30/10/21 10:31 Opinion | A World Running on Empty - The New York Times

https://www.nytimes.com/2021/10/29/opinion/inflation-global-supply-chains-us.html

PAUL KRUGMAN

A World Running on Empty

Oct. 29, 2021

By Paul Krugman
Opinion Columnist

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It’s been a troubled few months on the economic front. Inflation has soared to a 28-year high.
Supermarket shelves are bare, and gas stations closed. Good luck if you’re having problems with your
home heating system: Replacing your boiler, which normally takes 48 hours, now takes two or three
months. President Biden really is messing up, isn’t he?

Oh, wait. That inflation record was set not in America but in Germany. Stories about food and gasoline
shortages are coming from Britain. The boiler replacement crisis seems to be hitting France especially
hard.

And one major driver of recent inflation, in America and everywhere else, has been a spike in energy
prices — prices that are set in world markets, on which any one country, even the United States, has
limited influence. Donald Trump has been claiming that if he were president, gas would be below $2 a
gallon. How exactly does he imagine he could achieve that, when oil is traded globally and America
accounts for only about a fifth of the world’s oil consumption?

In other words, the problems that have been crimping recovery from the pandemic recession seem, by
and large, to be global rather than local. That’s not to say that national policies are playing no role. For
example, Britain’s woes are partly the result of a shortage of truck drivers, which in turn has a lot to do
with the exodus of foreign workers after Brexit. But the fact that everyone seems to be having similar
problems tells us that policy is playing less of a role than many people seem to think. And it does raise
the question of what, if anything, the United States should be doing differently.

So why does the whole world seem to be running on empty?

Many observers have been drawing parallels with the stagflation of the 1970s. But so far, at least, what
we’re experiencing doesn’t look much like that. Most economies have been growing, not shrinking;
unemployment has been falling, not rising. While there have been some supply disruptions — Chinese
ports have suffered closures as a result of Covid outbreaks, in March a fire at a Japanese factory that
supplies many of the semiconductor chips used in cars around the world hit auto production, and so on
— these disruptions aren’t the main story.

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30/10/21 10:31 Opinion | A World Running on Empty - The New York Times

Probably the best parallel is not with 1974 or 1979 but with the Korean War, when inflation spiked,
hitting almost 10 percent at an annual rate, because supply couldn’t keep up with surging demand.

Is demand really all that high? Real final sales (purchases for consumption or investment) in the United
States hit a record high but are roughly back to the prepandemic trend. However, the composition of
demand has changed. During the worst of the pandemic, people were unable or unwilling to consume
services like restaurant meals, and they compensated by buying more stuff — consumer durables like
cars, household appliances and electronics. At their peak, purchases of durable goods were an
astonishing 34 percent above prepandemic levels; they’ve come down some but are still very high.
Something similar seems to have happened around the world.

Meanwhile, supply has been constrained not just by clogged ports and chip shortages but also by the
Great Resignation, the apparent reluctance of many workers to return to their old jobs. Like inflation
and shortages of goods, this is an international phenomenon. Reports from Britain, in particular, sound
remarkably like those from the United States: Large numbers of workers, especially older workers,
appear to have chosen to stay at home and perhaps retire early after having been forced off their jobs
by Covid-19.

While the problems may be global, the political fallout is local: Shortages and inflation are clearly
hurting Biden’s approval rating. But what could or should U.S. policymakers be doing differently?

As I’ve already suggested, energy prices are largely out of U.S. control.

A few months ago, there were widespread claims that enhanced unemployment benefits were
discouraging workers from accepting jobs. Many states rushed to cancel these benefits even before they
expired at a national level in early September. But there has been no visible positive effect on labor
supply.

Should current shortages inspire caution about Democratic spending plans? No. At this point, the Build
Back Better agenda, if it happens at all, will amount to only about 0.6 percent of G.D.P. over the next
decade, largely paid for by tax increases. It won’t be a significant inflationary force; if anything, more
spending on infrastructure would help alleviate inflationary pressures over time.

Other things might help. I’ve argued in the past that vaccine mandates, by making Americans feel safer
about going to work and buying services rather than goods, could play a role in unclogging supply
chains.

What’s left? If inflation really starts to look as if it’s getting embedded in the economy, the Federal
Reserve should head it off by tightening policy, eventually by raising interest rates. It’s important to
realize, however, that raising rates too soon could turn out to be a big mistake, since the Fed won’t have
much room to cut rates if demand weakens.

The most important point, however, may be not to overreact to current events. The fact that shortages
and inflation are happening around the world is actually an indication that national policies aren’t the
main cause of the problems. They are, instead, largely inevitable as economies try to restart after the
epic disruptions caused by Covid-19. It will take time to sort things out — more time than most people,
myself included, expected. But a frantic attempt to restore the status quo on inflation would do more
harm than good.

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