President Joe Biden, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have told the public not to worry over the recent inflation, which they insist is “transitory.” They link the problem to supply-chain constraints that they suggest will soon lift. Supply problems have certainly contributed, but early relief seems unlikely.
Widespread supply-chain problems are clearly a global reality and part of America’s inflation story. Though many factors have contributed to the supply-chain woes, the heart of the matter is the post-pandemic buying surge. Consumers in the United States and around the world, having spent little during the lockdowns and quarantines and with sometimes-generous government checks in hand, have ratcheted up buying a wide range of goods and services.
As of August 2021, the most recent month for which data are available, consumers bought goods and services at an annual rate of $15.9 trillion. A year ago, that figure equaled $14.3 trillion. It should be easy to see how a demand jump of more than $1.5 trillion in a relatively short time has strained producers.
A shortage of workers has worsened the strain and slowed the catchup. Until recently, the United States offered especially generous unemployment benefits, making it more profitable for some to stay home than get jobs — especially workers with child-care responsibilities, who not only collected generous benefits but also saved on child-care expenses.
As of September, the combined effect of these influences had brought work participation to a mere 61.6 percent of the civilian population. Before the pandemic, participation averaged over 63.5 percent. The percentage change looks small, but it constitutes a decline of 5.5 million people available for work. Vaccine mandates have further curtailed the nation’s workforce.
Perhaps most significant in this mélange of trouble is the worldwide energy shortage. The post-pandemic demand surge would have strained production potentials in the best of circumstances, but policy actions have made matters worse. Biden began his term by shutting down the Keystone Pipeline and doing what he could to stop the fracking revolution. His actions have contributed to a 14 percent drop in North American fossil-fuel production from pre-pandemic highs.
The absence of this production has returned monopoly-like power to OPEC and Russia, both of which have every incentive to keep the price of oil high by constraining how much they pump. And both do better by getting more per barrel than from selling more barrels.
Green initiatives to replace fossil fuels with wind, solar and hydro power, which started well before the pandemic, have also contributed. Now, amid a surge in demand and huge portions of North American production taken offline, it has become difficult if not impossible to restart the closed operations.
These are not problems that dissipate quickly, regardless of whatever Biden, Powell and Yellen might claim. Indeed, as falling temperatures increase energy demands in the months ahead, intensified energy shortages will likely filter through all production efforts and make the shortages still more intense.
And once supply-chain problems ease, it will take even longer to see a reflection in inflationary pressures. Washington’s original claims of “transitory” effect look increasingly risible.
There’s still more: For years now — since the 2008–09 financial crisis, in fact — most of the developed world has followed what can only be described as inflationary fiscal and monetary policies. Governments, including Washington, have run unprecedented budget deficits.
Worse, from an inflationary standpoint, easy monetary policies have inflated money supplies. Effectively, these expansive monetary policies have financed government budget deficits with the electronic equivalent of the printing press. In the United States, the Fed has purchased over $5 trillion in newly issued federal debt since 2008 — over $3 trillion of it in the past year.
Both history and economic theory identify such behavior as a primary cause of inflation. Even if the president’s huge spending programs fail to become law, the stage seems set for still more inflation.
To be sure, history shows that the lags from policy to inflation are often long and always variable, but supply-chain considerations aside, it’s beginning to look as though these lags have run their course and the inflation has arrived.
Milton Ezrati is chief economist for Vested. Adapted from City Journal.
