
Senator Graham. Yeah. I am just--Dr. Reich, are you there?
Mr. Reich. Yes, I am, and that is exactly what I said, and
that is exactly what I mean.
Senator Graham. Okay. But we do have to secure the border
as part of immigration reform. Is that correct?
Mr. Reich. Yes, and we have had in this country a very
strong and robust debate about what securing the border
actually means just as we have had a robust debate about a lot
of things.
I think the central issue that we are debating today is
whether we have a corporate-centered economics or whether we
have a people-centered economics in terms of inflation and
making sure that wages rise in a real way. And as somebody who
has been involved in labor policy for the last 50 years, I can
tell you that from the World War II until the late 1970s we had
a growing middle class, we had lower inequality, we had more
opportunities for people in this country. And starting in 1980,
we actually had a U-turn, and most Americans have not had much
of a wage, if at all, but corporate profits continue to grow to
the point where last week we learned that corporate profits are
at a 70-year high.
Now if you cannot actually explain that and explain to the
American public how we can possibly have inflation and price
increases while corporate profits are at a 70-year high, then I
just simply do not know how you can say we have a people-
centered economics. We do not.
We have policies coming out of Washington----
Senator Graham. Thank you.
Mr. Reich [continuing]. That continue to improve the
wellbeing of American corporations----
Senator Graham. Okay.
Mr. Reich [continuing]. Not the wellbeing of American
people.
Senator Graham. Thank you. So I totally disagree with what
you just said. Before COVID, we had the fastest growing economy
in all sectors of America. African American and Hispanic
families were doing better than they have ever done. The
American disability community was doing better than it has ever
done. The poverty rate was lower, and our economy was in good
shape. And along comes COVID.
So all I am saying is we are here to talk about inflation,
and Senator Kaine mentioned immigration. Count me in for
supplementing a declining workforce. Count me out for an
immigration bill that does not secure the border first.
So, yes, we need a rational immigration system to
supplement a declining workforce. It is not just H-1B visa
workers. We need people in the service industry. When you
cannot find an American to do a job after you advertise it at a
competitive wage rate, you need to give business a chance to
bring people into our country to improve their lives and
improve our economy. Count me in for that.
But we are here to talk about how to deal with inflation,
and the Democratic response is to tax people. The Democratic
response is it is business's fault. It is Putin's fault. No. It
is the policy choices you have made as Democrats is the leading
contributor.
It is a bit complicated. I am sure there are other things
other than the policy choices, but it is no accident there has
been a surge in inflation after you pass a $1.9 trillion bill
to flood the Federal Government with spending, put money
throughout the economy in every area you can think of. It is no
accident that gas prices are through the roof when the man
campaigning for President said he would put the fossil fuel
business out of business. They virtually have.
So this whole hearing is about what to do, and if you left
it up to my Democratic friends, they would spend more money
through Build Back Better. Thank God, Manchin and a few others
said, no. And when it comes to energy production, instead of
producing here, you are calling Venezuela and you are calling
OPEC and you are calling maybe even Iran. You have got it
backwards.
Thank you.
Chairman Sanders. Thank you very much, Senator Graham.
Let us do a little bit of reverse engineering, so to speak.
Let us look at where we are.
Senator Graham mentioned policy issues. Let us take a look
at where we are and how we got here. Right now, we have more
income and wealth inequality than we have had, I think, in a
hundred years. We have CEOs making 350 times what their average
workers make. We have half of our people living paycheck to
paycheck. We have the average worker in America today making
$40 a week less in real wages than he or she made 50 years ago
despite huge increases in productivity. And right now, we are
looking at corporate profits at a 70-year high while companies
have raised prices for a number of goods at extremely high
levels. And, we have concentration of ownership in sector after
sector that we have not seen in a long, long time.
Secretary Reich, let us talk about policy. How did we get
to where we are today with so much income and wealth
inequality, where the people on top are doing phenomenally well
while ordinary Americans are struggling?
