Americans are worried about inflation. But what can the government do about it?
The traditional response to inflation looks to the Federal Reserve to raise interest rates and cool the economy. Notwithstanding the risk of provoking a recession, the Fed is doing this—but it will take a decent period of time for interest rate hikes to reduce inflation.
Meanwhile, there's lots of evidence that corporate greed and monopoly power are major contributors to the problem. Corporate profits are growing faster than inflation; companies are acknowledging that they are raising prices because they can, not because costs are going up; and workers' wages are not keeping up with inflation. These are problems that can be addressed, in part, by tough anti-monopoly policies and more worker unionization—but even if we get those things, they may take years to have full impact.
There are two important steps that the government can take to give consumers immediate relief from high prices, dealing with two of the most intense sticker-shock issues we face: soaring gas prices and out-of-control drug charges.
Big Oil is socking us every day at the gas pump, and as a direct result, they are reporting record profits. Not counting one-time charges related to losses in Russia, in the first quarter of 2022, BP reported $6.2 billion in profit; ExxonMobil chimed in with $8.8 billion; Shell set a record with $9.1 billion in profits; and Chevron clocked in with profits of $6.3 billion. Those astronomical sums are just from the first three months of 2022!
There's no secret as to why their profits are soaring: Big Oil has fixed costs of production while the market price of oil is skyrocketing, thanks to Russia's invasion of Ukraine and other reasons. This is a classic situation of windfall profits.
There's a straightforward solution to windfall profits. Legislation introduced in Congress would create a windfall profits tax on the extra profits Big Oil companies are making because of high international prices for oil and return the tax revenues directly to consumers.
This is just commonsense policymaking. Not surprisingly, it is also very popular. Eighty percent of Americans favor a windfall profits tax.
While soaring gas prices are a recent concern, sky-high drug prices are a chronic problem. Almost a third of Americans report rationing medicine they need because of high prices. Americans pay more than two-and-a-half times as much for prescription drugs than people in other countries. For 17 of the 20 top-selling drugs worldwide in 2020, pharmaceutical corporations made more money from U.S. sales than from sales to all other countries in the world combined.
Drugs aren't expensive because they cost so much to make, or even because it takes a lot of money to invent a new pharmaceutical. They are expensive because Big Pharma benefits from monopoly protections. If the government promotes competition, prices will plummet.
The simplest thing for the government to do would be to use Medicare to negotiate the price of drugs it pays for and establish that prices cannot be higher than that negotiated price.
But even while Congress debates that proposal (and weaker versions), there's a lot President Joe Biden could do using his existing authority. When buying for itself—through Medicare, the Department of Veterans Affairs (VA), or other agencies—the government can license generic producers to make drugs otherwise on patent. Similarly, when the government helps pay for the invention of a new drug—which it does frequently, through the $40 billion National Institutes of Health budget—it can authorize generic competition if patent holders are charging too much.
Generic competition makes all the difference when it comes to medicines. The introduction of six or more producers into the market, the Food and Drug Administration has found, can lead to price reductions of 95 percent.
National advocacy organizations including Public Citizen have recently petitioned the government to use these tools to stop profiteering on six specific medicines, including Paxlovid, the treatment for COVID-19, as well as a cancer drug, hepatitis and HIV treatments, insulin and asthma medication.
If President Biden acted on even one of these medicines, Big Pharma would get the message and start lowering prices.
Just like with a windfall profits tax, taking on Big Pharma is overwhelmingly popular. More than 8 in 10 Americans favor measures to introduce generic competition.
There are limits to what the government can do to address inflation and price-gouging by corporations. Pandemic-related supply chain disruptions aren't easily fixed. Most anti-monopoly measures to take on corporate power will take time to have impact.
Those limits are precisely why it's so important that the government do what it can to deliver immediate relief for American consumers. There are no better places to start than a windfall profits tax on Big Oil and enabling generic competition to bring down drug prices.
Robert Weissman is president of Public Citizen.
The views expressed in this article are the writer's own.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
