Raising interest rates won't fix the real reason behind inflation: price-gouging and corporate greed

• Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
• He recently spoke with Rakeen Mabud of the progressive Groundwork Collaborative about inflation.
• Mabud said the Fed raising interest rates won't combat corporate price-gouging.

Last week, the Federal Reserve issued the first of a projected seven interest-rate hikes this year in order to slow the American economy down and, hopefully, lower the skyrocketing prices that American consumers are paying. This is how the Fed successfully curbed inflation in the 1980s: Raising interest rates knocked the economy into a recession and spiked the unemployment rate as high as 11%, which drove down prices. But some experts doubt that raising rates will actually address the realities of our current inflationary crisis.

The rising prices that have plagued Americans for the last six months are "not your grandfather's inflation," said "Pitchfork Economics" podcast cohost David Goldstein in the latest episode. The spiking prices for gas, groceries, and housing supplies we've seen have "nothing to do with what we experienced in the 1970s," when America suffered from "high unemployment and high inflation at the same time," Goldstein said.

The pandemic isn't the only factor in rising inflation

To be clear, inflation is a very real problem that is making life difficult for about half of all Americans, and some 70% of all poor Americans. But today's causes for inflation bear no relation to the inflation of the late '70s and early '80s, so it's doubtful that the Fed's solutions from the past will work today. For one thing, the pandemic threw the whole world's manufacturing, storage, and delivery capacity into a state of chaos, and it takes time and money to repair the damage done.

And Rakeen Mabud, the chief economist at the Groundwork Collaborative, joined "Pitchfork Economics" to identify the second inflationary pressure on top of the pandemic: corporate greed.

Mabud, who coauthored a piece called "How We Broke the Supply Chain" in The American Prospect, said that greed manifests itself on multiple levels.

Mabud argues that the supply chain, for instance, was weakened over the last three decades through a corporate philosophy called the "just-in-time" method, a cost-saving methodology that ruthlessly eliminates storage costs and material overruns by driving up efficiency in the global supply and distribution chains. These raw materials and products are shipped all over the world in a slender cobweb connecting manufacturer nations — poorer countries that deregulate environmental protections and suppress wages down to pennies on the dollar — with the wealthier nations that consume the goods.

Market concentration has made just-in-time shipping an even more fragile endeavor. "Three ocean shippers control pretty much all of the ocean shipping in the entire supply chain," Mabud said. This method "has led to an incredibly brittle system that is unable to withstand shocks," she said, adding that "as a result, when it was hit with something like a pandemic, or even a storm halfway across the world, this brittle supply chain broke down."

So once a product has finally been assembled from often-delayed raw materials, and once one of the shipping alliances finally picks up the product, finds a shipping container, and sends it halfway across the world, the product still needs to travel from one of America's major ports to the store where consumers can buy it.

That's where the truckers come in — or not, as has been increasingly the case over the last year. Thanks to the consistent erosion of labor rights in America, it was estimated in a 2014 report from The National Employment Law Project that some "80% of port truckers are misclassified as independent contractors," Mabud said.

That means "these really essential workers who are getting goods from those ships to another point in the supply chain aren't able to use the bathroom," Mabud said. "They're sitting there waiting in these long lines." Trucking has become a job of "such rock-bottom quality that nobody wants" to do it, she said, "which, ultimately, is another weak point in our supply chain."

The same relentless corporate devotion to shareholder primacy that inspired this agenda of deregulation, wage suppression, and irresponsibly harsh efficiency has also inspired the last big factor in our current inflation crisis: price-gouging.

How inflation is used as an excuse to raise prices

I wrote at length about how executives at major American corporations are bragging about the record-high profits reaped from skyrocketing prices last month, but to recap: Corporations are using inflation as an excuse to raise prices even higher than their costs are rising. And because market concentration in America has grown so high, the few corporations left in each sector can raise prices in lock-step without fear of serious competition. Consumers have no choice but to pay the higher prices.

Take something like diapers as an example, Mabud said. "The entire diaper market in the US is essentially covered by two big companies. And if you're a parent with a kid, it doesn't matter if diapers are $20 a box or $40 a box — you're going to need to buy those diapers, and these two companies know that."

The Fed's interest hikes likely won't address any of Mabud's concerns about corporate greed and price-gouging. Mabud said that in order to get runaway prices under control, the first thing our leaders need to address is "our permissiveness towards bigness."

"We have allowed these companies to become huge and exert more power than is healthy for a sustainable, equitable, resilient economy," Mabud said.

Combating market concentration — breaking up monopolies, duopolies, and profiteering alliances — is the single most important step to driving down prices for American consumers. When every step in the supply chain is engaged in a race to the bottom that prizes efficiency over durability and high short-term profits over long-term economic strength, we'll always be one regional crisis away from total global calamity.