The week of January 31: Starbucks, inflation, China, and more.
I was wondering what to write about this week when a politician spilled (metaphorically speaking) a cup of coffee all over my screen. As so often, the trouble started on Twitter, specifically with a tweet by the New York Times’ Shane Goldmacher:
Headline: Starbucks will raise prices again, citing higher costs
Dek: The company’s profit soared 31 percent, to $816 million, in the last three months of 2021.
That’s true enough (note that those are year-on-year comparisons). You can see the results for the company’s fiscal first quarter — which ended on January 2, 2022 — for yourself here. And you can check out Starbucks’ fiscal first-quarter results for the period that ended on December 29, 2019 (in other words the last fiscal first-quarter numbers from before the pandemic) here. The company reported net earnings of $885.7 million for that quarter. Fully diluted earnings per share were $0.74 against $0.69 this time around.
I should stress at this point that I do not follow the Starbucks stock, nor I do not drink much Starbucks coffee (other than the Doubleshot Espresso, which is a damn fine can of coffee). I am not a Starbucks expert. Nevertheless, it’s not uninteresting (to me, anyway) that, looking at seasonally comparable quarters, the company did a lot better this time than in the previous first quarter (when we were deep in the pandemic), but somewhat worse than it managed in the last pre-pandemic first quarter. That might be a more relevant comparison.
But what did those who do follow the stock think about these latest results?
From (checks notes) the New York Times (admittedly this piece was by a different author):
Starbucks shares fell as much as 5 percent in after-hours trading after it announced its results for its fiscal first quarter, before recovering some of those losses.
Starbucks on Tuesday said higher costs are weighing on profits, leading the company to miss quarterly earnings estimates and cut its earnings outlook for fiscal 2022.
But investors were expecting a much gloomier forecast. Shares of the company were down as much as 5% in extended trading before rebounding after executives shared their revised projections. The stock was recently down less than 1%.
Higher costs, eh?
Stock prices move around for any number of reasons, but it does appear that, far from celebrating Starbucks’ ability to milk the latte-drinking hordes, the market was, at least partly, unhappy about the company’s failure to keep up with changes in the current pricing environment.
Representative Pramila Jayapal (D., Wash.) looked at the numbers in a different way. She retweeted Goldmacher’s original tweet, adding:
Despite soaring profits, Starbucks is raising prices AGAIN. We can’t accept this level of corporate greed as the status quo. Tax the rich and make sure every single worker in America can join a union.
Posting on NR’s very own Corner, Ramesh Ponnuru wondered “how higher taxes on the rich and more unionization are going to bring prices down.”
Good question.
Ramesh was responding to Phil Klein’s observation that the results were, in fact, a disappointment.
Phil also added that was “amusing to see liberals moving from slamming meat companies and grocery stores to the scourge of overpriced cappuccino.”
Indeed, but that evolution shows that the hunt for politically convenient scapegoats for politically inconvenient inflation is not slowing down. Big Meat, Big Grocery (Big Oil had its moment, too), and now Big Coffee. They are useful both as a way of deflecting blame away from the current administration (which is, to be clear, by no means solely responsible for the current surge in prices), but they also feed into a narrative of corporations as wrongdoers, and big government as the little guys’ protector.
Jayapal’s tweet is also of interest because of the way that it reveals a worldview in which corporations and “the rich” are resources that, on the most benign interpretation, can safely be made to pay up indefinitely. There’s an old story about a golden goose that comes to mind.
What’s more, either the reality that both companies and the wealthy respond to economic incentives/disincentives has either not occurred to Jayapal or she is choosing to ignore it. (This, I would stress, is a part the benign interpretation.) For example, businesses will typically (if they can afford it) pay up to get the workers they need (and Starbucks and other employers seem to be doing that). Beyond that (and to echo Ramesh’s point), however, they are unlikely to want to invest in hiring additional workers when labor (and other) costs are increasing. (Starbucks highlighted the fact that a “tight labor market” was among the challenges that it was facing.) Rather, they will look to do more with less or, indeed, turn their attention to automation.
