FOR A DECADE after the financial crisis, the problem of the world economy was the lack of spending. Worried households have paid off debts, governments have imposed austerity, and cautious businesses have curbed investment, especially in physical capacity, while hiring from a seemingly endless pool of workers. Today, spending is back soaring as governments boosted the economy and consumers let go. The surge in demand is so powerful that the supply is struggling to keep up. Truck drivers receive signing bonuses, an armada of container ships is anchored off the coast of California waiting for ports to open up and energy prices soar. As rising inflation scares investors, the glut of the 2010s has given way to an economy in short supply.
The immediate cause is covid-19. Some $ 10.4 billion in global stimulus has sparked a furious but unbalanced rebound in which consumers spend more on goods than normal, stretching global supply chains that have been deprived of investment. Demand for electronics has exploded during the pandemic, but a shortage of domestic microchips has hit industrial production in some exporting economies, such as Taiwan. The spread of the Delta variant has closed clothing factories in parts of Asia. In the rich world, migration is on the decline, stimulus has filled bank accounts and not enough workers want to switch from disadvantaged jobs like selling sandwiches in cities to in-demand jobs like warehousing. . From Brooklyn to Brisbane, employers are in a mad race for extra hands.
Yet the scarcity economy is also the product of two deeper forces. First of all, decarbonization. The shift from coal to renewables has left Europe, and in particular Britain, vulnerable to a natural gas supply panic that at one point this week had pushed up spot prices by more than 60%. The increase in the price of carbon in the European Union’s emissions trading system has made it difficult to switch to other forms of polluting energy. Swathes of China have faced power cuts as some of its provinces scramble to meet tough environmental targets. High prices for shipping and tech components are now triggering increased capital spending to increase capacity. But when the world tries to wean itself off from dirty forms of energy, the incentive to make long-term investments in the fossil fuel industry is weak.
The second force is protectionism. As our special report explains, trade policy is no longer written for the sake of economic efficiency, but in pursuit of a range of objectives, from the imposition of labor and environmental standards to the foreigner to the punishment of geopolitical opponents.
This week, Joe Biden’s administration confirmed that it will maintain Donald Trump’s tariffs on China, which are on average 19%, only promising that companies could ask for exemptions (good luck fighting the federal bureaucracy. ). All over the world, economic nationalism contributes to the economy of scarcity. The shortage of truck drivers in Britain has been exacerbated by Brexit. India has a coal shortage in part due to a misguided attempt to cut fuel imports. After years of trade tensions, the flow of cross-border business investments has fallen by more than half compared to GDP since 2015.
All of this may seem eerily reminiscent of the 1970s, when many places faced gasoline lines, double-digit price hikes, and sluggish growth. But the comparison only gets you so far. Half a century ago, politicians got their economic policy wrong, fighting inflation with futile measures like price controls and Gerald Ford’s “whip inflation now” campaign, which urged people to grow their own vegetables. Today, the Federal Reserve is debating how to forecast inflation, but there is a consensus that central banks have the power and the duty to control it.
For now, uncontrolled inflation seems unlikely. Energy prices are expected to decline after winter. Next year, the release of vaccines and new treatments for covid-19 should reduce the disruption. Consumers can spend more on services. Fiscal stimulus to end in 2022: Mr Biden is struggling to get his giant spending bills through Congress and Britain is considering raising taxes. The risk of a real estate crisis in China means that demand could even decline, restoring the gloomy conditions of the 2010s. And increased investment in certain industries will ultimately translate into increased capacity and higher productivity.
But make no mistake, the deep forces behind the scarcity economy do not go away and politicians could easily end up with dangerously flawed policies. One day, technologies like hydrogen should help make green energy more reliable. But that won’t fill the shortages just yet. As the costs of fuel and electricity increase, there could be a backlash. If governments do not ensure that there are adequate green alternatives to fossil fuels, they may have to address shortages by relaxing emissions targets and switching back to more polluting energy sources. Governments will therefore need to plan carefully to deal with the higher energy costs and slower growth that will result from eliminating emissions. To claim that decarbonization will lead to a miraculous economic boom is doomed to disappointment.
The scarcity economy could also increase the attractiveness of protectionism and state intervention. Many voters blame the government for empty shelves and energy crises. Politicians can shirk their responsibilities by exposing fickle outsiders and fragile supply chains, and making the false promise of building self-reliance. Britain has already bailed out a fertilizer factory to maintain the supply of carbon dioxide, an input for the food industry. The government is trying to pretend that labor shortages are good because they will increase wages and productivity throughout the economy. In reality, putting in place barriers to migration and trade will, on average, cause both to fall.
The wrong lessons at the wrong time
The disruptions often cause people to question economic orthodoxies. The trauma of the 1970s led to a welcome rejection of big government and crude Keynesianism. The risk is now that economic tensions will lead to a rejection of decarbonization and globalization, with devastating long-term consequences. This is the real threat posed by the scarcity economy. ■
This article appeared in the Leaders section of the print edition under the headline “The Economy of Scarcity”