The Wage Slowdown

Drawing the right conclusions about why prices rose during the Biden years and how they slowed is critical for working people as prices settle to new postpandemic highs. The conventional wisdom about the inflation that informed the Biden administration’s response — and continues to inform the Federal Reserve’s — is that wage growth has been the key variable in driving prices higher.

“Wage increases are not quite back to where they would need to be,” Powell said last year, meaning they were still too high.

The motivating goal for the Biden administration, for both the Democratic Congress of 2021–22 and the Republican Congress of 2023–24, and for the Federal Reserve, has therefore been to slow down hiring and weaken labor’s bargaining power to put a cap on wage increases. That has happened.

The official unemployment rate rose from 3.5 to 4.2 percent over the second half of 2023 and the first half 2024, stabilizing at the new higher level of around seven million workers for the past six months. The hiring rate (new hires as a share of employment) fell below prepandemic levels of 3.9 percent in the second half of 2023 and is today at its lowest rate since the Great Recession: 3.4 percent. That level, according to the economist Kathryn Edwards, “signals the labor market is in a deep recession.”

But the slowdown in the job market has been seen as a good thing from figures like Powell.

“Wage growth has eased over the past year,” Powell said in late January. “The labor market is not a source of significant inflationary pressure . . . what we have now is a good labor market.” President Donald Trump responded approvingly four days later, saying that the central bank’s decision to pause lowering interest rates “was the right thing to do.”

The Profit Explosion

The cost of this approach to stabilizing prices is, of course, the political ambition of improving average Americans’ lives. The spending reductions in the Inflation Reduction Act (IRA) required jettisoning the Biden administration’s expansive plans to reform American capitalism — to increase staffing in health and education; bring hearing, vision, and dental under Medicare; change community colleges to a tuition-free business model; provide four weeks of paid family and medical leave; expand elder care benefits — frozen in the 2021–22 Congress. The White House’s professed commitment to leave prices to the Federal Reserve meant that, as prices rose 14 percent during the debate on Build Back Better, elected leaders disclaimed any responsibility for addressing the evident problem on which public attention focused.

That inability to focus public attention reflected the unwillingness in Congress to address the real source of the new higher price level: corporate profits.

Every price is an income for someone, and the price increases of the past four years have meant an explosion of profits for owners and employers. Corporate profits doubled during the coronavirus pandemic and the accompanying legislative struggle over Bidenomics.

In the same period corporate profits doubled, the total value of goods and services those corporations produce grew by less than half. This is inflation. As a share of corporate value added — revenues minus nonlabor costs and taxes — nonfinancial corporation profits are higher today than at any point in the past seventy-five years according to the US Department of Commerce’s data.

The ideological cement of the administration’s “modern supply side economics” was corporate tax increases. The new spending would be “paid for,” pleasing moderates, while top incomes of the powerful would have new limits, pleasing class-struggle politicians. The failure to raise the tax rate on corporations’ domestic income therefore splintered this coalition.

The fact that corporate profits exploded during the inflation, just at the moment when corporate taxes were on the table, makes the story Democrats tell themselves about prices all the more disorienting in political terms. Catherine Rampell of the Washington Post set the tone during the crisis, calling the idea that profits were inflationary a “conspiracy theory . . . infecting the Democratic Party.” As macroeconomic orthodoxy concedes raising taxes as a proper fiscal-policy response to inflation, such efforts to divert attention from corporate profits in the formulation of fiscal policy were a rhetorical disaster for how the Democrats entered the 2022 primaries.

Speculation and Profiteering

The story of oil profits over the past five years shows this point. They were driven, as Michael Greenberger, Servaas Storm, and Carlotta Breman have shown, by speculative price manipulation in the futures markets for agricultural and energy commodities. Storm and Breman found as much as 48 percent of the increase in the price of oil from 2020 to 2022 was driven by financial speculation in futures markets.

During the 2022 oil-price run-up, former Commodity Futures Trading Commission chair Greenberger said that noncommerical users with no intention of delivering or receiving product were trading “something like 13 times the physical amount of oil.” Rising commodity prices pull in tremendous volumes of speculative capital — enough that prices depart from the demands of actual users such as refineries and food processors, as even the Department of Energy recognizes.