As for corporate “greed,” it is worth remembering that the managers of a business cannot operate their pricing solely on the basis of past cost increases. They also must look ahead. Starbucks’ recent experience has been of higher-than-expected costs, including of labor, but also, inevitably in current conditions, arising out of supply-chain disruptions. The company reported that
like many others in the industry, Starbucks experienced a rapid increase in supply chain costs in the U.S. related to distribution and transportation driven by supply chain staffing shortages. This required the company to identify more expensive alternatives to meet strong customer demand. While supply chain driven inflationary costs were unexpectedly amplified and rapidly accelerated in December, these disruptions are expected to continue for the foreseeable future.
And, as the company correctly notes, Starbucks has hardly been alone in this. Turn, for example, to that full New York Times report on the Starbucks’ numbers to discover this:
The price of menu items at fast-food restaurants rose 8 percent in 2021, the biggest jump in more than 20 years, according to government data, with the chains citing higher costs for food, transportation and workers.
The link leads to another Times story (but from mid January), the message of which is clear:
The pandemic has led to price spikes in everything from pizza slices in Manhattan to sides of beef in Colorado. And it has led to more expensive items on the menus at fast-food chains, traditionally establishments where people are used to grabbing a quick bite that doesn’t hurt their wallet.
At a Chipotle in Costa Mesa, Calif., the price of a chicken burrito — nothing fancy, hold the guacamole — about a year ago was $7.25. These days, that same burrito costs around $7.95, according to price data collected by analysts. In Ann Arbor, Mich., a ShackBurger at Shake Shack used to cost $5.69; now it’s $6.09. And in Oklahoma City, an order of 50 bone-in wings from Wingstop that cost $41.99 early last year is now $47.49, a 13 percent increase.
The overlap between Starbucks and less upscale food chains is (I’d guess) fairly limited, but some, at least, of the cost pressures will be the same.
The New York Times:
Last year, the price of menu items at fast-food restaurants rose 8 percent, its biggest jump in more than 20 years, according to government data.
And that is in what the Times describes, correctly, as a “hypercompetitive” fast-food market. That Big Coffee, Big Burrito, and Big Bone-In Wings are all involved in various dastardly plots to gouge the public seems unlikely. They are simply responding (when they can) to higher costs.
Recent experience, amplified by the way that so many governments (the Biden administration is by no means the only culprit) have been either insouciant or actively irresponsible (the American Rescue Plan, anyone?) in the face of inflationary experience (not to speak of central banks) will, I am sure, have led managements — in Starbucks or elsewhere — to factor in higher costs in the next six to twelve months when planning pricing policy. And so, for instance, note how Starbucks stated that “supply chain driven inflationary costs . . . are expected to continue for the foreseeable future.”
And while longer-term contracts and hedging mean that higher coffee costs should take a good time to filter through, so to speak, they cannot be ignored indefinitely. I couldn’t help noticing this from Fortune in December:
Coffee prices rose to a decade high on Wednesday, fueled by a shipping crunch, a spike in demand, and dry weather.
The ICE Arabica coffee futures contract, which tracks the higher-quality bean, was sitting above $2.40 per pound midmorning in Europe—more than double what it was at the start of this year.
Robusta, the world’s second major coffee contract—which tracks the more highly caffeinated, often lower quality, robusta bean—was also sitting just off 10-year highs on Wednesday, after hitting its highest point since 2011 on Tuesday.
Together, those contracts show a coffee market in chaos. Coffee has posted the largest price rise of any commodity in 2021—a year that has consistently broken records across markets for energy and food.
And (my emphasis added):
Although there isn’t a direct relationship between the futures markets for coffee and how much you’ll be paying for your morning coffee, prices for such staples are rising for consumers. Factors that have hit prices for the bean, including shipping shortages and weather, are also hitting everything else that goes into that cup—from packaging materials, to labor costs, to the cost of energy involved in shipping and roasting coffee.
The least benign interpretation of Jayapal’s tweet (and of the arguments made by others in the same camp) is that those seemingly prepared to ignore the reality of the economic environment in which a business operates are in fact well aware of where it will lead and see the resulting catastrophe as a feature — central planners can then (allegedly) sort things out — not a bug. If that’s the case, long lines won’t be confined to Starbucks. Meanwhile, I’d pay attention to growing murmurings about the usefulness of price controls. A cloud no bigger than a man’s hand? Maybe.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 52nd episode David is joined by Yuval Levin of the American Enterprise Institute. Their discussion covers a wide array of topics, including what really matters in the contemporary debate over markets — that is, anthropology, mediating institutions, moral formation, and growth as a moral good. The two of them feel comfortable criticizing Aristotle, but all toward the aim of a free and virtuous society.
