Welcome To Stressed Supply Chains And The Shortages Economy

If 2020 was the year of the pandemic, 2021 is shaping up to be the year of stressed supply chains and the shortages economy. In scale and scope, unprecedented supply shortages have had a cascading impact on global supply chains and prices of key inputs. The business world is fretting about shortages of big ticket items like chips for automobiles, which run the sophisticated electronic systems in cars, to the humble foam cushion which drivers sit on. Steel and lumber prices in America are at record levels, pushing up prices for finished products and homes. Widespread labor shortages (and strife) is threatening to hold back a nascent economic recovery and shippers are scrambling to get hold of scarce shipping containers, pushing up freight prices to record levels. What are the policy pathways to deal with the shortages economy?

Inflation hawks and Fed watchers are of course looking at the supply shock from the perspective of rising prices and inflation. Financial markets have been spooked in recent weeks over concerns that the Federal Reserve and other leading central banks are perhaps behind the curve in assessing a potential rise in inflation. Conventional market wisdom is that central banks will have to abruptly change course by tightening monetary policy later this year. There is also the view that supply chain dislocations are to be expected due to a global pandemic and normalcy will be restored in the months ahead via businesses restocking of inventory.

I would argue that the market’s worse concerns, while relevant, are an imperfect gauge to what is happening in the real economy. Not since the 1973 oil embargo has the world economy seen a supply shock on this scale and it is useful to understand the three macro drivers of these shortages.

As a start, the global pandemic has lead to a fundamental rethinking about the utility of offshore supply chains, particularly but not limited to critical emergency items like medical equipment and supplies. With business leaders working from home and businesses stranded due to the pandemic, there were obvious strains in organizing and coordinating complex supply chains. The supply shortages now underway is likely to accelerate two trends: some level of reshoring to ensure business continuity, and companies stocking up on more than needed inventory to keep production lines humming. Both will drive up costs and dislocate existing supply chains.

The pandemic is also upending the traditional relationship between labor and capital. For much of the last few decades, as French economist Thomas Piketty has noted, it is capital rather than labor which has benefitted from globalization and an integrated global economy. With President Biden emerging as the most pro-labor and pro-trade union leader in a generation, labor’s bargaining position has strengthened considerably, further enhanced by widespread labor shortages. As restaurants and big employers in America bid for a limited pool of labor, workers will also benefit from the push to increase the minimum wage to $15 per hour, which in the short-term will diminish the traditional power of big business and in the medium-term accelerate the trend of AI and automation.

The ransomware attacks on Colonial Pipeline, which supplies petroleum products to much of the eastern seaboard of the United States, and more recently at meatpacker JBS is a new and present risk. The fact that wily hackers, suspected to be Russian, disrupted supplies of key commodities and extracted “hostage” money from private companies is a worrying new trend which will test the resilience of an already stressed global supply chain. Businesses will need to cyber-proof IT systems and build expensive new defenses to deal with hacking threats from state and non-state actors.

Since supply chains are global in nature, global rather than national solutions will alleviate challenges from the shortages economy. Supply chain originators (China and East Asia) need a seat at the table with supply chain destinations (America and Europe) to remediate immediate supply shortages and to build back a more pandemic and economic shock resistant supply chain. Now more than ever, the voice of business and labor also needs to be heard.

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