Debate on Excess Profits: Which profits are too high?

Some companies are benefiting particularly from the current crisis. The accusation: They used the rising inflation for their business. The word “greed inflation” is doing the rounds. What is it really?

First it is the Chancellor who criticizes companies that make big profits on Twitter. “That’s not okay,” writes Olaf Scholz in early July. This harmless “not okay” has now become the demand for a tax on excessive profits – not formulated by Chancellor Scholz himself, but by the SPD party leader Saskia Esken or the Greens co-chairman Ricarda Lang.

criticism from the ECB

Do companies take advantage of the currently high inflation in order to increase prices practically in their “slipstream” and thus make even more profit? In the US, there is a debate going on among economists, who have also invented a new term: “greedflation”. In German: “greed inflation”. Inflation further fueled by corporate greed.

ECB Director Isabel Schnabel recently said in a speech: “To put it provocatively: Many companies in the euro zone, although by no means all, have benefited from the recent rise in inflation.” This statement was interpreted as criticism of companies. When asked, the ECB explained that it was not up to the European Central Bank to criticize the private sector.

No greed, but “catch-up inflation”?

Some economists point out that in a market economy, corporate profit maximization cannot be described as greed. Some economic experts in the US saw signs of “greedflation” shortly after the corona restrictions were lifted. The thesis: People had some catching up to do, and prices could sometimes be excessively increased.

In this context, one can often read about a kind of “corona catch-up inflation” – for example in gastronomy. The immense profits of the mineral oil companies, for example, where the coffers have been ringing since the beginning of the war in Ukraine, are now on a different paper. Here, too, observers expect that profits will only be higher for a short time and that the market will regulate prices again.

Competition equalizes prices

Whether companies can actually actively drive prices up depends primarily on their market power. This allows monopolists to dictate prices, while price increases are always limited in a competitive market. This is how Volker Wieland, Professor of Monetary Economics at the Goethe University in Frankfurt, sees it: “You need a competitive system to prevent too much market power.”

The economist doesn’t think much of the term “greed inflation”. It is not reprehensible if a company increases the price of its goods. “The competition ensures that prices and profits go down,” says Wieland. He is skeptical about the concept of a tax on excess profits and asks: “Which profit is too high?” In any case, profits would already be heavily taxed in Germany.

“Constitutionally Difficult”

Thomas Obst from the German Economic Institute looks at the debate in a similar way. He, too, sees politics as primarily responsible for avoiding oligopoly structures. In his view, however, the excess profit tax is a bad instrument and, moreover, “constitutionally difficult”. The German constitution provides for stricter rules than most laws abroad.

“Greed inflation” is not a phenomenon for Obst, but a “reproach”. In any case, he expects inflation to slow down in the coming months and attributes this to an expected fall in demand. On the debate about the excess profit tax, Obst says: “Instead of sparking new distribution debates, we should consider how we can deal with the inflation shock together.”

No easy way out of inflation

Many economists see the central banks as being responsible for the discussion about “greed inflation”. They would have to fight inflation by raising interest rates. Economic ethicist Johannes Wallacher from the Munich School of Philosophy also finds: “The central banks reacted too late by abandoning their loose monetary policy.”

Too late? Wallacher says there is no easy way out of inflation, “because many of the factors that are driving price increases are not going away anytime soon.” Politicians must focus on effectively cushioning the social and economic consequences. But the business ethicist is not a fan of an excess profit tax either: “I would prefer stricter antitrust laws.”