“Nobody with power is looking at what they’re doing,” Greenberger told the Guardian about the role of futures speculation in the inflation. “There’s no cop on the beat.”

Volatility in upstream commodity markets, tolerated due to the lobbying of derivatives trades, is not, however, the only source of pressure on prices. Once materials costs go up, downstream users such as processors and manufacturers have a reason to raise their margins. Lumber is a representative commodity: whereas log and timber prices rose less than 10 percent during the inflation, lumber prices rose more than 50 percent. Retailers also get in on the game, as the drama of used car prices during 2020 and 2021 showed.

The power to expand margins, on top of speculatively high commodity prices, has also been augmented by the reorganization of industries during the profit boom. Despite record high prices received in lumber, the North American sawmill industry eliminated 3.1 billion board feet in 2024, or about 4 percent of total production capacity.

The margin between log prices and lumber prices shows that a lack of profits isn’t driving the consolidation. Like most things in corporate finance, rather it is the desire for power and control over the market — in particular over prices — that motivates such closures.

We can see such margin expansion clearly with the difference between the per-gallon price of oil and the price of gasoline (also known as the “crack spread,” for refineries’ cracking towers). While crude oil prices are today 20 percent higher than in 2018, gasoline prices are 29 percent higher than in 2018. Refineries are a key bottleneck in the energy supply chain, and more than half the price of gasoline in the past decade has come from refiners’ margins. Yet between 2020 and 2022, as gasoline prices rose 40 percent, refinery owners cut back total US refining capacity by 5 percent. It remains today below prepandemic levels.

Business Leadership Undermines the Democrats’ Coalition

There is evidence that a struggle for power and influence occurred inside the Biden administration over how to respond to the profit-driven inflation of 2021 and 2022. In December 2021, for example, the White House began liquidating the Special Petroleum Reserve — a federally managed oil inventory created for national defense — to countervail against futures traders betting on rising prices. This direct management of the supply to users was a departure from business orthodoxy.

More directly confrontational with the industry was the June 2022 letter the White House sent to the major oil companies and their CEO’s identifying “historically high profit margins for refining oil” as a problem for the public interest. Refining capacity rose during 2023 and 2024, though not to prepandemic levels.

Many of the elements in the party responsible for this orientation of anti-inflation policy on profiteering left the administration during 2023. Those that stayed adapted to a new political reality. The passage of the IRA sealed the official narrative that government spending and wages had been to blame all along.

Deference to the wealthiest industry associations has meant not only ceding control of our diplomacy to oligarchs — whether artificial intelligence companies’ concerns over China, natural gas companies’ interest in the Mediterranean, or auto-parts companies’ concerns over Mexico — but also our basic food, energy, and housing policies. Business control of markets in food, energy, and housing sectors leaves us even less prepared for the next shock.

The Trump administration shows this trend will only continue. Gary Gensler, who fought for securities regulation to promote financial stability, is out at the Securities and Exchange Commission. Paul Atkins, his replacement, is a critic of public oversight of corporate accounting. Lina Khan, who as Federal Trade Commission chair directed enforcement against supply-chain consolidation, is out. Whether war, drought, or other unknown future emergency, the next opportunity for raising prices will be grasped by industries with increased corporate pricing power. And corporate taxes, the disincentive for such profiteering, are about to fall again.

Liberals and Democrats are eager for partisan reasons to criticize the Trump administration’s approach on prices. But those criticisms obscure the conflict within the Democratic Party over just what should be done about the high cost of living. Tolerating a profit explosion and cooling down the labor market won out in the Biden years as the right approach — except it lost liberals in Congress in 2022 and the White House in 2024.

If workers and their allies are to organize an effective challenge to the deepening business control of government, the politicians they elect will have to respond differently to the challenge of rising prices. The biggest risk for workers engaged in organized politics is that they learn the wrong lesson from the profits explosion of the past four years.