Until relatively recently, I haven’t been a big fan of Paul Krugman. Over the past ..oh, year or so, though, I’ve found his opinion pieces in the NYT very interesting.
The other day he wrote one about inflation, in which he said (or I heard) that the economics profession is at a loss right now, with nothing much meaningful to say about the current inflation. How so? He traces this inability back to a basic assumption of modern macroeconomics: that supply/demand imbalances in goods and services will rectify themselves in short order. Therefore, they don’t need to be taken into consideration when analyzing or setting general economic policy.
That might have been good enough a half-century ago, when the world was dominated by a US economy whose plant and equipment hadn’t been destroyed in WWII, when supply chain tools were in their infancy and OPEC hadn’t begun to flex its muscles. But it isn’t any more.
It seems to me that we’re now in a world where microeconomists, who study competition among firms and industries, and whom the academic world has always regarded as a bunch of career minor leaguers, have now become stars of the show.
The way I see it, the current inflation in the US is the result of three factors:
–the application of what has turned out to be too much fiscal and monetary stimulus to the domestic economy in countering the negative effects of the pandemic
–the NATO decision to boycott Russian oil and gas,–and, maybe more important in the long run, the denial of US oilfield drilling and maintenance services–after that country’s invasion of Ukraine, and
–the recasting of the current world-spanning industrial supply chain as a result of political changes in China and the US.
It seems to me that:
–fixing the first issue is well underway
–in a political sense, the much bigger boycott issue with Russia is natural gas, which is 4x or so as important as oil as a source of foreign exchange. My guess is that because boycotts are inevitably leaky, the bigger oil issue is output reduction if/as local petroleum engineers are unable to perform routine maintenance. The natural gas issue isn’t one of alternate supply–there’s plenty of that, and of technology to get gas into local pipeline networks. It’s all about capacity of LNG ships to get output to Europe and terminals to receive and regasify it. For what it’s worth, Germany is apparently now worried about overcapacity
–this is the tricky one. And it’s overwhelmingly a microeconomic issue. It’s mostly about relocating semiconductor capacity away from Taiwan and relocating simple manufacturing/assembly operations away from China. But it’s also about the fixing the long-standing inefficiency of Los Angeles-area ports, educating inept American auto manufacturers about how to order semiconductor parts, how many new plants need to be built–of what type and size, and where… My guess–and I have to constantly remind myself that I’m usually too early/optimistic–is that we’re past the worst of the supply disruptions in most everything. I don’t think higher short-term interest rates will either help or hurt too much. Ironically, a higher cost of capital may retard the readjustment of supply chains and manufacturing capacity a bit, however.
Tomorrow: how my portfolio is dealing with this