The economic recovery is not playing out as Federal Reserve Chairman Jerome Powell or the Biden administration anticipated.
COVID-19 has accelerated trends that altered supply and demand conditions in many industries and labor markets that would have occurred more gradually had businesses and offices not abruptly closed.
Before the lockdowns, we had the technology to work from home, but employers clung to old myths. For example, that workers are too distracted at home and won’t be motivated when in fact many are more productive absent grinding commutes and distractions from colleagues.
Don’t want to return
As offices reopen, New York and other cities face a crisis. Many commuters don’t want to return — at least not five days a week.
Transit systems, office towers, sandwich shops and expense-account restaurants must now operate with less overall capacity but still can’t find enough workers.
The situation should improve in September when schools reopen and federal supplemental unemployment benefits end, but the ambitious among the displaced waiters, bartenders and catering managers moved to sectors that thrived despite COVID, digital economy, shipping, and mortgage financing. They discovered a few months of intensive employer-sponsored training or just on-the-job mentoring can unlock better careers.
Less-congested cities face fiscal crises in the next few years but when help-wanted signs abound in store windows, we can’t say that its temporary or recession driven.
Bottlenecks throttle production
Throughout the economy supply bottlenecks limit production. Those will take years to work out and continue inflationary pressures. The mismatch between employers’ needs and workers’ skills and locations will drive wage-price pressures even as employment remains well below trend levels expected prior to the pandemic.
Underinvestment in the production of raw materials has come home to roost, and the pandemic’s continued grip on Asia constrains supply chains. In Vietnam, workers are sleeping in factories to avoid COVID exposure.
The pandemic revealed global supply chains are pulled too taut. A Japanese semiconductor factory fire can limit auto production globally, and we are nearing the limits of cheap labor from Asia.
Climate change impacts on agriculture and China’s increasing rich diet—for example, appetite for red meat — are pushing up prices for basic commodities in the food chain.
A good deal of the $6 trillion in stimulus and relief money spread around by Presidents Donald Trump and Joe Biden is still sitting in household, corporate and state government checking accounts. As businesses and consumers adjust to living with the delta variant, those will create more demand than businesses can supply and more inflation, but Powell’s easy money policies have important political imperatives.
With COVID, the national debt held by the public has rocketed to 110% of gross domestic product but federal interest payments have hardly budged. The Fed has pushed down interest rates paid on government bonds by printing $4 trillion to take Treasury and mortgage-backed securities off the market.
Biden’s proposed $4 trillion infrastructure, industrial policy and social spending won’t be fully financed with new revenue sources. Too many proposed taxes are unpopular with moderate Democrats in Congress. He must borrow more and rely on the Fed to print money to purchase even more Treasurys or see interest rates rise.
Higher interest rates would curb home construction and raise costs in capital-intensive industries such as electric vehicles, green energy and semiconductors that the president wants to boost.
Until recently, much of the media was quick to support Powell’s story line that inflation is temporary. Although the pace moderated a bit in July, the month-over month annualized rate of headline consumer price inflation was still 5.8% and likely to persist.
Considerable attention focused on volatile prices for rental cars, lodging, airfares and restaurants and the like but higher prices and in some instances shortages for groceries, bicycles, home appliances, and toys are no mirage.
Burns propped up the administration
In the 1970s, Fed Chairman Arthur Burns rationalized successive jolts in prices for energy, food, mobile homes, children’s toys, women’s jewelry and many other products that ultimately composed 65% of the consumer price index to keep his money printing machine rolling and prop up the Nixon-Ford administration.
After Paul Volcker vanquished inflation, political independence became the lodestar for Western central bankers, but economic history appears lost on advocates of a more socially conscious monetary policy and Fed.
Powell comes up for reappointment soon. He can’t easily pull back accommodative money policies and survive unless inflation imposes political pain on Biden greater than progressive Democrats’ pressure to create a European-style welfare state.
That may be about to happen.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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