President Joe Biden blames inflation on supply chain problems. He has assured the American people that since supply problems will lift soon, so will inflation pressures. He’s wrong on both counts. The inflation reflects more than supply chain problems, but even if it were just supply matters, they will persist longer than he claims.
The nation’s supply chain difficulties have many moving parts, but their root lies in the post-pandemic buying surge. Consumers, having spent little during the lockdowns and quarantines and sometimes with generous government checks in hand, have ratcheted up buying since the strictures have eased. Overall consumer spending has grown 11.6 percent over the past 12 months, a rate of increase only surpassed by the initial, post-strictures buying surge during the summer of 2020.
The demand surge has filtered back from retailers to producers who, having stopped or curtailed activity during the lockdowns, have had to scramble to catch up. Delays, shortages, and rising prices are the result.
A worker shortage has exacerbated the strain. Fears of infection have kept many people away from the workplace, while government policies have kept others at home. Until recently, especially generous unemployment benefits made it more profitable for some to avoid work, especially workers with child care responsibilities who collected not only generous benefits, but also saved on child care expenses. As of September, the combined effect of these influences had brought work participation to a mere 61.6 percent of the civilian population, down from the pre-pandemic level of 63.5 percent. The percent change looks small, but it constitutes a 5.5 million decline in the number of people available for work.
The extra unemployment payment expired in September, but other generous government benefits remain in place, enough to keep some potential workers at home.
Recently, vaccine mandates have had an additional and detrimental effect on worker participation. Some workers have quit their jobs, rather than comply. Others have been fired or placed on leave. An absence of comprehensive data makes it hard to know exactly how much the mandates will further constrain the workforce. Using as guidance the experience of Washington state, where some 2,000 government workers have left because of the vaccine mandate, it’s easy to see mandates across states and businesses taking more than a million more individuals out of the workforce.
Meanwhile, a rise in strike activity has had an independent effect. The latest data from Cornell University’s Labor Action Trackers records almost 200 strikes so far in 2021, more than in years. That’s hardly surprising, since worker shortages provide leverage for organized labor and inflation offers workers ample motivation to seek higher wages. True, striking workers are still technically employed, but they aren’t producing. So far, the cumulative impact is small compared to other influences on labor availability. But whatever the justice of the strikes, they have made their own contribution to the labor shortage.
Meanwhile, the spring–summer rise in COVID-19 infections has added its burden on supply chains. The Delta variant has slowed production only marginally in the United States and Europe, but it has had a powerful effect in Asia. China’s strict “zero-tolerance” policy quickly shuttered factories and shipping centers at the first sign of renewed infections. Governments elsewhere in Asia have also had to suspend work at factories, notably in important exporting economies such as Vietnam, Malaysia, and Indonesia.
The loss of this production has cut product flows to this country, consumer goods in large part, but also parts needed by domestic producers. This interruption has done especial damage to the delivery of computer chips to auto manufacturers and of holiday gifts, notably toys.
Perhaps most significant in this mélange of trouble is the worldwide energy shortage. The post-pandemic demand surge would have strained production potentials in the best of circumstances, but policy actions have made matters worse. Biden has halted the Keystone XL pipeline and stopped the fracking revolution. Whatever the justification for his actions, they have contributed to a 14 percent drop in North American fossil fuel production. Furthermore, the absence of this production has returned monopoly-like power to OPEC and Russia, both of which have every incentive to constrain how much they pump and so keep the price of oil high.
Green initiatives have also contributed. These shut down coal mines and marginal supplies of oil and natural gas. Now, with the surge in demand, it has become difficult, if not impossible, to restart the closed operations. It has proved even harder to ramp up alternatives, such as wind, solar, and hydro, to fill the energy supply gap. China has experienced an especially severe shortfall in electricity production. That may seem a long way from the United States, but the factory closures have constrained exports of products needed in this country.
These aren’t problems that dissipate quickly, whatever the president says. On the contrary, falling temperatures this winter will increase energy demands and intensify shortages that will likely filter through all production efforts. Even if Biden were to reverse his positions on fracking and the Keystone XL pipeline, it would take months for the associated energy sources to reach users. It may turn out that Transportation Secretary Pete Buttigieg’s forecast of no easing until mid-2022 is optimistic.
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