The problem of the shortage of the global economy
For hold After the financial crisis, the problem with the global economy was the lack of spending. Anxious families paid their debts, governments imposed austerity and prudent businesses stymied investment, especially in material capacities, while hiring from a seemingly endless pool of workers. Now spending is back in force, as governments stimulated the economy and consumers let loose. The increase in demand is so strong that supply is struggling to keep up. Truckers get signing bonuses, a fleet of container ships dock off California waiting to clear ports, and energy prices are spiraling upward. As rising inflation scares investors, the glut of the 2000s has given way to an economy in shortage.
The direct cause is COVID-19. About $10.4 trillion in global stimulus has unleashed a furious but lopsided recovery as consumers spend more on goods than usual, expanding global supply chains that have been deprived of investment. Demand for electronic goods has boomed during the pandemic, but shortages of microchips within them have hurt industrial production in some exporting economies, such as Taiwan. The spread of the variable delta has led to the closure of garment factories in parts of Asia. In the rich world, immigration is declining, stimulus has filled bank accounts and not enough workers can imagine switching from undesirable jobs like selling sandwiches in cities to in-demand jobs like warehousing. From Brooklyn to Brisbane, employers are in a crazy struggle for extra hands.
However, the shortage economy is also the product of two deeper forces. First, carbon removal. The switch from coal to renewable energy has left Europe, especially Britain, vulnerable to a panic over natural gas supplies that at one point this week sent spot prices up more than 60%. The high price of carbon in the EU’s emissions trading scheme has made it difficult to switch to other dirty forms of energy. Vast areas of China have faced blackouts as some of its provinces are scrambling to meet strict environmental targets. Higher prices for freight and technical components are now driving up capital spending to expand capacity. But when the world tries to wean itself off dirty forms of energy, the incentive to make long-term investments in the fossil fuel industry is weak.
The second force is protectionism. As our special report makes clear, trade policy is no longer written with economic efficiency in mind, but in pursuit of a range of goals, from enforcing labor and environmental standards abroad to punishing geopolitical opponents.
The Joe Biden administration confirmed this week that it would keep Donald Trump’s tariffs on China, which average 19%, and promised only that companies could apply for waivers (good luck fighting the federal bureaucracy). All over the world, economic nationalism contributes to a shortage economy. Brexit has exacerbated Britain’s lack of truck drivers. India has a coal shortage due to a misguided attempt to cut fuel imports. After years of trade tensions, the flow of cross-border investment by companies has fallen by more than half compared to the world gross domestic product Since 2015.
It may all seem eerily reminiscent of 1970s, when many places encountered queues in the gasoline pump queues, double-digit price hikes, slow growth. But the comparison only gets you so far. Half a century ago politicians got economic policy wrong, fighting inflation with futile measures like price fixing and Gerald Ford’s “Whip Inflation Now” campaign, which urged people to grow their own vegetables. Today the Federal Reserve discusses how to forecast inflation, but there is consensus that central banks have the power and duty to keep them in check.
For now, out-of-control inflation seems unlikely. Energy prices should fall after winter. Next year, the spread of new vaccines and treatments for covid-19 should reduce disruptions. Consumers may spend more on services. Fiscal stimulus will end in 2022: Biden struggles to get his huge spending bills through Congress and Britain plans raise taxes. The risk of a housing collapse in China means that demand may fall, bringing back the stagnant conditions of the 2000s. Also, increased investment in some industries will eventually translate into greater capacity and higher productivity.
But make no mistake, the deeper forces behind economic imperfection will not go away, and politicians can easily end up with seriously wrong policies. One day, technologies like hydrogen are supposed to help produce green energy more reliable. But this will not fill the shortage for the time being. With rising fuel and electricity costs, there could be a backlash. If governments do not ensure there are suitable green alternatives to fossil fuels, they may have to meet the shortfalls by relaxing emissions targets and returning to dirtier sources of energy. So governments will have to plan carefully to deal with the higher energy costs and slower growth that will result from eliminating emissions. Pretending that decarbonization will lead to an economic boom is bound to lead to disappointment.
A deficient economy can also enhance the appeal of protectionism and state intervention. Many voters blame empty shelves and energy crises on the government. Politicians can escape responsibility by criticizing volatile foreigners and fragile supply chains, and talking about the false promise of promoting self-reliance. Britain has already saved a fertilizer plant to maintain a supply of carbon dioxide, an input to the food industry. The government is trying to claim that a shortage of labor is a good thing, because it will raise wages and productivity across the economy. In fact, putting up barriers to immigration and trade will, on average, bring both down.
The wrong lessons at the wrong time
Turmoil often leads people to question economic beliefs. The shock of the 1970s led to a welcome rejection of big government and crude Keynesianism. The danger now is that stresses in the economy lead to decarbonization and globalization being ostracized, with dire long-term consequences. This is the real threat posed by the shortage of the economy. ■
This article appeared in the Leaders section of the print edition under the heading “The Economy of Shortage”