Biden’s Stimulus Costs Less Than Excess Corporate Profits

by David J. Lyon

Is $2 trillion a lot of money? At $250 billion per year for 8 years, you bet it is.

But would you be surprised to know that it is a mere fraction of the excess profits big business in the U.S. rakes in every year? By “excess”, I mean profits that are beyond the profits from investing in economies of scale, or from investing in innovation, or from process improvement, all of which can increase profits while improving things for consumers and workers, and expanding the economy at the same time. Excess profits are those that come from market power, the price- and wage-setting power that comes from dominating a market and raising prices (or suppressing wages). This means of increasing profits takes from consumers or workers, and is always a net loss for society overall.

I describe this difference between profits from market power and profits from scale economies or innovation in more detail in my paper, The Free Market Fallacy (non-paywalled version here), and I attempt to estimate the portion of excess (or “supranormal” in economics lingo) profits in six example industries. The results are, to put it mildly, eye-opening. 

Our low-wage labor markets are quite concentrated (giving the employer market power), and as my analysis in Working Poverty: Low Skills or Low Wages? found, that enables firms to suppress wages about 25%, or $4,500 per year — enough, if corrected, to bring such workers above the federal poverty line. Health care markets are similarly exploited, as we have allowed hospital mergers to continue apace for decades, giving them the market power to charge, on average, 4 times cost(!). Pharmaceutical companies fend off competitive forces partly through mergers as well, but mostly through various tactics I call “weaponized intellectual property”: for example, filing dozens of unnecessary patents for a single drug, for the sole purpose of keeping generic competition at bay. This gives the industry a ridiculously high average return to R&D of 90%, well above typical RORD levels. Princeton economists have estimated the total overcharge from our health care industry at an eye-popping $8,000 per family per year, or a total of $1 trillion a year in excess profits to the health care industry.

Excess profits from just these two areas are already several times higher than the cost of President Biden’s stimulus package, and they are only a fraction of the total. Fast food and retail almost certainly make excess profits similar to those they make from wage suppression by suppressing the prices they pay their suppliers; manufacturing industries are also highly concentrated industries, and have been quite successful at eroding the power of the main force that counterbalances their labor market power, unions, allowing them to push wages about $3,000 per worker per year below competitive-market rates; polluting industries have successfully weakened many environmental regulations, allowing them to externalize the cost of the associated harms, saving the fossil fuel industry, for example, about $150 billion per year. Not to mention wage suppression in health care (e.g. home health care aides), excess profits from the financial industry (one study pegs this at over $650 billion per year), or the amount lost to corporate tax avoidance.

So let’s not get too carried away over spending, for 8 years, a little over 1% of GDP to get our post-COVID economy back on track, when we already allow over 5 times that much to go to excess corporate profits. And let’s start right away establishing protections against market power to return those excess profits to where they belong – the pockets of consumers, workers and small businesses.