A short entry today, but one thing that really strikes me in the coverage of what’s worse, inflation or recession, is that some of the major public voices in the debate—like Lawrence Summers—express tremendous certainty about the subject, both on ‘which is most dangerous’ and on ‘this is what you do to prevent the worst one’, despite a century of economic policies by individual states and international organizations that could fairly be interpreted as suggesting that most economists and financial experts are at best making educated guesses about what is coming next, what its consequences might be, and what should be done to get everything on the best path. More importantly as I look at it, there seems to be tremendous faith in the ability to generalize about recession, depression, inflation and financial crisis despite the fact that the structures of the global economy in 2022 and 1922 are so profoundly different in so many ways (hell, 1992 and 2022 are very different) and despite the fact that each challenge or crisis rests on very sui generis causal foundations.
The mainstream press is picking up on some of the distinctive aspects of the issues facing the global economy at the moment and to their credit, I’m seeing at least some economists acknowledging that these causes don’t fit the orthodoxy on inflation very well and perhaps can’t be managed with the crude monetary tools that are conventionally deployed. The pandemic is properly recognized as a major immediate cause of supply chain problems and the war in Ukraine along with the strong NATO response to it is clearly another.
There are three issues that I’m not seeing as much interest in, however. I haven’t seen too many people digging deeper into what “supply chains” have become, well before the pandemic, and why they were so vulnerable to the pandemic’s disruptions as a result. We’ve entered a new era of globalization in the last thirty years where there is very little resiliency in how commodities are produced and how they make it to end consumers. Thirty years ago, major manufacturers of consumer goods often could source parts, components and materials from multiple places and original producers. If one source became unavailable or too pricey, they could switch rapidly. They also were increasingly able to move their own production facilities from one labor market to the next for better margins or to get away from union contracts. That moment had a lot of disadvantages for labor and did a lot to push us into the current era of accelerating inequality, but one thing you could say for it was that the overall system of production had only a few major points of material vulnerability (oil shocks most notably) that could travel up and down the line in a serious way. Whereas the current global system seems to me to be much more vulnerable to “butterfly effects”, where there is only one source for a particular component or material, or where even the slightest perturbation of transport networks, consumer confidence, etc. can throw off the whole thing. Consumers were realizing the effects well before the pandemic, seeing that many major durable goods purchases were increasingly just different cosmetically but were all made from the same increasingly crappy components coming from the same place. If global-scale economic production of the materially concrete commodities that modern households need or want (as opposed to the latest dumb app that nobody would really miss if its digital-tech producer evaporated into smoke tomorrow) remains as fragile as it is now, then the pandemic is not going to be the last thing that knocks it all for a loop. And neither governments nor major international economic organizations seem to have the faintest clue of how to intervene in or manage these issues.
Which relates to the second point: we’ve crossed into a new era of monopoly power over the global economy. But it doesn’t reside with producing corporations any longer, or even financial markets as such—it resides in a handful of gigantic hedge funds that have almost no incentive to worry about the material economy as such, and even less incentive to worry about whether large number of end consumers in major economies are struggling. If governments and their advising economists are at a bit of a loss about how to intervene in economies, it’s partly because economies are less and less meaningfully subject to national authority in liberal states and partly because many economic decisions of enormous impact on hundreds of millions of people are being made within an intensely private and nearly completely ungoverned space.
And that is meaningful in terms of the third point. Most economic experts thinking about inflation in developed economies have the 1970s as their main point of reference. Inflation and “stagflation” in that era, especially after the oil shock of 1973, certainly had a huge impact on many citizens across the developed world, as did the intense recession of the early Reagan Administration that often seen as evidence for the value of strong monetary interventions even if they regrettably lead to recession or stagflation. But the publics who were affected by the economic problems of that period, from about 1973-1985, were in many ways in a better situation than ordinary people are today. They were at the top of a long period of economic growth that also favored a wider distribution of wealth. In most developed economies, those publics also benefitted from social democratic safety nets that had yet to be dismantled by Reagan, Thatcher and their peers. The relative costs of high-quality health care, higher education, housing and many other fundamentals of “the good life” were relatively low compared to now. Many college-educated workers had reasonable expectations of continued earnings growth for their entire lifetime and considerable job security. Union contracts were far more common and many of them including provisions for pensions to retired workers. The economic crisis of this moment, on the other hand, is affecting populations who are in far more tentative and insecure situations even when their incomes are at least comparable to those of fifty years ago. When the “inflation hawks” talk about the need for sharp interventions even at a risk of recession—or their critics try to think about the relative impact of current levels of inflation on household budgets—I see almost none of them reckoning with how much more vulnerable everybody but the ultra-rich are to the global economy that the crisis of the 1970s and early 1980s helped to create.
Image credit: Photo by Stephane YAICH on Unsplash