70 Finance & economics TheEconomistOctober9th 2021
evensomecentralbankersdoubtedtheir
powertocurbwageandpriceincreases.Ar
thurBurns,thenthechairmanoftheFed
eral Reserve, reckoned that “monetary
policycoulddoverylittletoarrestaninfla
tion thatrestedsoheavilyonwagecost
pressures”.ResearchbyChristinaandDa
vidRomeroftheUniversityofCaliforniaat
BerkeleysuggeststhatMrBurns’sviewwas
a commononeatthetime.Buttheendof
theeraofhighinflationdemonstratedthat
centralbankscouldreininsuchpriceris
es,andthisknowledgehasnotbeenlost.
LastmonthJeromePowell,theFed’scur
rentchairman,declaredthat,if“sustained
higherinflationweretobecomea serious
concern,wewouldcertainlyrespondand
useourtoolstoassurethatinflationruns
atlevelsthatareconsistentwithourlon
gerrungoalof2%.”
Thenewfiscalorthodoxylikewisehas
itslimits.Budgetdeficitsaroundtheworld
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
abletoaffordscarcecarsandcomputers.
Butitwouldadda painfulcodatonearly
twoyearsofcovid19.
Anotherimportantrespectinwhichthe
global economy has changed since the
1970s is in its far greater integration
through financial 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
forcesbuffetingtheglobaleconomy.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 inflation 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 inflation 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 figure had declined to 16%, the
lowest on record.
Costofliving adjustments (cola),
which automatically translate increases in
inflation 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 inflation, 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, stagflation 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 inflation 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 miffed motorists
are suffering 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