Granger causality shows that inflation causes markups and not the other way around (in Italy)

See Testing the Sellers’ Inflation Theory: The Role of Markups by Tomás Baioni of Universidad Nacional de La Plata.

"Abstract

2021-2022 marks the period where inflation accelerated globally, after more than 10 years of low and stable inflationary pressures. Many economists have asserted the causes of this recent increase in inflation: external pressures, driven by a surge in international prices due to the Russian-Ukraine war; internal pressures, partially explained by increasing government spending and sizeable fiscal deficits. However, some economists have moved away from mainstream theories and have focused on corporate profits, monopolistic behavior and rent seeking as main drivers of inflation. I address the so-called sellers' inflation theory by looking at the cumulative response on headline inflation to a 1\% quarterly national markup increase in Italy for the period 1996-2023. Results suggest that first, markups have increased since 2021, but are still lower than the 1996-2019 average, and secondly, that the effect of increasing markups on inflation is found to be not statistically significant. Moreover, Granger causality shows that inflation causes markups and not the other way around. When differentiating between 1996-2009 and 2010-2023, markups only have a positive effect on inflation in the second sample, albeit not statistically significant. I disaggregate markups as well by sector and find that manufacture and mining are the only sectors whose markups have a significant impact on inflation, although negatively. Despite the fact that these results cannot be extrapolated to other countries, this paper suggests that sellers' inflation is more of a theoretical concept than a practical one in Italy."

Democrats’ flawed hate affair with corporate profits and stock buybacks

By Catherine Rampell. Excerpts:

"Democrats insist, however, that there is a non-wasteful alternative use of companies’ mounting profits: investment! In a House hearing on Wednesday, lawmakers berated oil executives for (you guessed it) too-high profits and too many buybacks. Democrats complained these companies should funnel their cash into expanding output.

This makes about as little sense as when Republicans promised “capital deepening” in 2017.

The issue is not whether oil executives deserve sympathy. (They don’t.) It’s that — as in 2017 — it is hard to convince companies to undertake risky investments they don’t think will be profitable.

As I have written before, there are real hurdles to investment in fossil fuels (unrelated to President Biden’s climate agenda). The number of rigs in operation has been rising, but there still aren’t enough. It will take months to get more into position and ultimately pumping oil. By then, prices may have collapsed, which would lead these investments to become unprofitable.

This is precisely what happened in several bust cycles — including in 2020, when prices briefly went negative. And it’s why investors are pressuring firms to be cautious about their pace of expansion today.

Yelling at companies to stop their buybacks won’t cause them to increase investment or oil output. In fact, some policy measures Democrats are considering, ostensibly to discourage firms from returning so much cash to shareholders, would do the opposite.

Progressives have been threatening to impose a tax on “excess profits.” They’ve proposed a “windfall profits tax” that actually functions as an excise tax. It would take half the difference between the price of a barrel of Brent crude today, and the average inflation-adjusted price from 2015 to 2019. With prices hovering around $100 per barrel, this would effectively add about $17 to the cost of each barrel for oil producers.

This sort of thing makes risky investments look even less attractive, and could cause producers to reduce oil output. That’s what happened the last time Congress enacted a similarly structured “windfall profits tax.” It is also the opposite of what’s needed to bring prices down today.

White House officials sometimes appear to understand that energy producers seek greater certainty that they won’t lose their shirts again in a few months if they invest in expanding production. Sometimes, though, the administration joins the populist chorus bashing greedy firms for “profiteering,” buybacks or the like. If they actually want sky-high gas prices to come down, they would do well to stop encouraging the confused populists."

Catherine Rampell on inflation, corporate greed and Senator Warren

See The greediest Thanksgiving ever. Excerpts: 

"For “corporate greed” to be the culprit behind the recent spike in prices, well, you’d have to believe either that businesses suddenly got much greedier — that this is the greediest Thanksgiving ever! — or that businesses somehow suddenly got much more effective at acting upon that greed.

Here’s the thing. Corporations are always out to make a buck. That’s their job. That was true a century ago, a decade ago and last year, too. In spring 2020, readers may recall, inflation plummeted (with oil prices even briefly turning negative) and corporate profits crashed. That didn’t happen because every executive and shareholder out there suddenly became more altruistic. Companies were greedy then, too, and they were trying to make money.