The Return of the Regional Seminars
National Review Institute is back on the road with their biennial Regional Seminars. This year’s event series, titled “Creating Opportunity,” will feature panel discussions and one-on-one conversations that make the moral and practical case for free enterprise.
Notable speakers include William B. Allen, David L. Bahnsen, Jack Brewer, Dale R. Brott, John Buser, Veronique de Rugy, Kevin Hassett, Pano Kanelos, Rich Lowry, Karol Markowicz, Andrew C. McCarthy, Andrew Puzder, Amity Shlaes, Kevin D. Williamson, and, less notable, me.
The series of half-day conferences is slated for seven cities across the country: Palm Beach, Newport Beach, Silicon Valley, Dallas, Houston, Chicago, and New York City.
On February 16, I’ll be speaking with Kevin Hassett in at the Sailfish Club, Palm Beach, and Rich Lowry, Jack Brewer, and Karol Markowicz will also be there. More details here.
After that, the next seminars will be held in Newport Beach, California, on March 2 and Menlo Park, California, on March 3.
We hope you will join us. You can learn more and purchase tickets here.
The Capital Matters week that was . . .
Inflation
Last week’s announcement that the Federal Reserve is gearing up for a round of tightening in response to runaway inflation raised the question: Where did this inflation mess come from? To some extent, we might stop to blame the word “modern.” That word used to be grand; you would be happy to have a kitchen filled with modern appliances, or to be a modern man. But today, the word has become a weapon wielded by cancel culture’s activists. In economics, the most infamous use of the word is in the creation of “modern monetary theory” (MMT), which suggests that the government can just print money to finance runaway expenditures. There is a strong case to be made that inflation is spinning out of control right now in large part because of MMT . . .
Last year, U.S. consumer price inflation was recorded at 7 percent — the highest annual rate since 1982. But economists seem divided over why the price level rose so sharply.
Put aside the baseless suggestions from politicians about the role of corporate greed or market concentration; economists such as Larry Summers and John Cochrane confidently claim that the problem was primarily too much macroeconomic stimulus being pumped into the economy. Others, including James K. Galbraith and even, until recently, Fed Reserve chairman Jerome Powell, have suggested that the culprit was the severe Covid-lockdown-related disruption to the supply of goods and services. If the profession can’t agree on the source of such a profound macroeconomic phenomenon, what faith can the public have in their pronouncements? . . .
Ryan Bourne contends that the disagreement about how much of our inflation is caused by supply factors is, at least in important part, a disguised disagreement about what policy rule the central bank should follow. If the Federal Reserve were at all times trying to get as close to 2 percent inflation as possible, any period of excess inflation would necessarily reflect an excessively loose monetary policy. (If it were trying to hit a 2 percent average goal, then some periods of excess would be compatible with a sound policy — but only if and to the extent that there had been an undershoot previously.)
If, on the other hand, monetary policy should aim to produce a stable rate of spending growth, then the central bank should tolerate, and not aim to resist, increases in the price level that result from supply disruptions. Bourne mentions Scott Sumner as the most prominent exponent of this view.
I think Bourne is on the right track here, but I’d add a couple of qualifications . . .
The campaign by progressives to blame inflation on corporate greed continues apace, and now Representative Pramila Jayapal has moved on to Starbucks . . .
There was an interesting post on the FRED blog today at the St. Louis Fed. It looks at the data on real personal consumption expenditures (so, adjusted for inflation) for durable goods, nondurable goods, and services. It indexes each of those such that 100 is equal to the February 2020 level of real expenditures. That means index readings above 100 represent levels greater than February 2020, and readings below 100 represent levels less than February 2020. The pandemic recession began in March 2020, so these indices allow us to easily make comparisons to what the economy was like immediately before Covid.
The information in the post gives us a different way to look at the increase in consumer spending on goods relative to services that we saw during the pandemic.
China
Eagerly turning to CGTN.com (the website for China Global Television Network, which is ultimately controlled by, well I think you know . . .), I was excited to read this by Andrew Korybko. Korybko is described as “a Moscow-based American political analyst.” Note that “the article reflects the author’s opinions and not necessarily those of CGTN.” Somehow, I don’t think that CGTN will disagree with much of what he has to say . . .