Mr. Reich. Mr. Chairman, to my mind, there are three
related, interrelated reasons. One is that corporate power
keeps growing. And when I say corporate power, I am talking
about market power, corporate dominance over their markets, the
ability to raise prices and not suffer any competitive loss,
and we see this especially during the pandemic and now.
Senator Graham asks, how can it be? Well, I will tell you
how it can be. Because corporations--and they have said this in
earnings calls over and over again. They are taking advantage
of both the pandemic and the inflation and the war, some
companies, to raise their prices because they can. They can get
away with it.
Now you can call it, and we can call it, whatever we want
to. We can call it price gouging, or we can call it
profiteering. It does not matter what we call it. The fact is
they are doing what their shareholders want them to do, and
that is capitalism, but workers and consumers are paying the
price.
Another major factor is that labor has had less and less
bargaining leverage. Labor unions--when I was growing up, a
third of the private sector workforce was unionized. Now, 6
percent of the private sector workforce is unionized, which
means that if you have companies that are getting more and more
dominant on the one hand and workers who are losing their
bargaining power on the other, it is no surprise that you are
going to see widening inequality.
Chairman Sanders. Let me interrupt you if I could because I
want to get to--thank you. Let me get to Dr. Owens to respond
to that.
Ms. Owens. Yeah, so you need motive and opportunity to
commit a crime. I do not think that corporate greed has changed
significantly from the pre-pandemic period to the post-pandemic
period. So I really agree with my Republican colleagues on that
point.
I think what we are seeing here is opportunity. It is the
opportunity that changed. In the case of Exxon, which just
today noted that they are going to be seeing quarterly profits
this quarter better than they have seen in a decade, the
opportunity was foreign war. In the case of 3M, that has jacked
up the price of masks, the opportunity was the pandemic. And in
some cases, the opportunity is actually the pretext of
inflation, the ability to point to inflation rather than their
own profiteering.
So I think what we are seeing here is really a system that
was set up to pounce on a moment like this and corporations are
taking it to the hilt. They are telling us that over and over
again. I think we should believe them.
And I think Congress can step in and we have a variety of
policy tools at our disposal, from an excess profits tax to
trying to rein in buybacks to implementing a Federal price
gouging statute. I think we are overdue for a Federal price
gouging statute to protect against exactly this kind of
profiteering during crisis moments, economic transition,
climate catastrophe, and the like.
Chairman Sanders. Let me ask Dr. Faulkender. How do you
feel when two people have more wealth than the bottom 42
percent, when CEOs make 350 times more than their average
employee? Is that a good thing?
Mr. Faulkender. I view profit as a reward that people
realize from serving their fellow Americans, and so if they
amass profits because they have offered a better product at a
lower cost than somebody else, I do not begrudge them for
providing that good or service to me or to my fellow Americans.
Chairman Sanders. Okay. Thank you.
Senator Grassley.
Senator Grassley. Thank you, Mr. Chairman. I have no
questions. I want to speak. Democrats have been consistently
wrong about inflation. This hearing is yet more evidence that
they remain clueless about the economies of inflation and are
in denial about the role played by their reckless spending.
At the start of 2021, Democrats told us inflation was
nothing to worry about as they pushed ahead with a $2 trillion
liberal spending spree. According to them, the real risk to our
economy was spending too little. Now imagine that. This
argument never had any basis in reality. At that point,
Congress had spent as much on the pandemic in inflation-
adjusted dollars as we had waging World War II.
Democrats ignored common sense, and they ignored the
warnings of very prominent economists. This included Larry
Summers, who held top posts in the Obama and Clinton
administrations, who cautioned that Democrats' $2 trillion
partisan spending spree ``set off inflationary pressures of a
kind we have not seen in a generation.''
Since then, Democrats have been trying to explain away
inflation. In April 2021, President Biden told us inflation was
due to base effects from prices being suppressed during the
pandemic. In June, we were told inflation was merely transitory
and the result of a bottleneck in supply chains. These remained
the favored lines of arguments until October, when inflation
surged to 6.2 percent, at that time the highest rate in 31
years.
President Biden finally recognized inflation as a problem
and claimed addressing it was his, quote-unquote, top priority.