What happened was the pandemic caused demand to plummet, forcing a drop in both the prices that companies charged and the profits that they earned.

What is happening now, inversely, is that demand is up again. Way up. Especially for physical goods, such as furniture and cars and sports equipment, since cooped-up consumers have cash they’re eager to spend and they’re still not totally comfortable purchasing higher-risk services such as travel or live entertainment.

As I said, companies are always out to make a buck; it turns out to be much easier to make a buck when demand is high.

The pandemic also fouled up — really, continues to foul up — the supply chain. Those bottlenecks make it more challenging for companies to produce and sell quite as much stuff as the public wants.

So they are selling out what they have, turning a tidy profit on those sales, and paying top dollar to acquire even more inventory, the last unit of which is often the most expensive to procure. Similar forces are affecting the energy market as factories ramp up production and gobble up more fuel in the process.

These forces are leading to both record profits and higher inflation. Progressives say you should be suspicious that both things could be happening at once, but the truth is that both are a symptom of constrained supply doing its best to meet gangbusters demand."

"it beggars belief that inflation is up because either greed or market power has somehow gotten so much worse in the past 20 or so months — as opposed to these more obvious dynamics (demand outstripping supply) driving up prices."

The Average Profit Margin for a Restaurant

By Patrick Gleeson, Ph. D.,; Reviewed by Michelle Seidel, B.Sc., LL.B., MBA.

"There are two profit margins widely used by accounting professionals: gross profit margin and net profit margin. Confusingly, some restaurant journalists write about profit margins without specifying which. Worse, when you read these articles carefully, you see that some use "profit margin" to refer to the gross profit margin and some use the same phrase to refer to net profit margin. There's a huge difference!

Gross Profit Margin

Gross profit, is what is left after you deduct the direct costs of goods sold – such as food costs and labor costs directly associated with preparation and serving. It's a useful statistic for professionals evaluating a restaurant's efficiency and profitability, but it's not at all the same thing as net profit – which includes all costs – among them are administrative expenses, building costs, taxes and interest. Net profit is what you put in your pocket.

Difference Between Gross Profit Margin and Net Profit Margin

Gross profit margin equals the revenue minus the cost of goods sold divided by revenue. Net profit margin equals revenue minus all costs, direct and indirect, divided by revenue.

When you want to know whether a restaurant is likely to succeed or go under, the best first place to look is at its net profit margin. If the net profit margin is 10 percent – this means that out of every dollar the customer spends – the restaurant pays 90 cents for all expenses, and retains ten cents in profit – which, incidentally, isn't at all bad. The average net profit margin for all S&P 500 companies is a little over 8 percent.

Fast Food Margins

The range of net margins in the fast food industry are quite wide. A few chains, especially McDonald's, have very healthy net margins. In 2017 , the average net profit margin for all McDonald's restaurants was over 22 percent. Among all franchises, however, net margins are drastically lower.

In 2012, for example, when McDonald's had a net profit margin of just under 20 percent; Burger King's net margin was less than a third of that and another big chain; Wendy's, had a scary thin 0.3 percent. This is very bad, but the fast food industry average for 2012 was only somewhat better, at 2.4 percent, a very thin margin that leaves little room for error.

Fast Casual and Casual

Casual dining, as it used to be called, is now commonly divided into two categories: fast casual and casual, sometimes called "family style."

Fast Casual restaurants include Chipotle, Shake Shack and similar chains where you order at the counter, sometimes having the food brought to the table, sometimes carrying at least part of your meal to the table yourself. It's often said that fast casual restaurants are distinguished from fast food chains by their healthier menus, but that may be more an aspiration than an actual difference.
In 2013, the fast casual segment of the restaurant industry had an average net profit margin of 6 percent. Overall, the fast-casual and casual segments together also averaged 6 percent net profit margins. To put this in context, this is a little more than 2 percent worse than the average of all S&P 500 companies, but nearly three times better than the fast food segment.

