We are hearing shrieks of “Corporate Greed!” as inflation surges. But is it really Corporate Greed?
Corporations are Price Gouging! Really?
Prices are up most everywhere: gas, food, labor. Inflation is now at 9.1%. I haven’t seen it this high since I was in high school over 40 years ago.
Some are calling this price gouging or corporate greed, but is it?
Businesses are always seeking to maximize profit. That’s what they do. That’s their fiduciary responsibility to taxpayers.
So why are prices up now?
There is High Demand. $6T of freshly printed stimulus money is still flooding the market driving demand ($4T Trump, $2T Biden). People are returning to “normalcy” after the pandemic and traveling on vacation. There has been pent up demand for travel and leisure as people hunkered down during the pandemic. Plus, interest rates have been artificially low for decades driving further demand.
At the same time there is Limited Supply. The Supply Chain is still sputtering. There are shortages of goods and key parts required in manufacturing. There continues to be a worker shortage as workers make positive, strategic changes to their career plan. But still the labor participation rate is far too low. Then there are cases where there is a shockingly low amount of competition (spoiler alert: typically due to government regulations). Oh, and did we forget the massive government shutdowns of the economy which reduced production?
We all know from Economics 101 that when demand is high and supply is low, then prices go up.
So, are corporations actually greedy? Or are they just responding to market conditions and incentives.
Today is a great time to sell a home. Demand is high and inventory is limited (albeit things have relaxed a bit in the last few months). In a market like this sellers can get top dollar when they sell their home. If you were selling your home, would you take the highest bid for your home? Does this make you greedy? Or are you just responding to market conditions and incentives?
Gasoline is over $6 per Gallon in California
I normally don’t pay much attention to gas prices since I drive an EV. But with so much complaining about gas prices I have started paying attention. Wow!
Prices are high. Really high. Premium gas is often over $6.50 per gallon in my community. This must be those greedy oil companies price gouging, right? After all, corporate profits for oil companies are at an all-time high.
Let’s break it down.
There is high demand for gas. We are coming out of the pandemic and there is pent up demand for travel. More people are commuting to work as companies ask employees to work in the office. Plus, it is summertime when prices always go up due to higher demand and the requirement here in California for the summer blend gasoline due to environmentalism.
At the same time supply is low. Refineries are still not operating at full production. Surely this must be some sinister plot by oil companies to limit supply, right?
During the pandemic gas prices plummeted due to low demand. Oil companies were losing money. So, they shut down refineries and slowed down production. After all, why produce more product when you are losing money doing it?
Now suddenly the economy opens back up and it is taking a while for these refineries to catch back up. It’s difficult to find workers. We still have that trucker shortage problem. Plus, never mind the fact that California is making it illegal for owner operators to do trucking.
Then ask yourself, why are there few if any new refineries? Surely when demand for gas is so high and profit opportunity is so great, you would expect entrepreneurs to enter the market to produce more gasoline, right? Or less competitive oil companies would see this as an opportunity to produce more supply at a slightly lower price to grab more market share.
But that’s not happening. Why? Never mind the fact that the regulatory code makes building new oil refineries incredibly difficult and expensive. At the same time President Biden has said “I promise you, we are going to end fossil fuels”. California Governor Gavin Newsom and the Sacramento legislatures have made it illegal to sell brand new, gas-powered cars starting in 2035. Given these regulatory realities, do think oil companies would want to invest in a new refinery?
These oil companies are just responding to market dynamics and incentives.
Gavin Newsom Announces that California will Produce Insulin.
The high cost of insulin is well known. Insulin can cost $25-$300 per vial (without insurance). Patients need up to 6 vials a month. That can add up quickly.
Meanwhile, prices for insulin have risen 54% from 2014 to 2019. Why? And why did this start in 2014?
Consider Obamacare which was just ramping up in 2014. More insurance creates more demand. At the same time, it provides a mechanism to insulate patients from the true cost of the product. They don’t care what it costs. They only care what their co-pay is. As demand increases, so do prices.
Meanwhile there are only 3 primary makers of insulin. Just 3. Wow. Why only 3? With insulin profit so great, surely there should be a surge of entrepreneurs entering the market to compete. But that’s not happening to a great degree. Government regulations make it very difficult and expensive for new competitors to enter the market.
Now Gavin Newsom has announced that California will produce their own insulin. What? California can’t even build their high-speed rail passenger train without going way over budget and way behind schedule. Now we expect them to make insulin?
This is way outside the core competency of government. This also invites the question of the proper role for government.
I believe this will end up becoming a problem because government is not motivated by the profit motive. Instead, they will make decisions for political reasons to gain votes. This program, if it launches at all, will likely end up in a deficit and require taxpayers to subsidize on-going production.
But my progressive friends are overjoyed.
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Shout Out to Randy Wussler
Randy Wussler, a local here in Rancho Bernardo, just completed a Cross Country bike ride of 3,272 miles while raising money for Juvenile Diabetes Research. What an accomplishment! What a personal victory! Congratulations to Randy.
Disclaimer: I worked with Randy about 20 years ago. He is a first-class dude.
#CorporateGreed #CaliforniaInsulin #GasPrices
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