Even after Joe Biden and the Democrats reach agreement on a budget deal that delivers some impressive benefits, the current outbreak of entirely atypical inflation could sink the Democrats in the 2022 midterms. Rising gas prices, higher grocery bills, and unaffordable rents are much more vivid to most voters than even major improvements in public infrastructure and child care.
What exactly is going on, how quickly might inflation subside, and what can the administration do to help it along?
Basically, we have a collision of long-term structural forces and unexpected short-term supply shocks. The irony is that Bidens remedies of reshoring production are just what are needed. But they will take time.
Contrary to the conservative story, this inflation is not mainly the result of higher wages. Some workers, mainly in food service, have gotten substantial wage increases, but median worker compensation is up only 3.7 percent over a year ago, compared to an increase in the Consumer Price Index of 5.4 percent. Most workers are falling behind.
However, contrary to the assurances of some liberals like Paul Krugman, this is not just a matter of waiting a few months for the kinks to work themselves out as the economy reopens. We are facing a delayed reckoning for several decades of bad policy. This will not be cured overnight, though there are some things that the Biden administration can and should be doing in the near term.
The big source of the price increases are supply bottlenecks caused by an overreliance on a global supply chain, coupled with corporate concentrations that government too willingly accepted. This was a crisis waiting to happen, and it took only a faster-than-anticipated recovery.
No previous postwar recovery led to price hikes resulting from supply constraints. The current situation is entirely the result of perverse structural changes in the economy. If you unpack the several elements of the supply chain system, each has been made more vulnerable in recent decades by bad corporate practices tolerated by bad government policies.
Overwhelmed Ports. The system begins with large containerized ships off-loading at ports. As our friend Barry Lynn observes, in the late 1990s a large cargo ship had 6,000 containers. Today, a large container shipmany of them Chinese state-ownedhas 20,000 containers.
Only a few ports, such as the Port of L.A., can handle ships this large. At the Port of Oakland, Lynn reports, there are empty gantry cranes, because they cannot handle the largest ships. The U.S. government could limit the size of container ships and spread out the traffic.
This is all unregulated, and it gets worse. Eight trans-Pacific shipping companies, none of them American, even have antitrust immunity.
Deregulated Trucking and Rail. After a ship is off-loaded, the container goes either by truck or by rail to a warehouse district to be broken down and transshipped to its final destination. There are reports of shortages of truck drivers. But there were no such shortages when trucking was regulated and truck driving was a well-compensated occupation.
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Transport by rail is five times as efficient as by truck. But since rail deregulation, the financial owners of rail companies have disinvested in rail yards, seeking more lucrative use for the real estate.
The point is that the entire logistics system should be seen as an integrated whole, with policies to ensure that there is enough capacity and enough slack for peak demands. The reliance on private market forces, both global and domestic, left the system vulnerable to both supply shocks and price manipulation. It was a spurious form of efficiency that didnt account for hidden risk.
The Special Case of Semiconductors. Three decades ago, most semiconductors were produced domestically and most semiconductor companies were integrated. They both designed and fabricated the chips.
Over the past few decades, one Taiwanese company, TSMC, which was financed by the Taiwanese state in the late 1990s, has come to monopolize some categories of customized chips. This reliance on Taiwan plus South Koreas Samsung, plus some random events such as a major fire in a Japanese fabrication plant, coupled with a sudden economic contraction followed by a sudden recovery, has led to bottlenecks.
Specifically, when the auto industry had a sharp decline in sales early in the pandemic, it cut back its orders for chips. Semiconductor makers shifted their fabrication to computers and other microelectronic products, which were experiencing increased demand as more people were working at home. When automakers wanted to revive production, chipmakers could not shift back on short notice.
This led to both scarcity and price pressures, in cars and in the entire advanced economy that relies on chips. The backlog of automakers orders for chips is still increasing, not diminishing, and now exceeds 20 weeks. The shortage of cars for sale increases the price of new cars, which are up 8.7 percent in a year, and of used cars as a substitute, up 24.4 percent.
Energy. Gas prices fell about 10 percent during the pandemic, but are now up a staggering 42 percent over a year ago. Why so much? Global energy markets are integrated, but the U.S. is awash in domestic oil. We were a net energy exporter in 2019 and 2020.
There is no evidence that the big integrated companies face supply scarcity. Some of the spikes are price-gouging, pure and simple. Exxon just reported a third-quarter profit of $6.15 billion, and Chevron was close behind at $6.11 billion. Yes, we need to reduce oil consumption over time, but not this way.
What About Shortages of Workers? Wages are up in some sectors because the rate of labor force participation has still not returned to its pre-pandemic level. It was 63.4 percent prior to the pandemic, and just 60.2 in April 2020, and has rebounded only to 61.6. So there are some six million workers who have left the workforce. Many of them are older workers, who do not feel safe returning, or who have just decided to retire, or who are home taking care of kids, or who are still living on savings. The fact that there are fewer workers than normal does put a bit of upward pressure on wages in some sectorsbut it is not the prime driver of bottleneck inflation.
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Larry Summers, as usual, is profoundly wrong when he argues that the $1.9 trillion American Rescue Plan, enacted last March, overstimulated the economy. The economy was in recession and tens of millions of people were suffering. The ARP provided relief. Todays supply bottlenecks are reminiscent the stagflation of the 1970sthe combination of supply pressures with too weak a recovery. Lets hope the Fed doesnt add to the misery by hiking interest rates.
What Can Be Done? There is not much Biden can do in the short run, but there are some things. He could be demanding that the oil companies stop taking advantage of consumer distress by jacking up gas prices.
His administration is already working to unclog the L.A. and Long Beach ports, with a mix of carrots and sticks, including congestion fees for trucks that leave cargo in port for too long. More of this is in the works.
He could be leaning on our two prime East Asian protectorates, Taiwan and Korea, which produce the lions share of advanced semiconductors, via Taiwans TSMC and South Koreas Samsung, to give priority to American buyers. Wouldnt this be economic nationalism at the expense of Europe? Amazingly, no. The prime customer of Taiwans semiconductor exports is China.
Wait, China is threatening to invade Taiwan and China is also Taiwans prime customer? Yup. So it would send a double signal if the U.S. requested its Taiwanese ally to divert some chips to the U.S.
Biden could be explaining that the great supply chain fiasco is a lot like Afghanistan. He is not responsible for it. Six previous presidents let this incubate. But it exploded on his watch and hes doing everything he can to fix it.
Election Day 2022 is exactly a year away. With some presidential leadership and no small amount of luck, this bizarre bout of inflation could start subsiding next summer. Since the future of his presidency depends on it, Biden owes it to himself to try everything he can.