Full-Service Margins

Full-service restaurants are basically what's left after you subtract fast food, fast casual and casual restaurants. This market segment includes fine-dining restaurants, but it also includes less elegant places where, as in the fine dining segment of the industry, you're ushered to a table and handed a menu. The difference between fine-dining and other full-service restaurants isn't that the approaches are entirely different – both are "full-service" – but in the degree of refinement and, yes, how much it costs. The Houston's restaurant chain is probably right at about the dividing line between "full-service" and "fine-dining.

In 2017, full-service restaurants had average profit margins of 6.1 percent, essentially the same margin as fast-casual and casual restaurants."

US companies are too focused on the short term. Except when they think long term. But that’s bad, too, apparently.

By James Pethokoukis of AEI.

"Many Democrats, including Elizabeth Warren, and some Republicans, including Marco Rubio, complain that businesses aren’t investing enough because of corporate short-termism driven by shareholders looking for high returns ASAP. (Spoiler: This doesn’t actually seem to be true.) Back during the 2016 presidential race, Hillary Clinton called the phenomenon “quarterly capitalism.” If only more businesses looked to the distant horizon and invested accordingly.

So what’s a good example of long-termism, properly understood? How about retailing giant Amazon? It does a whole lot of investment, some $200 billion since 2011, including huge amounts on R&D. And a review of the US tax code suggests that Amazon is doing exactly what Washington wants American corporations to do: invest. Companies can avail themselves of a R&D tax credit as well as a temporary provision that allows them to deduct 100% of the cost of new investments. As the company puts it, “Congress designed tax laws to encourage companies to reinvest in the American economy. We have.”

Amazon’s statement was a response to this Joe Biden tweet: “I have nothing against Amazon, but no company pulling in billions of dollars of profits should pay a lower tax rate than firefighters and teachers. We need to reward work, not just wealth.” But the point of those pro-investment tax provisions is to encourage investment that leads to higher productivity and higher living standards. 

And as to the basic charge that Amazon paid no 2018 federal taxes, ace Wall Street Journal tax reporter Richard Rubin explains it this way:

A closer look at the internet giant’s tax disclosures over several years paints a more complicated picture: Amazon has paid income taxes somewhere, albeit at a low rate, likely helped by deductions and incentives related to investment, research and employee compensation…. Did Amazon really pay no taxes for 2018? We can’t know. Amazon’s tax returns are private, and its financial statements disclose costs in terms designed for shareholders, not policy makers: It includes accounting measures of taxes, which differ from tax-return calculations. … By one measure — comparing pretax U.S. profit and the company’s “current provision” for U.S. income taxes — Amazon earned $11 billion and had a tax bill of negative $129 million in 2018, essentially getting a net benefit from the tax system. … But the current provision isn’t the same as the bottom line of Amazon’s 2018 tax return. Instead, the current provision is an accounting measure of the company’s near-term tax cost. It is an estimate of the 2018 tax bill plus settlements of past disputes, changes to past projections and updates to reflect new regulations and laws. Amazon’s total effective tax rate for 2018 was 11%, including that current provision but also adding in foreign, state and deferred taxes. … What’s the right way to determine what Amazon actually pays? There’s no right way, and each year is a snapshot. Longer views can help. From 2012 through 2018, Amazon reported $25.4 billion in pretax US income and current federal tax provisions totaling $1.9 billion. That is an 8% tax rate — low, but not zero or negative. Looking back further, since 2002, Amazon has earned $27.7 billion in global pretax profits and paid $3.6 billion in global cash income taxes, a 13% tax rate.

So it’s complicated. But what’s relatively simple to understand is that Amazon, one of the most innovative companies in the world, continues to plow billions into all sorts of investment, including R&D. Its low tax rate isn’t a problem. Indeed, there is good reason to think it would be beneficial to have a much lower US corporate tax rate at about the level of Amazon’s."

In the Long Run, Fear of Short-Termism Is Mostly Bunk

Is the economy suffering from CEOs pushed by investors to focus only on the next quarter? The evidence shows it isn’t

By James Mackintosh of The WSJ. Excerpts:

"We can go beyond anecdotes. Harvard Law School professor Mark Roe points out in a forthcoming paper that there should be three effects, if short-termism really has spread from Wall Street to management. R&D should be lower, since it has costs today for uncertain benefits in the future; business investment should fall faster in the U.S. than countries less reliant on stock exchanges; and corporate cash should be lower as shareholders demand it back via buybacks and dividends.