However, instead of admitting government spending was a main
contributor, would you believe it, he sought to argue that the
solution was spending trillions more. Now can you imagine that?
Thankfully, the American people were not buying it. More
importantly, common-sense Democrats like Joe Manchin did not
buy it either.
It is now clear high inflation endangers Democrats'
reckless tax-and spending agenda. As a result, Democrats are
grasping at straws to find a scapegoat, hence, blaming
inflation on corporate greed, never mind that economists across
the political spectrum overwhelmingly reject the theory.
Seventy-nine percent of the economists responding to a Chicago
Booth School of Business survey said they disagreed that,
quote-unquote, dominant corporations is the cause of today's
inflation. Jason Furman, President Obama's Chief Economist, has
stated that ``corporate greed is a bad theory of inflation''
and called such arguments, quote-unquote, a side show. Larry
Summers has called such arguments, quote-unquote, diversionary.
And Benjamin Page, a senior fellow at Liberal Tax Policy
Center, has called them, quote-unquote, a red herring.
The current Democratic rhetoric would be amusing if not for
the disastrous consequences that could result from
misdiagnosing the cause of inflation. The current focus on so-
called corporate greed risks taking us down the failed road of
the 1970s-style price controls and windfall profit tax. Anyone
who lived through that time can tell you that these policies
made things worse by reducing supply. The result was rampant
shortages, most notably, gas lines around the block. Let us not
repeat the mistakes of the past.
I yield back my time.
Chairman Sanders. Thank you very much.
Senator Whitehouse.
Senator Whitehouse. Thanks very much. Secretary Reich, you
have said that corporate profits are at a 70-year high. My
recollection from my economics classes is that competition
would drive prices to, at, or near the marginal cost of
production. That does not seem to be happening, and there are
two markets in which it seems particularly not to be happening.
One is the oil market, and the other is the meat market. Are
there characteristics of the oil market that create this
problem or allow it to exist? And same for the meat market, is
there something unusual about those two markets that seemingly
causes this market theory not to pertain in those markets?
Mr. Reich. Well, Senator, you have both in the oil market
and in the meat market a relatively few number of producers who
can easily coordinate their production. It is called
oligopolistic pricing and oligopolistic coordination, and we
see it not just in oil and in meat.
I want to emphasize that since the 1980s two-thirds of all
American industries have become more concentrated, and you look
across the industries, particularly where you see the greatest
inflation, and you see the fewest number of competitors
dominating the industries because they can raise prices even
though they are highly profitable. That is a core problem
today.
If you will allow me, I just want to--because I have been,
in much of this discussion, struck by the criticism of the
American Rescue Plan and the very important actions that the
Senate and the House took to help average Americans. I think it
would be wrong simply to sit back and not say that one of the
great successes going through this pandemic was that so many
Americans did not fall into poverty as we have seen in former
recessions. The fact that they did not fall into poverty, that
they actually survived, is a great credit to the Senate and the
House for passing the American Rescue Plan. And again, if you
take the view that this economy is about people, it is not
about corporations, then you have to congratulate what the
government did to help people through this pandemic.
Senator Whitehouse. What would you say is the role of the
international oil cartel and speculation in driving the recent
surge in oil prices?
Mr. Reich. The international oil cartel and speculation
typifies the kind of oligopoly that is the relatively few
number of players who coordinate prices and production that we
see and again that exemplifies the problems of oligopoly, that
is, when you have producers who are able to coordinate prices
and production, inevitably, they are going to do what their
shareholders want them to do, and that is to maximize profits.
And then they are going to turn around, and they are going to
do again what their shareholders want them to do, which is buy
back their shares of stock to raise and maintain the highest
possible share prices. That is probably good for their
shareholders, but what is good for shareholders, we see time
and again, is not necessarily good for the economy or good for
consumers or good for workers.
Senator Whitehouse. In the 30 seconds remaining, I would
just note that in addition to corporate market power, which the
Secretary discussed, we have a really stunning problem of
corporate political power in this country, with massive
corporate trade associations dominating this building. The oil
and gas industry, through basically blunt force political
power, has forced us to ignore climate change now for a decade.
