Image courtesy of Yunsik Noh on Unsplash
There has been no scarcity of news articles and news reports about the shortages of supplies worldwide. Included among the most frequent are pictures and video clips of container ships waiting to be unloaded in ports around the world, announcements about companies unable to hire warehouse workers or truck drivers, smart chip shortages impacting deliveries of new cars and trucks, and raw materials unable to be delivered around the world.
The editorial team at The Economist wrote an article that clearly outlines the sequence of events that created the current product shortages and predicts that these shortages are not likely to end soon.
Not surprisingly, the editors write that the immediate cause of the shortages is COVID-19. Instead of pointing to product shortages stemming from reduced manufacturing output due to worker COVID-19 infections, the editors write that the bigger cause is the $10.4 trillion global stimulus programs triggering consumers to spend more than normal.
Demand for electronic goods has increased. However, the chips that operate these products are unavailable because the production of microchips has been impacted by factory closures in countries like Taiwan, which is a major chip producer.
In wealthy countries, the stimulus has increased the balance in people’s bank accounts, allowing many workers to wait for jobs to open in industries other than the hospitality or warehouse sectors. Many employers are operating with shortages of hourly workers.
Beyond COVID-19 causality, the editors write that there are two deeper forces at work. Global decarbonization issues have increased the demand for renewable energy sources and increased the costs of natural gas, oil, and coal, since those suppliers are hesitant to invest in expanded production given the decarbonization movement.
The other force cited by the editors is protectionism. Political battles in many countries have switched the trade focus from economic efficiency to the pursuit of goals like labor and environmental standards. The flow of cross-border investment by corporations has decreased by nearly 50% since 2015.
The COVID-19 fiscal stimulus that created the consumer demand and triggered the shortages is going away as the risk of continued infection and economic disruption declines. Chip manufacturers and other industries are likely to increase production capacity in the future, helping to ease the imbalance of supply and demand.
However, The Economist editors observe that these deeper forces are not going away. Politicians need to carefully consider the policies that exacerbate public reactions.
One example the editors cite is the push for green power sources. As countries continue to push for more renewable energy sources, the shortages will force the costs of electricity to become higher. Manufacturers will pass that increased cost on to consumers, and utilities will do the same. Economic growth will slow due to these increased costs.
Politicians who believe that decarbonization will stimulate the economy are likely to be replaced by politicians who blame the increases in prices on the policies that created them. Governments will need to carefully match their green energy policies with the availability of renewable energy sources.
The editors remind their readers that the inflationary years of the 1970s led to a rejection of big government by voters. The real threat of the shortage economy is a voter backlash against decarbonization and globalization.
In the U.S., politicians from carbon energy-producing states like Texas and West Virginia are protesting regulations and laws designed to reduce the utilization of these resources. If the cost of electricity impacts the wallets of consumers elsewhere, they may question the wisdom of such policies.
The Biden administration recently announced that it will keep in place the Trump administration’s tariffs on goods produced by China. Those tariffs average 19%. In a shortage economy, those tariffs are passed on to consumers, who either pay them or choose to reduce their purchases of the higher-priced goods.
The Economist editors are correct in their analysis that steering our economies through decarbonization and globalization will not be easy. The logjam of unloaded container ships will eventually be processed. It will take a lot of cooperation and cajoling in the halls of our government to deal with the other forces without triggering a voter backlash.
I’m not an optimist. The road ahead will get bumpier.
