It’s becoming increasingly clear that the current economic environment in which we find ourselves defies conventional description.
It is most assuredly not a normal business cycle recovery nor are the inflationary pressures pushing up consumer and producer prices the product of a demand-driven overheating economy that leads to production bottlenecks, and subsequent wage and price hikes typical of late-cycle behavior.
We have solid growth and “panflation,” price hikes that are induced by a global pandemic that has disrupted supply chains around the world, greatly distorted global labor markets amid uneven demand for specific goods and services.
It also seems that traditional tonics to cool the economy and bring down rising prices may not be the answer to this vexing problem.
In short, health care policy remains economic policy and until the pandemic and all its attendant variants are fully under control, or eliminated altogether, supply disruptions, labor shortages and rising prices may, as Federal Reserve chair Jerome Powell suggested, turn out to be more than transitory.
Many economists and many less-informed elected officials are blaming these distortions on the monetary and fiscal policy levers used to ease the economic blows dealt by the coronavirus and now its delta variant.
But those criticisms don’t jibe with real world experience.
Record jobs gap
There are not tankers sitting off the coast of California with tons of goods on board because the Fed is buying too many bonds, or fiscal policy is too loose.
Millions of Americans didn’t retire early and more than 1 million women didn’t exit the workforce because they were getting too much assistance from the government.
The record gap between the number of jobs open in the US, at 10.9 million workers versus 8.5 million unemployed, is not a product of policy, but of the pandemic, as well.
There has been a massive shift in worker demands, pay equity, flexible hours and locations, the desire to exit jobs that are not respectful of an employee’s efforts while also not paying a living wage … something seen most acutely in the leisure, hospitality, travel and restaurant worlds.
Some have simply decided to get a better education, retrain for different and emergent economic opportunities, or strike out on their own.
In the industrial world, many workers see the robotic handwriting on the wall. Sure, they can go back to the warehouse, fully recognizing that in the short-term they’ll be paid better than they were before, but ultimately be replaced by machines. So, why bother?
A global computer chip shortage isn’t the result of the CARES Act or Zero Interest Rate Policies (ZIRP) around the globe.
Ending the pandemic will normalize economy
This also isn’t the “stagflation” of the 1970s or early ’80s, which was driven by the U.S. shocking the global economy by abruptly discarding the gold standard; the Arab oil embargo that pushed oil prices up by a factor of four; errant polices like wage and price controls; union agreements that included not just contractual annual wage increases, but also additional wage hikes tied to inflation, or the Iranian hostage crisis which tripled oil prices again in 1979.
This is “panflation” a disruption in both supply and demand, in labor markets and in global trade.
We see it from Vietnam to Vancouver and from Texas to Taiwan.
Ending the pandemic, however long it takes, is the real cure to normalizing the economy.
No amount of tapering or interest rate hikes, and quite frankly, no amount of social engineering will bring these imbalances back to pre-pandemic levels.
We’re not stuck with these problems forever, but we’re going to need some more enlightened solutions to normalize the economy, monetary and fiscal policies, and bring some rationalization back to domestic labor markets and international trade, or “panflation” may prove to be more than just an economic flash in the pan.