I think we will rue the day that we let the oil and gas
industry have that kind of control over what we do here in
Congress.
And with that, I will yield.
Chairman Sanders. Senator Scott.
Senator Scott. Thank you, Chairman Sanders. The Federal
Reserve Bank of San Francisco recently released a report
stating that massive government spending is to blame for the
raging inflation crisis hurting families across America right
now. My Democratic colleagues disagree and want to approve
trillions in additional spending.
Dr. Faulkender, is the Federal Reserve wrong?
Mr. Faulkender. Is the Federal Reserve wrong? The Federal
Reserve was entirely too accommodative during the most recent
year in increasing the money supply and facilitating the amount
of Federal spending that was then monetized by the Fed.
Senator Scott. So what is causing inflation? Is it
spending, or is it Federal Reserve actions, or both? What is
it?
Mr. Faulkender. It is a combination of both. So we have
excessive demand coming from excessive fiscal stimulus. So we
have increased household checking and savings accounts balances
by $3 trillion while the Fed pushed more money into the money
supply, and at the same time, we degraded our ability to
provide supply to offset that increase in demand.
Senator Scott. So how much longer is the inflation going to
last?
Mr. Faulkender. I think we were looking for inflation to
curb this year, but with what is going on geopolitically we
continue to expect energy prices to rise. And now we are
looking at food prices rising, particularly grains, and so
inflation will continue. Fortunately, with the failure of the
enactment of Build Back Better, we are not going to have as
much fiscal stimulus overdoing demand in the economy.
Senator Scott. So does spending in excess of what we
collect, does that cause inflation?
Mr. Faulkender. It does, particularly when it is monetized
by the Fed increasing the money supply to support it.
Senator Scott. I questioned OMB Director Young last week
about the nation's financial stability and President Biden's $6
trillion proposed budget that will take the U.S. debt to $45
trillion in 10 years. She could not tell me if that debt was
too much or what number would be enough. I know that the
Chairman believes that, you know, we can absorb more debt. I do
not think on this--nobody would do that in their personal life,
have all this excessive debt.
So each of the witnesses, can you tell me, is $45 trillion
worth of debt too much for the United States to carry, or what
number do you all think is the right number? Mr. Faulkender?
Mr. Faulkender. Historically, when debt-to-GDP ratios get
above 100 percent, that is when you start being concerned. The
U.S. fiscal capacity is probably slightly larger than that
because we are the world's reserve currency, but I do not want
to test how much we can get to. I think we need to pull back.
Senator Scott. So can we service $45 trillion?
Mr. Faulkender. Given the expected increase in interest
rates, it is going to become an excessive burden for the
Federal budget. It is going to become unsustainable, and that
could put us into a debt spiral.
Senator Scott. So does that mean we would not be able to
pay the interest expense, or what would happen?
Mr. Faulkender. We would have to print additional money to
pay the interest expense, which is just going to increase
interest rates even further and increase inflation.
Senator Scott. Ms. Owens.
Ms. Owens. Yeah, when I look at the inflation we see right
now, I actually see 50 years, decades, of underinvestment. We
have let American manufacturing hollow out. We have let our
supply chain hollow out. And we are really paying the price for
that right now. We do not have any redundancy, any geographic
diversity, any resilience in our supply chain.
Senator Scott. What about the $45 trillion?
Ms. Owens. It seems like we are paying the price for that.
Senator Scott. But you think we can sustain $45 trillion
worth of debt?
Ms. Owens. I believe we are at about $23 trillion right
now.
Senator Scott. But the budget--if in 10 years, if we follow
President Biden's budget, we will be at $45 trillion.
Ms. Owens. Yeah, I think the President's budget laid out
his plans for investment in the American economy going forward
and his plans to pay for it with taxes on the rich.
Senator Scott. Well, even with that, you know, the budget
goes--the debt goes to $45 trillion, even with the taxes on the
rich. You realize that?