None has happened. R&D spending by S&P 500 companies is at the highest proportion of sales since at least 1990, according to Goldman Sachs. Business R&D is the highest proportion of GDP since the government started tracking it in 1959. If short-termism is a problem, it isn’t obviously hurting overall R&D spending."

"Capital spending has dropped as a share of sales and GDP over many years—but it has dropped in Germany and Japan too, countries notable for not being sensitive to shareholder desires. The broad pattern of falling corporate capital spending is mirrored across industrialized countries"

"The surge in share buybacks is often held up as short-termism writ large. But companies by and large aren’t buying back stock with cash that could instead be invested for the future. They are borrowing to pay for the buybacks, taking advantage of low interest rates, and aren’t deprived of cash as a result."

Oil Companies Pay More In Taxes Than They Make In Profits

Christian Science Monitor Letter on Greedy Oil Companies by Don Boudreaux.

"In this November 16th, 2005, letter in the Christian Science Monitor I pointed out that, however greedy U.S. oil companies are, U.S. politicians are greedier:

In his Nov. 10 editorial cartoon, Clay Bennett shows an oil-company executive sitting smugly in front of charts showing that “audacity” and “temerity” are rising along with profits.

Is it audacious to risk billions of dollars annually to explore for oil? Is it temerity to enjoy high profits in some years, knowing that other years will bring losses?

The truly audacious (and greedy) ones are the politicians who demagogue this issue. After all, since 1980 oil companies have paid taxes of $2.2 trillion (in 2004 dollars) – an amount more than three times higher than the profits these companies earned during the same period."

Robert J. Samuelson Explains The Problems With Hillary Clinton's New Tax Proposal To Encourage Profit Sharing

See The trouble with Hillary Clinton’s profit-sharing plan. Excerpts:

"Her proposal seems simple. She would provide a 15 percent tax credit — that’s a direct tax cut — for profits that companies distribute to workers. On a $5,000 profit-sharing payment to a worker, a company would save $750 in taxes (that’s 15 percent of $5,000). The credit would phase out after two years, presumably after demonstrating its value. The Clinton campaign estimates the cost at about $20 billion over a decade.

“It’s a win-win,” argues Clinton.

Well, maybe not. Creating the tax break would pose huge practical problems, and the economic advantages of profit-sharing may be overstated.

Writing regulations wouldn’t be easy. One issue is what to do with firms that already offer profit-sharing. In 2014, about 36 percent of employees worked at firms that have some form of profit-sharing, reports sociologist Joseph Blasi of Rutgers University. This poses a dilemma. Tax policy often tries to avoid rewarding taxpayers for doing things they already do. But denying these companies a tax break would put them at a disadvantage with firms that get it. 

Another problem: Some companies would convert normal pay increases into profit-sharing to qualify for the tax break. This would save taxes, but workers wouldn’t benefit. The Clinton campaign pledges “to develop protections against [such] abuses.” More complex regulations. Similarly, the campaign says the tax credit “would phase out for higher-income workers.” How high? More regulations. The credit would also be capped for any one firm “to prevent an excessive credit for very large corporations.” More regulations.

All this would be nonproductive work — interpreting and manipulating rules. It would benefit tax lawyers and accountants. Whether their parasitic work would outweigh productivity gains from more profit-sharing is unclear.

The assumption is that these gains occur automatically. That’s not true, according to research by Blasi and economists Douglas Kruse of Rutgers and Richard Freeman of Harvard. They find that, for firms to become more productive, profit-sharing must occur in combination with other work practices: high levels of training, job security and on-the-job problem-solving. What matters is the whole package of practices. (In fairness: Blasi, Kruse and Freeman support Clinton’s proposal and think it should be broadened.)

We have a microcosm of tax policy: The gains of Clinton’s proposal are overstated, the costs understated. We’d be better off with fewer preferences and lower rates. Let firms and individuals decide what’s best for them. But politicians would have to stop using the tax code as an advertising agency and benefits bargain store. That’s a long shot."

The public thinks the average company makes a 36% profit margin, which is about 5X too high

From Mark Perry.

