Reviews | A world running empty


The last few months have been troubled economically. Inflation hit its highest level in 28 years. Supermarket shelves are bare and gas stations closed. Good luck if you have problems with your home heating system: Replacing your boiler, which normally takes 48 hours, now takes two or three months. President Biden is really messing up, isn’t he?

Oh, wait. This inflation record was not set in America but in Germany. Stories of food and gasoline shortages come from Britain. The boiler replacement crisis seems to hit France particularly hard.

And one of the main drivers of recent inflation, in America and elsewhere, has been soaring energy prices – prices set in world markets, in which a country, even the United States, has limited influence. Donald Trump was affirming that if he were president, the gas would be less than $ 2 a gallon. How exactly does he imagine that he could achieve this, when oil is traded globally and America accounts for only about a fifth of the world’s oil consumption?

In other words, the issues that have hampered the recovery from the pandemic recession appear, by and large, to be global rather than local. This does not mean that national policies play no role. For example, Britain’s woes are in part the result of a shortage of truck drivers, which in turn has a lot to do with the exodus of foreign workers after Brexit. But the fact that everyone seems to have similar issues tells us that politics plays a less important role than many people seem to think. And that raises the question of what, if anything, the United States should do differently.

So why does the whole world seem to be running on empty?

Many observers have drawn parallels with the stagflation of the 1970s. But so far, at least, what we’re going through doesn’t look much like this. Most economies have grown, not shrunk; unemployment has fallen, not increased. Although there have been some supply disruptions – Chinese ports have suffered shutdowns following Covid outbreaks, in March a fire at a Japanese factory that supplies many semiconductor chips used in cars around the world hit auto production, and so on – these disruptions are not the main story.

The best parallel is probably not with 1974 or 1979, but with the Korean War, when inflation skyrocketed, reaching almost 10% year-on-year, because supply could not keep up with growing demand.

Is the demand really that high? Actual final sales (purchases for consumption or investment) in the United States have reached an all-time high but have roughly returned to the pre-pandemic trend. However, the makeup of demand has changed. At the worst of the pandemic, people couldn’t or didn’t want to consume services like restaurant meals, and they made up for it by buying more things – durable consumer goods like cars, home appliances and electronics. At their peak, durable goods purchases were at an astonishing 34% above pre-pandemic levels; they have dropped a little but are still very high. Something similar seems to have happened around the world.

Meanwhile, supply was limited not only by clogged ports and chip shortages, but also by the Great Resignation, the apparent reluctance of many workers to return to their old jobs. Like inflation and commodity shortages, it is an international phenomenon. The reports from Britain, in particular, are remarkably similar to those from the United States: a large number of workers, especially older workers, appear to have chosen to stay at home and perhaps take early retirement after having been forced to quit their jobs by Covid-19.

While the problems may be global, the political fallout is local: shortages and inflation clearly hurt Biden’s approval rating. But what could or should American policymakers do differently?

As I have already suggested, energy prices are largely out of the control of the United States.

A few months ago, there were many claims that increasing unemployment benefits discouraged workers from taking jobs. Many states have rushed to cancel these benefits even before they expired nationally in early September. But there was no visible positive effect on labor supply.

Should the current shortages prompt caution with regard to Democratic spending plans? No. At this point, the Build Back Better program, if it comes to fruition, will only account for around 0.6% of GDP over the next decade, largely funded by tax increases. It will not be a major inflationary force; if anything, more spending on infrastructure would help ease inflationary pressures over time.

Other things might help. I’ve argued in the past that vaccination warrants, by making Americans feel like they’re going to work and buying services rather than goods, could play a role in unblocking supply chains.

What’s left? If inflation is really starting to look like it’s entrenched in the economy, the Federal Reserve should avoid it by tightening policy, possibly raising interest rates. It’s important to realize, however, that a rate hike too soon could turn out to be a big mistake, as the Fed won’t have much room to cut rates if demand weakens.

The most important point, however, may be not to overreact to current events. The fact that shortages and inflation are occurring all over the world is in fact an indication that national policies are not the main cause of the problems. They are, on the contrary, largely inevitable as economies attempt to restart after the epic disruption caused by Covid-19. It will take time to sort things out – longer than most people, including me, expected. But a frantic attempt to restore the status quo on inflation would do more harm than good.

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