So, Mr. Reich, what do you think about $45 trillion worth
of debt? Do you think we can afford it?
Mr. Reich. Well, I think that we could afford it, but there
are two necessary prerequisites. One is investing in the
American people, that is, education, infrastructure, making
sure that people have what they need to be more productive.
That is what we have done for much of the postwar era. We
stopped doing it. It is very important that we resume doing it.
Secondly, I think we have to raise taxes on the
extraordinary wealthy and also on big companies, and for
Congress to fail to do that at a time when we have
unprecedented corporate wealth and income, and also individual
wealth and income at the top, not ordinary people--I am talking
about at the top. There is extraordinary--it is an opportunity
to get our fiscal house in order, and for Congress not to take
this opportunity I think would be a shame.
Senator Scott. Thank you, Chairman.
Chairman Sanders. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Thank all of
you for your testimony.
I keep hearing from some of my Republican colleagues that
the Trump tax cuts brought better outcomes for American
workers. I would just point out that it is a fact that real
wages grew faster during President Obama's second term than
during the Trump years, and that does not include the Trump
years after COVID hit. So the notion that this $2 trillion tax
cut was a great boon to American workers and wages just does
not bear out under any scrutiny.
What we know it brought us was $2 trillion added to the
deficit and debt and a huge amount of additional stock
buybacks, and I want to focus for a moment on the stock
buybacks because they went from approximately $368 billion a
year in 2016-2017 to what Goldman Sachs estimates will be about
$1 trillion this year.
Secretary Reich, let me just ask you to talk a little bit
about the connection between those Trump tax cuts and ongoing
stock buybacks. As I think everybody agrees, all the witnesses
agree, those are great from the perspective of the
stockholders. I mean, you have a large share of those
stockholders, I would point out, are overseas investors that
are pocketing those gains, but clearly, the argument that they
were going to go to higher wages and more investment just did
not bear out.
So, Secretary Reich, if you could start by just talking
about what the incentives from that bill were created and what
we are still living with.
Mr. Reich. Yes, Senator, we were promised--the American
public was promised--you recall, before the Trump tax cuts,
that everybody would get a raise, a wage raise, and that there
would be a huge new round of investments in America. Neither of
those came to pass. Instead, corporations used their--the money
that they otherwise would have spent, otherwise would have been
taxed, the revenues, they actually spent on corporate buybacks.
I think it is important to understand that stock buybacks
do not generate more productivity in the economy. There is no
trickledown from a stock buyback. When corporations use their
record profits, as they are doing right now, to buy back their
own shares of stock, what they are doing is delivering higher
returns to their shareholders because buybacks reduce a
company's shares outstanding, pushing its profit per share
figure higher. They hit a new record last year. They are
going--they are on the way to hitting an even larger record
this year.
It is--it helps the share price, but it amounts to a
redistribution from workers and consumers to shareholders
because in an inflationary environment, as we are in right now,
when highly profitable companies are using their profits to buy
back shares and they are raising their prices at the same time,
what happens is: Consumers pay more. Workers, even if they got
a raise, are losing those raises because they are losing them
to inflation. And shareholders do better, but as we all know,
most shareholders--half of the stock market is owned by the top
1 percent of Americans by income, and 84 percent is owned by
the top 10 percent of Americans by income. This is how you get
the redistribution upward.
Senator Van Hollen. So, Dr. Owens, one of the proposals
that was in the House-passed Build Back Better agenda was a
modest excise tax on stock buybacks. I do not know if you are
familiar with the proposal and what your view of that is.
Ms. Owens. Yeah, I mean, I think the other thing buybacks
are good for, aside from shareholders--and I completely agree
with the Secretary that buybacks do nothing for innovation,
nothing for productive investment, but you should remember they
are also really good for executives. Executives are frequently
compensated in stock. They announce a round of buybacks. Share
prices go up. And guess what we see in the research? In the
days following one of those buyback announcements, executives
are more likely to cash in that stock.
