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Here's what's really hurting the economy

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I went out for pizza the other night, but I had to eat it in my car.

This was because Frank Pepe had this sign on his door in Manchester, Connecticut.

“Attention: Cafeteria closed after 16:00 today due to staff shortage.”

So I ate in my SUV, that’s okay, (pizza was great), but it got me thinking 1) this can’t be good for Frank Pepe’s, and 2) the note on the door is literally a sign of the times.

It’s a sign that we live in a world where shortages of supplies, such as workers, oil, semiconductors, are rampant, affecting the economy to a degree we haven’t seen in decades. The effects on inflation, Fed policy, a possible recession, and our global well-being are immeasurable.

Supply restrictions are everywhere these days, some are Captain Obvious, others are more opaque. In some cases, economic downturns result from declines in demand. This could be the result of a stock market crash like after 1987 or 2000 as consumers have less money to spend. Or it could be something like the February-April 2020 COVID recession, where people don’t go out to buy things.

Supply shocks can also cause dips or recessions. “There were two mega supply shocks in the 1970s,” economist Nouriel Roubini told me during the last Yahoo Finance All Markets Summit. “One was the war between Israel and the Arab states that led to a spike in oil prices in 1973, the second was [1979 Iranian revolution] This caused oil prices to rise. This time the spike is not just in the oil crisis, but in natural gas, food, fertilizer, industrial products and semiconductors.”

On December 30, 2021, a closed sign was placed on the door of the Main Street Pub in Clifton, Virginia. – The bar has struggled with ongoing staffing issues throughout the pandemic. (Photo by Heather SCOTT/AFP) (Photo by HEATHER SCOTT/AFP via Getty Images)

Since the onset of COVID, the global economy has been battered by both supply and demand shocks that have plagued leaders worldwide. The roughly $5 trillion stimulus our government has put into the economy goes into cars, homes and meme stocks etc. increased demand. Given the supply constraints mentioned above, it’s hard to remember a time when the supply-demand mismatch was so apparent.

One effect of this was inflation, which is currently hovering at 8.2% – still hovering near the 40-year high of 9.1% we saw in June. Can we discern how much of it comes from the demand side and how much from the supply side? Phil Levy, Flexport’s chief economist, says Europe’s energy problems are a supply shock, while too much demand is the bigger problem.

“The biggest part of what we’ve seen [higher] prices are driven by increased demand, and supply can’t quite keep up with that pace,” says Levy.

Reasons for supply shortages

Let’s delve deeper into supply shortages, the causes of which are the pandemic, the massive resignation, the Russian invasion of Ukraine, the disappearance of globalization and climate change, or some combination of these factors.

Putin’s invasion of Ukraine interrupted the supply of wheat, corn, grain and even sunflower seeds. Europe’s strait over natural gas supplies, plus the sabotage of a pipeline there, plus boycotts of Russian oil and gas means less energy for Europe and beyond. There are already slowdowns and stops in production. Winter is only 60 days away, and allowances for heat are a distinct possibility.

This is a global supply problem. How about this latest headline from the Wall Street Journal: “New England Risks Winter Outages as Gas Supplies Tighten, Grid officials warn of tensions as the region competes with European nations for liquefied natural gas shipments.”

Speaking of New England, climate change can wreak havoc on the supply, you might learn this Thanksgiving when your cranberry sauce is outrageously expensive or doesn’t exist due to famine. Why? Why? Extreme drought in New England, which Zachary Zobel, a scientist with the Woodwell Center for Climate Research in Massachusetts, told Grist, was the result of climate change. Climate change is disrupting the supply chain in many other ways and on a much larger scale.

As GM CEO Mary Barra told me recently, chip shortages are hitting industries around the world, including the auto business. But it’s not just big companies that are affected by the low chip supply. My graduate school, Bowdoin College, recently ran into supply chain problems while trying to complete some buildings.

Michael Cato, Chief Information Officer, said, “Due to the chip shortage, the companies that manufacture the controls for our AV systems have announced shipping delays of 12-24 months, and we were warned that network equipment would be similarly challenged.” “This complicates our planning in many ways, including scheduling financial budgets and navigating the multi-year timeline of construction projects.”

There may also be a shortage of workers to complete these projects. The massive resignation has hit many businesses, but it’s also affecting the government. John McQuillan, CEO of Triumvirate Environmental, which disposes of commercial and hazardous waste, is doing a job that requires government permission—it’s slowing the process, he says.

“We want to increase our processing capacity, but you have a lot of regulators quitting. More experienced people tend to be older. I have four or five things waiting in the United States, Canada, and Mexico right now. And all I’ve heard is, ‘There’s a shortage of staff, “The key person has retired or we look forward to hiring someone for this position.”

What’s in our anti-inflation toolkit?

What can be done about procurement issues? Remember, these are a major cause of inflation and possibly a recession. Ideally, the Federal Reserve could moderate inflation by raising interest rates. Unfortunately, the Fed’s traditional tools are to raise interest rates and shrink its balance sheet, not to increase supply but to curb demand. This does not mean that policymakers and the private sector are helpless.

Michael Spence, Nobel laureate in economics and professor emeritus at Stanford, writes in Project Syndicate that higher rates and withdrawals of liquidity “threaten to push global growth below potential.” “There is another way,” he says, “supply-side measures.” Like what? Spence argues that “creeping protectionism must be reversed” and wants the tariffs removed. He also says that efforts should be made to increase efficiency. “Many sectors, including the public sector, are lagging behind, and concerns remain about the effects of automation on employment.”

In a recent report by the Center for American Progress, a liberal think tank in Washington, chief economist Marc Jarsulic advocates expanding the uptake of COVID-19 vaccines to mitigate labor and production supply shocks and providing additional support for increased child and home care. reducing the limits of labor force participation and working-age migration to increase the labor supply.

“Such actions are not part of the standard anti-inflation toolkit, but should be, given the changing economic environment,” Jarsulic says.

Financial Times columnist Rana Foroohar, in her new book “Homecoming, The Path to Prosperity in a Post-Global World,” suggests that all these supply problems may actually be a beacon of hope, saying: “The supply chain disruptions of the last few years 1973-74 and it lasted longer than the 1979 oil embargoes combined. It’s not a matter of time, it’s the new normal.”

The book argues that “a new era of economic decentralization will reunite place and well-being. The ground-based economy and a wave of technological innovation are now making it possible to keep operations, investments and wealth closer to home wherever they are.”

Here’s hoping Foroohar wrote the silver lining playbook.

This article appeared in the Saturday edition of Morning Brief on October 22. Subscribe to

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