The global economy scarcity problem

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F.OR A DECADE The problem with the world economy after the financial crisis was the lack of spending. Concerned households paid their debts, governments forced austerity measures, and cautious companies withheld investments, especially in physical capacity, while hiring from a seemingly infinite pool of workers. Now spending has risen sharply again as governments have stimulated the economy and consumers have slackened. The surge in demand is so strong that it is difficult for supply to keep up. Truck drivers get signature bonuses, an armada of container ships is anchored off California waiting for the ports to be released and energy prices soar. While rising inflation scares investors, the floods of the 2010s have given way to a scarcity economy.

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The immediate cause is Covid-19. About $ 10.4 trillion in global stimulus packages have sparked a furious but one-sided recovery, with consumers spending more than normal on goods and stretching global supply chains starved for investment. The demand for electronic goods has boomed during the pandemic, but a shortage of microchips in them has affected industrial production in some exporting countries such as Taiwan. The spread of the Delta variant has closed clothing factories in parts of Asia. In the rich world, migration has declined, incentives have filled bank accounts, and not enough workers are keen to move from unpopular jobs like selling sandwiches in the cities to more in-demand jobs like warehousing. From Brooklyn to Brisbane, employers are in a mad scramble for extra hands.

But the scarcity economy is also the product of two deeper forces. First, decarbonization. The move from coal to renewables has left Europe, and the UK in particular, vulnerable to a gas supply panic, which at one point this week had pushed spot prices up over 60%. A rising CO2 price in the European Union’s emissions trading system has made it difficult to switch to other dirty forms of energy. Parts of China have faced power outages as some of its provinces struggle to meet stringent environmental targets. High prices for shipping and technical components are now leading to increased investments to expand capacity. But when the world tries to wean itself from dirty forms of energy, the incentive to long-term investments in the fossil fuel industry is weak.

The second force is protectionism. As our special report explains, trade policy is no longer written with a view to economic efficiency, but pursues a range of goals, from enforcing labor and environmental standards abroad to punishing geopolitical opponents.

This week, Joe Biden’s administration confirmed it would keep Donald Trump’s tariffs on China averaging 19%, only promising that companies could apply for exemptions (good luck fighting the federal bureaucracy). Economic nationalism contributes to the shortage economy worldwide. Britain’s shortage of truck drivers has been exacerbated by Brexit. Coal shortages in India are in part due to a misguided attempt to reduce fuel imports. After years of trade tensions, the flow of cross-border corporate investment has decreased by more than half compared to the world market GDP since 2015.

All of this may eerily remind you of the 1970s, when many places faced gas station queues, double-digit price hikes, and sluggish growth. But the comparison only gets you so far. Half a century ago politicians made a big mistake in economic policy, fighting inflation with pointless measures like price controls and Gerald Ford’s “Whip Inflation Now” campaign, which encouraged people to grow their own vegetables. Today the Federal Reserve is debating how to forecast inflation, but there is consensus that central banks have the power and the duty to keep it in check.

A runaway inflation seems unlikely for the time being. Energy prices should go down after winter. In the next year, the spread of vaccines and new treatments against Covid-19 disorders are to be reduced. Consumers may spend more on services. Fiscal incentives will expire in 2022: Mr Biden is struggling to get his jumbo spending bills through Congress and Britain plans to raise taxes. The risk of a real estate crisis in China means that demand could even fall and restore the sluggish conditions of the 2010s. And a surge in investment in some industries will eventually lead to more capacity and higher productivity.

But make no mistake, the deeper forces behind the scarcity economy don’t go away and politicians could easily end up with dangerously wrong policies. One day, technologies like hydrogen should help make green electricity more reliable. But that won’t close any bottlenecks now. When fuel and electricity costs rise, there can be backlash. If governments fail to ensure there are adequate green alternatives to fossil fuels, they may have to address bottlenecks by relaxing emissions targets and using dirtier energy sources. Governments must therefore plan carefully to cope with the higher energy costs and slower growth that result from eliminating emissions. Pretending that decarbonization leads to a miraculous economic boom will inevitably lead to disappointment.

The scarcity economy could also make protectionism and state intervention more attractive. Many voters blame the government for empty shelves and energy crises. Politicians can evade responsibility by annoying fickle foreigners and fragile supply chains, and by making false promises to strengthen self-reliance. The UK has already rescued a fertilizer factory to maintain supplies of carbon dioxide, an input to the food industry. The government tries to claim that the labor shortage is good because it will increase wages and the productivity of the entire economy. In reality, the establishment of barriers to migration and trade will, on average, result in both falling.

The wrong class at the wrong time

Disturbances often lead people to question economic orthodoxy. The trauma of the 1970s resulted in a welcome rejection of great government and crude Keynesianism. The danger now is that the pressures in the economy lead to a rejection of decarbonization and globalization with devastating long-term consequences. That is the real threat posed by the shortage economy.

This article appeared in the Leaders section of the print edition under the heading “The Shortage Economy”


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