Month: November 2021

Price Gouging

Many of the increasingly clamorous inflation hawks are convinced that the main culprits behind the recent rise in prices are Congressional Democrats and the Biden Administration. Other observers point to supply chain problems or escalating wage demands. Yet there has been surprisingly little focus on the parties responsible for actually setting most of the prices: large corporations.

That’s why it was refreshing to see a front-page article in the Wall Street Journal the other day that provided a more honest account of what is happening. Its headline was: “Inflation Helps Boost Profit Margins: Companies Seize Rare Opportunity to Increase Prices and Outrun their Own Rising Costs.”

The second part of that is the most significant: corporations are raising prices not only to cover their rising costs but well beyond. In other words, they are exploiting a crisis situation to fatten their bottom lines. There is a term for this: price gouging.

Companies such as high-end mattress producer Sleep Number and heating/cooling equipment manufacturer Carrier Corp., the Journal noted, have each pushed through three major price increases this year. As a result, corporate profits are booming. The Journal article cited figures showing that many large companies are reporting margins at least 50 percent above 2019 levels.

It was appropriate for the Biden Administration to call on the Federal Trade Commission to investigate whether illegal conduct by petroleum companies is responsible for the spike in gasoline prices. Other sectors should also be scrutinized.

Given the high level of concentration in many industries, it is likely that anti-competitive practices may be at play. Sometimes this can verge into explicitly criminal behavior. Earlier this year, for example, poultry processor Pilgrim’s Pride pleaded guilty and was sentenced to pay $107 million in criminal fines for its participation in a conspiracy to fix prices and rig bids for broiler chicken products.

Around the same time, Argos USA had to pay $20 million to resolve criminal allegations that it participated in a conspiracy to fix prices, rig bids, and allocate markets for sales of ready-mix concrete in the Southern District of Georgia and elsewhere.

Those who have studied economics will probably recall this comment by Adam Smith in The Wealth of Nations: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.” These days, the contrivance probably occurs in emails or Zoom calls, but the result is the same.

A key component of the effort to bring inflation under control is to prevent corporations from exploiting the country’s transition from the pandemic in a way that harms the rest of us.

Biden’s DOJ Announces Crackdown on Corporate Recidivists

For years, rogue corporations have in effect gotten away with murder through a system that allows them to avoid prosecution for serious offenses by promising to change their ways and paying affordable financial penalties.

These arrangements, widely used by the Justice Department, are known as deferred prosecution and non-prosecution agreements but they are really nothing more than leniency practices. Their supporters claim that the threat of actual prosecution in the future is sufficient to get companies to clean up their act. They also point out that the agreements have provisions requiring such changes.

Unfortunately, there are numerous examples of companies that have violated the terms of their deferred or non-prosecution agreements with apparent impunity. The Biden Justice Department is vowing to change that. Last month, Deputy Attorney General Lisa Monaco gave a speech in which she said DOJ is tightening its procedures on leniency agreements, especially for companies with “a documented history of repeated corporate wrongdoing.” She indicated that DOJ will look not only at the offense related to the agreement but the full range of misconduct.

To assist DOJ in its efforts, Public Citizen has just published a report highlighting 20 large companies with deferred prosecution and non-prosecution agreements that have histories of wrongdoing documented in Violation Tracker.

Some of these rap sheets have continued after the company entered into its leniency agreement. For example, after signing an agreement in 2020, Wells Fargo was fined $250 million by the Office of the Comptroller of the Currency for unsound banking practices.  After signing an agreement in 2019, Merrill Lynch (owned by Bank of America) was fined several times by the Congressionally authorized industry regulator FINRA, including an $11.65 million penalty this year for overcharging customers.

After signing an agreement in 2019, Walmart has been involved in numerous violations, including a case in which it paid $20 million to the EEOC to resolve allegations of gender discrimination.

The list could go on. There are abundant examples proving that deferred prosecution and non-prosecution agreement have done little to deter corporate misconduct and that recidivism has continued to run rampant.

It is encouraging to hear the Biden Justice Department talk tough about corporate crime after years in which large corporations have enjoyed exceedingly light-handed treatment from federal prosecutors. It is especially heartening to learn that DOJ will look at the entire track record of corporations in making prosecutorial decisions. I hope that Violation Tracker will help them in their deliberations.

Culpable 26

COP26, the United Nations Climate Change Conference now taking place in Glasgow, is primarily a gathering of governments. The idea is that political leaders from around the world can come together to make commitments that will address one of the most pressing problems confronting the human race.

The ability of nations to make substantial progress is, however, increasingly in question. European countries are reported to be worried that measures resulting in higher energy prices could prompt a populist backlash like the Yellow Vest movement in France. The ability of the U.S. Congress to enact significant climate legislation remains uncertain.

Moreover, the parties which are most responsible for the climate crisis are not governments or the people they represent, but rather the giant corporations whose operations and products account for a large portion of greenhouse gas emissions. Perhaps we should spend more time talking about the Culpable 26, or whatever number of major polluters we deem to be most worthy of castigation.

Identifying the worst climate culprits is complicated by the fact that many of them are claiming to be part of the solution rather than the problem. They tout their efforts to reduce emissions and many even claim to be moving toward net-zero.

There are several problems with these claims. The first is the “net” part. Many companies will end up focusing more on carbon offsets than reducing their emissions substantially.

The second is that the target dates they are setting are well into the future. The Net Zero Tracker lists about 575 large publicly traded corporations as having commitments to net zero or related goals. Of those, more than half set their target date at 2050 or later. They are giving themselves three decades to respond substantively to what amounts to a global emergency.

The third problem is that progress toward these goals will likely be measured by the corporations themselves. Self-reporting is pervasive in the world of corporate social responsibility and ESG, putting into question the entire enterprise.

After all, many of the companies vowing to meet climate goals have abysmal track records when it comes to regulatory compliance. Take the example of Royal Dutch Shell, the largest industrial company with a net zero commitment (by 2050).

As shown in Violation Tracker, Shell has racked up more than $875 million in environmental penalties from federal, state and local regulators in the United States alone. That shows the extent to which the company and its subsidiaries have run roughshod over pollution regulations.

Shell’s Violation Tracker page also shows hundreds of millions of dollars in penalties for other offenses such as accounting fraud (overstating its petroleum reserves) and false claims (underpaying royalties on oil produced under federal leases). In other words, Shell has a history not only of environmental misconduct but also of deceiving shareholders and the federal government.

Shell is far from unique in this regard. Many companies have a track record of deception. Self-reporting is not a reliable basis to determine whether big business is really reducing its damage to the climate.