So I think if we want CEOs' incentives, shareholders'
incentives, corporate incentives aligned with what we care
about in the real economy, you know, building worker power,
building an economy that works for all of us, taking on
buybacks is a critical piece of that. The House-passed proposal
could do that. President Biden put out a proposal in his budget
that is nice as well. I think there are a lot of options here.
Senator Van Hollen. Thank you. I guess my time is out.
Chairman Sanders. You can take a little bit more.
Senator Van Hollen. Well, we have a professor from the
great Smith School at the University of Maryland. Good to see
you. So I did want to press you on one issue, which is the
House Build Back Better legislation. And people can have
disagreements, obviously, over the elements, but it is paid
for. You would agree with that?
Mr. Faulkender. I would not. As Senator Graham pointed out
in his opening statement, once you recognize that these
temporary measures are going to be made permanent, CBO
estimates that it will add $3 trillion to the debt.
Senator Van Hollen. Right. But if you look at the--what CBO
does is the actual, the law, right, budget projection. It is
paid for. We have got lots of tax cuts around here. Some have
expired by law; some have been extended. But just in terms of
the legislation itself, it is paid for on its face. Right?
You are assuming that the Congress, future Congresses, will
extend the tax cuts. That is your assumption. Right?
Mr. Faulkender. I am assuming future Congresses will extend
some of the spending programs; that is right.
Senator Van Hollen. Right. And the tax cuts.
Mr. Faulkender. Yes. So if things like the refundable child
tax credit will be extended----
Senator Van Hollen. And not the taxes, yes. Right. So I
think in terms of the near-term impact on inflation, to the
extent that you have got tax revenue coming in, offsetting
expenditures, in that sense, at least in the first number of
years, it would be neutral.
I do not want to prolong the conversation. My time is up.
Thank you, Mr. Chairman.
Chairman Sanders. Thank you very much.
Senator Padilla.
Senator Padilla. Thank you, Mr. Chair, and I thank you for
once again putting the spotlight on how corporate greed drives
up costs for working Americans and hurts workers across the
country.
As I have noted in this Committee before, I approach the
topic not just as a member of this Committee and as a member of
the Senate but as a parent. We have seen it firsthand, Angela
and I, when we go to the grocery store, when we are at the gas
station. Prices are up, and we know how it impacts working
families. We get the feeling, and the feeling is not good.
But these price increases--right. This is our job to lay
out what is causing it in our attempts how to address it. These
price increases that are in the news constantly are not just
about rising costs for small businesses that may be struggling
to get by. The reality is--and you have pointed out the
evidence, Mr. Chairman, that corporations across industries are
posting record profits.
In 2021, corporate profits hit an all time high of nearly
$3 trillion, up 25 percent from 2020. Now estimates show that
the earnings of S&P 500 companies rose nearly 50 percent over
the past year, and no doubt, they boast about these statistics
to their boards and to their investors while they justify
increased prices for American families, to the public, by
citing the pandemic or supply chain- related challenges.
And to add insult to injury, while some major corporations
are increasing costs for working families, they are issuing the
stock buybacks that were just mentioned and record executive
compensation packages that enrich CEOs and shareholders.
Some have even tried to blame inflation on the critical
assistance provided to the American people to help them endure
a once-in-a-century global health pandemic. Or, some have even
blamed workers who are fighting for the right to organize and
standing up for fair pay and benefits and safer working
conditions.
But with the growing consolidation of corporate power and
increasing inequality amid record corporate profits, it is
evident that corporate greed is what is increasing the costs
for American families, and as we continue our recovery, we must
ensure that the economy works for all Americans.
And so with that as a basis, my first question is going to
be directed at Secretary Reich. While large oil and gas
companies--we talked specifically about record profits while
prices are going up, and I wanted to focus on the oil and gas
industry for a moment because while large oil and gas companies
have raised prices at the pump the profits of five of the major
oil companies increased by $154 billion last year. Now these
companies have also spent nearly $13 billion on stock buybacks
over the past year.