"


I find this totally fascinating, though not completely unexpected. When a random sample of American adults were asked the question “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” for the Reason-Rupe poll in May 2013, the average response was 36%! That response was very close to historical results from the polling organization ORC’s polls for a slightly different, but related question: What percent profit on each dollar of sales do you think the average manufacturer makes after taxes? Responses to that question in 9 different polls between 1971 and 1987 ranged from 28% to 37% and averaged 31.6%.

How do the public’s estimates of corporate profit margins compare to reality? Not surprisingly they are off by a huge margin. According to this Yahoo!Finance database for 212 different industries, the average profit margin for the most recent quarter was 7.5% and the median profit margin was 6.5% (see chart above). Interestingly, there wasn’t a single industry out of 212 that had a profit margin as high as 36% in the most recent quarter. The industry “REIT-Diversified” had the highest profit margin at 33.5% followed by just one other industry – Wireless Communications  at 30.9% – with a profit margin higher than 30%.

“Big Oil” companies (Major Integrated Oil and Gas) make a lot of profits, right? Well, that industry had a below-average profit margin of 5.1% in the most recent quarter. And evil Walmart only made a 3.1% profit margin in the most recent quarter (as I reported recently), which is less than half of the almost 7% average government take on retails sales in the form of state and local sales taxes. Think about it – for every $100 in sales for Walmart, the state/local governments get an average of $6.88 in sales taxes (and as much $9.44 in Tennessee and $9.16 in Arizona, see data here), while Walmart gets only $3.10 in profits!

Bottom Line: The public’s complete overestimation of how much companies earn in profits as a share of sales explains a lot. If $36 of every $100 in sales at a company like Walmart, McDonald’s, Home Depot, Ford Motor Company or a local dry cleaner or restaurant really did turn into profits, then of course those companies could afford to pay unrealistic living wages of $15 per hour, accept unreasonable demands from labor unions, provide all sorts of generous fringe benefits including weeks of paid holidays, long paid maternity leaves, and gold-plated pension programs, etc. The public that believes in the fantasy-world of sky-high 36% profit margins would naturally think companies are just being greedy and stingy when don’t pay higher “living wages” and have to be forced to do so through minimum wage, or living wage, legislation.

If the average person could realize that a 36% profit margin isn’t even close to reality, and that the typical, median firm has a profit margin of only 6.5%, or almost 30 percentage points below what the public thinks is a normal profit margin, then hopefully the average person would become a little more realistic about how the business world operates. Companies aren’t being stingy when they pay competitive wages, they’re just trying to survive on what are sometimes razor-thin profit margins, in a competitive environment where there’s not a large margin of error. If they’re not operating efficiently and watching costs very carefully, it’s pretty easy for a business to go from a 6.5% profit margin to a 0% break-even situation, and then to losses and bankruptcy — just look at the more than half a million businesses that fail every year."

If Everyone Else is Such an Idiot, How Come You're Not Rich?

Interesting post about Netflix by Megan McArdle. Click here to read it.

"When I catch myself thinking along these lines, I try to stop and ask a simple question: "If everyone else is such an idiot, how come I'm not rich?"

If you see a person--or a company--doing something that seems completely and inexplicably boneheaded, then it's unwise to assume that the reason must be that everyone but you is a complete idiot who is blind to fairly trivial insights such as "people desire inexpensive and conveniently available movie services, and will resist having those services made more expensive, or less convenient". While it's certainly true that people do idiotic things, it's also true that a lot of those "idiotic" things turn out to have perfectly reasonable explanations.

And in fact, if management of all these large public companies really were the staggeringly malevolent yet totally hapless lackwits that so many seem to believe, it should be really, really easy to get rich by outwitting them. Oh, sure, they'd probably get all their rich friends in Congress and Kiwanis to gang up on you, but since, according to the internet, almost all those people are also too dumb to come in out of the rain, you should be able to defeat them with a couple of well-placed banana peels.

If you've found it maybe not quite that easy to make a pile of money by outguessing all these benighted fools, then perhaps you should consider the possibility that they aren't quite as stupid as you are making them sound when you sniffily ask "Why don't they just . . . ?

Quite often, the answer to that exasperated "why don't they just . . . ?" is green, and it folds."