But perhaps what is most distinctively fascist about China is the direction in which it is going economically. Orwell was careful to describe fascism as a political and economic system, and with good reason.
Chan:
“Companies may chase profit margins like other capitalist enterprises, but party officials step in when they see an overriding state interest. Those who fail to fall in line are felled — the most spectacular example being billionaire tech magnate Jack Ma, who disappeared for months after criticizing the country’s financial regulators. Together with Beijing’s anti-union, anti-labor stance, the Chinese economy today recalls Mussolini’s corporatist fascism.”
The treatment of the unions (or, more specifically, labor) under fascist theory, if frequently not practice, is complicated (and the role of unions as a mainstay of the regime in Perón’s Argentina only complicates matters further), but Chan is right to draw a link between the Beijing regime’s handling of the economy and corporatism. Corporatism does not have to be fascist (far from it), but fascism wouldn’t be fascism without it. It is, incidentally, worth examining how neatly Xi’s doctrine of “common prosperity” fits within a corporatist model . . .
Despite Xi Jinping’s guidance to China’s diplomatic corps in June 2021 to project “a credible, lovable, and respectable image,” his regime continues to alienate itself from other Asian states — indeed, from states that would seem critical if China is to be successful in achieving its aim of hemispheric hegemony.
While Beijing has put Northeast Asia on edge with its ongoing aerial-intimidation campaign around Taiwan, it has simultaneously encroached upon the waters of Indonesia, interfering with lawful energy exploration.
China’s violations of Indonesian sovereignty are far from “lovable” and may be self-defeating. Because Indonesia is the world’s fourth-largest country by population and is Southeast Asia’s largest economy, it figures to play a central, and perhaps decisive, role in the competition between China and the United States for regional influence. There is good reason that Evan Laksmana, senior research fellow at the National University of Singapore’s Lee Kuan Yew School of Public Policy, has referred to Indonesia as the “strategic fulcrum in the era of U.S.–China great power competition.” China will understand that perfectly well, meaning that the aggressive stance it is taking toward Indonesia is at once puzzling and informative . . .
The Chinese Communist Party is forcing anyone who goes to the 2022 Olympics to download an app called My2022. The stated plan is to use it to monitor “health and travel data” — which, in China’s surveillance dystopia, is sinister enough. But there are even more menacing ways Chairman Xi could use this app to spy on users.
Americans — athletes and attendees alike — should delete the app . . .
Entrepreneurialism
Many Americans are unhappy with the economy right now. That’s a problem for incumbent politicians, but it’s an opportunity for new entrepreneurs.
American entrepreneurs have been stepping up to the challenge. As the Cato Institute’s Chris Edwards wrote in a recent blog post, “Since the summer of 2020, the number of U.S. business startups appears to have soared.” . . .
Supply Chains
Ordinarily, peak shipping season starts around the middle of August and goes through December. January is a lull because U.S. consumer spending declines every year after the holiday season, and February is a lull because many workers in Asia have time off for the lunar new year, which reduces exports.
Ordinarily, peak shipping season starts around the middle of August and goes through December. January is a lull because U.S. consumer spending declines every year after the holiday season, and February is a lull because many workers in Asia have time off for the lunar new year, which reduces exports.
Businesses depend on that cycle. They hire extra seasonal workers in peak season and regroup in off-peak season. They reevaluate their practices in spring in preparation for the next peak season to start in late summer. That’s how improvements are supposed to be made.
The post-peak lull would be the time to catch up on backlogs and remove inefficiencies. Unfortunately, it doesn’t look like businesses will be able to do that this year as they normally would . . .
Businesses affected by supply-chain disruptions are currently looking at ways to build resilience to future supply-chain shocks. Reliance on just-in-time supply chains has left some businesses without goods as shipping delays abound, so they are looking to keep larger inventories to remedy the problem.
That covers who, what, when, why, and how, which leaves us with one question: Where? Some businesses can’t answer it because warehouses are filling up around the country . . .
The Fed
A couple of weeks ago, I took a look at the nomination of Sarah Bloom Raskin to become the Fed’s vice chairwoman for supervision. It didn’t seem like a great idea (and, as I reported, I wasn’t alone in thinking so).
