The Economist - USA (2021-10-09)

70 Finance & economics TheEconomistOctober9th 2021

evensomecentralbankersdoubtedtheir

powertocurbwageandpriceincreases.Ar­

thurBurns,thenthechairmanoftheFed­

eral Reserve, reckoned that “monetary

policycoulddoverylittletoarrestaninfla­

tion thatrestedsoheavilyonwage­cost

pressures”.ResearchbyChristinaandDa­

vidRomeroftheUniversityofCaliforniaat

BerkeleysuggeststhatMrBurns’sviewwas

a commononeatthetime.Buttheendof

theeraofhighinflationdemonstratedthat

centralbankscouldreininsuchpriceris­

es,andthisknowledgehasnotbeenlost.

LastmonthJeromePowell,theFed’scur­

rentchairman,declaredthat,if“sustained

higherinflationweretobecomea serious

concern,wewouldcertainlyrespondand

useourtoolstoassurethatinflationruns

atlevelsthatareconsistentwithourlon­

ger­rungoalof2%.”

Thenewfiscalorthodoxylikewisehas

itslimits.Budgetdeficitsaroundtheworld

are forecastto shrinkdramaticallyfrom

this year to next. In America moderate

Democrats’worriesaboutexcessivespend­

ingmaymeanthatPresidentJoeBiden’s

grandinvestmentplansarepareddown—

orfailtopassatall.

Whatnextfortheworldeconomy,then,

if it doesnotfacea 1970sre­run?Rocketing

energycostsposea seriousrisktothere­

covery. Soaring prices—or shortages, if

governmentstrytolimitrises—willdent

households’andcompanies’budgetsand

hit spending and production. That will

comejustasgovernmentswithdrawstim­

ulusandcentralbankscountenancetight­

erpolicy.Ademandslowdowncouldre­

lievepressureonsupply­constrainedsec­

tors:oncetheyhavepaidtheireye­water­

ingelectricitybills,Americanswillbeless

abletoaffordscarcecarsandcomputers.

Butitwouldadda painfulcodatonearly

twoyearsofcovid­19.

Anotherimportantrespectinwhichthe

global economy has changed since the

1970s is in its far greater integration

through financial markets and supply

chains;tradeasa shareofglobalgdp, for

instance, has more than doubled since

1970.Theunevenrecoveryfromthepan­

demichasplacedintensestressonsomeof

thetiesbindingeconomiestogether.Pan­

ickinggovernmentscouldhoardresourc­

es,causingfurtherdisruption.

Past experience, therefore,isnotthe

clearestlensthroughwhichto viewthe

forcesbuffetingtheglobaleconomy.The

worldhaschangeddramaticallysincethe

1970s,andglobalisationhascreateda vast

networkofinterdependencies.Thesystem

nowfacesa new,uniquetest. n

Parting ways

Global composite purchasing-managers’

indices*, compared with previous month

Source:IHSMarkit *Basedon a survey of purchasing executives

1

70

60

50

40

30

20

2020 2021

Input prices

Output

↓ Contracting

↑ Expanding

Regime shifts

United States, annual average % change

Sources:BureauofEconomicAnalysis;

BureauofLabourStatistics;WorldBank

*August

†Q2 at annual rate

2

Covid-1recovery

2021

Covid-1pandemic

2020

Post-financialcrisis

2009-19

GreatModeration

1983-08

GreatInflation

196 -82

86420-2-4

Consumer prices GDP per person

†

*

cal discipline, and enabled vast amounts of

stimulus during 2020. Now as in the 1970s,

the  worriers  warn,  governments  and  cen­

tral banks may be tempted to solve supply­

side  problems  by  running  the  economy

even  hotter,  yielding  high  inflation  and

disappointing growth.

These  parallels  aside,  however,  the

1970s provide little guidance to those seek­

ing to understand current troubles. To see

this, consider the areas where the histori­

cal comparison does not hold. Energy and

food­price  shocks  typically  worry  econo­

mists  because  they  could  become  baked

into  wage  bargains  and  inflation  expecta­

tions,  causing  spiralling  price  rises  (see

Free  exchange).  Yet  the  institutions  that

could underpin a new, long­lived era of la­

bour  strength  remain  weak,  for  the  most

part.  In  1970  about  38%  of  workers  across

the  oecd,  a  club  of  mostly  rich  countries,

were  covered  by  union  wage  bargains.  By

2019,  that  figure  had  declined  to  16%,  the

lowest on record.

Cost­of­living  adjustments  (cola),

which automatically translate increases in

inflation into higher pay, were a common

feature of wage contracts in the 1970s. But

the  practice  has  declined  dramatically

since. In 1976 more than 60% of American

union workers were covered by collective­

bargaining  contracts  with  cola provi­

sions; by 1995, the share was down to 22%.

A paper published in 2020 by Anna Stans­

bury  of  Harvard  and  Mr  Summers  argued

that a secular decline in bargaining power

is the “major structural change” explaining

key features of recent macroeconomic per­

formance,  including  low  inflation,  not­

withstanding  the  decline  in  unemploy­

ment  rates  over  time.  As  dramatic  as  the

pandemic has been, it seems unlikely that

such a big shift has reversed so quickly.

Moreover,  stagflation  in  the  1970s  was

exacerbated by a sharp decline in produc­

tivity growth across rich economies. In the

decades  after  the  second  world  war,  gov­

ernments’  commitment  to  maintaining

demand  was  accommodated  by  rocketing

growth in productive capacity (the French

called  the  period  “les Trente Glorieuses”).

But by the early 1970s the long productivity

boom  had  run  out  of  steam.  The  habit  of

stoking demand failed to help expand pro­

ductive potential, and pushed up prices in­

stead. What followed was a long period of

disappointing productivity growth. 

Since the worst of the pandemic, how­

ever,  productivity  has  strengthened:  out­

put  per  hour  worked  in  America  grew  at

about 2% in the year to June, roughly dou­

ble the average rate of the 2010s. Booming

capital  spending could  mean  such  gains

are sustained. 

Another important break with the 1970s

is that central banks have neither forgotten

how to rein in inflation nor lost their com­

mitment  to  price  stability.  In  the  1970s

Fossilfuels

Can’t live without

them. Yet

F

or muchof  the  past  half­decade,  the

operative word in the energy sector was

“abundance”.  An  industry  that  had  long

sought  to  ration  the  production  of  fossil

fuels  to  keep  prices  high  suddenly  found

itself swamped with oversupply, as Ameri­

ca’s  shale  boom  lowered  the  price  of  oil

around the world and clean­energy sourc­

es, such as wind and solar, competed with

other  fuels  used  for  power  generation,

such as coal and natural gas.

In recent weeks, however, it is a short­

age of energy, rather than an abundance of

it, that has caught the world’s attention. On

the  surface,  its  manifestations  are  mostly

unconnected.  Britain’s  miffed  motorists

are suffering from a shortage of lorry driv­

ers to deliver petrol. Power cuts in parts of

China  partly  stem  from  the  country’s  at­

tempts to curb emissions. Dwindling coal

stocks at power stations in India are linked

to  a  surge  in  the  price  of  imports  of  the

commodity. 

Yet  an  underlying  factor  is  expected  to

worsen the scarcity in the next few years: a

The age of energy abundance is dead