As working families are paying the price amid these higher
gas prices, it is outrageous that oil companies continue to
reap billions in profits and use those profits to further
enrich their executives and shareholders. That is why I am a
proud co-sponsor of the Big Oil Windfall Profits Tax Act, which
would establish a per-barrel tax to capture the windfall
profits of the largest oil companies and return that money to
consumers in the form of a quarterly rebate. I know Senator
Whitehouse has talked about this earlier. The measure would
provide consumers much needed relief while maintaining American
competitiveness and reducing pressure on inflation by targeting
corporate profiteering.
So, Mr. Secretary, I know you are joining us virtually, but
can you spend a minute talking how a windfall tax can help
counter the outsized power of these large corporations and
reduce inflationary pressure?
Mr. Reich. Yes, Senator, and I think it is very important.
A windfall profits tax is exactly what is needed right now when
oil companies, for example, are showing, as they are,
historical profits. They are making huge amounts of money. They
are raising prices at the pump at the same time. They do not
need to raise those prices. They could easily absorb any cost
increases, but they are not absorbing those cost increases.
They are--instead, as you pointed out, they are taking their
windfall, their huge windfall profits, and they are buying back
shares of stock to help their shareholders and executives.
And so people are going to the gas pumps. They are spending
their own money at very, very high and rabid rates to fill
their gas tanks. And that money, a large portion of that money,
is going to executives and major investors. So you want a
windfall profits tax that enables--that stops them from doing
that and actually rebates that money to consumers.
We did it in World War II. We did it in World War I. We did
it under emergency circumstances. There is no reason we should
not be doing it now. In fact, there is every reason we should
be doing it.
Senator Padilla. Thank you very much.
And, Mr. Chairman, I know my time is up. I will submit some
additional questions for the record. I just wanted to
appreciate the distinction and the emphasis on not just taxing
profits, taxing windfall profits because that is what is
happening now through the exploitation at the pump. Thank you,
Mr. Chair.
Chairman Sanders. Well, thank you, Senator Padilla.
Let me close by saying this. This hearing has focused on
inflation taking place at the same time as we are seeing
record-breaking profits, we are seeing record-breaking levels
of stock buybacks, we are seeing high dividends, we are seeing
and living through a moment in American history where the
people on top are doing phenomenally well while working people
are struggling.
Now this hearing actually has been criticized. I got a
letter this morning from the Chamber of Commerce, who strongly
criticized the basis, the hypothesis, underlying this hearing.
But when we talk about corporate power in America, it is
important to understand that the Chamber of Commerce itself has
spent $1.4 billion in lobbying in the last 20 years.
During this hearing, we referred to the fact that
pharmaceutical industry profits are soaring. And yet, at a time
when we want to lower the cost of prescription drugs, it turns
out that the pharmaceutical industry, to defeat that initiative
within Build Back Better, spent some $300 million on lobbying
alone, not to mention advertising and campaign contributions.
So while this hearing today focused on corporate profits
and inflation, in truth, what we are touching on is an issue
much broader, and that is the incredible power now held by
corporate America, not only over the economic life of this
country but the political life of this country and the media
life of this country. And I think it is fair to say that never
before, at least in the modern history of this country, have so
few had so much in terms of financial resources and in terms of
political power.
And the challenge that we are facing right now is whether
we are going to live in a government--live with a government
that works for all of us or is dominated by big money and
trusts and works for the very few. Unfortunately, right now the
latter is the case. The rich get richer, and working families
struggle. The wealthy buy political campaigns. So I would hope
that this hearing today is simply a start in focusing on this
massive disparity, not only in wealth but in economic and
political power as well.
And with that, let me thank our panelists for being with us
and the Senators who participated, and let me conclude this
hearing.
And let me just say that I want to thank the--all
information for all Senators--as information for all Senators,
questions for the record are due by 12:00 noon tomorrow with
signed hard copies delivered to the committee clerk in Dirksen
624. E-mailed copies will also be accepted. Under our rules,
the witnesses will have seven days from receipt of our
questions to respond with answers.
With no further business before the Committee, this hearing
is adjourned.
[Whereupon, at 12:30 p.m., the Committee was adjourned.]
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
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