I noted that her nomination could be a signal that mission creep at the Fed (although “creep” is becoming too leisurely a word) may be on the edge of speeding up once more.
In connection with this nomination, it’s worth reading this letter to President Biden signed by a number of state treasurers, auditors, and financial officers . . .
Americans do not need the federal government telling banks who can and cannot receive credit based on politics. However, if on February 3, the Senate Banking Committee approves President Biden’s recent nominee to the Federal Reserve, Sarah Bloom Raskin, our country will be taking a giant step in that direction.
Ms. Raskin, who wishes to become vice chairwoman for supervision of the Board of Governors and a member of the Federal Reserve System, believes that the Fed should discourage bank’s lending to companies that she deems insufficiently green. If she prevails, oil and gas companies risk being squeezed out of bank loans — a plight that may eventually befall any company that fails to meet her environmental standards. Not only is that a potential threat to the livelihood of many Americans; it’s a threat that should never emanate from the Fed. President Biden should withdraw her nomination immediately . . .
Ex-Im Bank
A few weeks ago, the Export-Import Bank asked for comments on the terrible idea of using its subsidies domestically. I won’t bore you with all the ways this would be making a bad corporate-welfare program even worse. If you are interested you can read my submission here. I will just note that this idea is the kind of policy that irrelevant and stagnant agencies come up with when they are struggling to do what they are supposed to do in the first place and aren’t doing. This is also what happens when politicians refuse to admit that an agency needs to go bye-bye . . .
Infrastructure
Roads and bridges, a straightforward matter, right?
Not quite . . .
ESG
BlackRock CEO Larry Fink wants you to know that investing based on environmental, social, and corporate-governance factors — what is now known as “ESG” — isn’t “woke.” That claim, made in his annual letter to CEOs on January 18, is debatable. What’s not debatable is that the global leader in asset management takes a hypocritical approach to ESG, as do countless similarly minded companies. They tout their work to save the world while investing heavily in perhaps the world’s worst violator of environmental, social, and corporate-governance standards: Communist China . . .
Russia and Ukraine
In a recent article written for Bloomberg, Javier Blas looks at the extent of the EU’s dependence on Russian natural gas. It’s no secret that the number is high, almost 40 percent. But Blas also examines how much of that gas flows through Ukraine, and thus would be vulnerable in the event of intensified fighting in that country. He highlights the fact (something which is not well understood) that this amount has fallen by some 65 percent over the past couple of decades, as new pipelines have opened up offering different transit routes, a process that would continue if the Nord Stream 2 pipelines open for business (my guess: they will). The amount of gas that flows through Ukraine is still considerable, but Ukraine is, Blas explains, now “only” a key transit point for Russian gas into Austria, Italy, and Slovakia. (However, unlike much of the rest of the continent, Italy maintains strategic gas reserves.)
But that still leaves open the question as to whether Russia will (regardless of route) turn off the taps to the pipelines that supply Europe in order to put pressure on the EU in the event of a major conflict in Ukraine . . .
‘Pro-Worker’ Populism on the Right
Did “pro-worker” conservative nationalism-populism help workers while President Trump was in office?
No.
Will it help workers in the future, as currently formulated by leading nat-pops such as senators Josh Hawley and Marco Rubio?
No . . .
The Debt
Combined with baseline deficits, the national debt held by the public — less than $17 trillion before the pandemic — would surpass $40 trillion a decade from now.
And yet there has been no widespread debt backlash from politicians, voters, economists, or financial markets. This newfound comfort with debt is based on the contention that low interest rates have rendered almost any government debt level to be affordable. The average interest rate paid by Washington on its debt has fallen from 8.4 percent to 1.5 percent over the past three decades. However, economic variables tend to fluctuate, and only a fool would assume that a current economic trend will last forever. In the past, economic forecasts and markets told us that high inflation and high unemployment cannot happen simultaneously, that the late-1990s tech-stock bubble wouldn’t burst, and that national housing prices can never fall. Just last year, the Federal Open Market Committee consistently underestimated current-year inflation by three full percentage points. Interest-rate forecasts have proven spectacularly wrong for 50 years.
But now, economic commentators assure us that soaring federal debt is affordable because interest rates will remain low forever . . .
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