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The Shortage Economy!?

Updated: Nov 6, 2021

The Economist reports on how the economic sluggishness of the the post-financial crisis period (the 10's) has given way to the so-called "shortage economy".

This economic shift is driven by 3 forces:

1. Covid-19: Some $10.4trn of global stimulus has unleashed a furious but lopsided rebound in which consumers are spending more on goods than normal, stretching global supply chains that have been starved of investment.

2. Decarbonisation: Europe Britain, and China are facing rising energy prices due to restrictions of and decreasing investment in fossil fuels

3. Protectionism: Migration, bailouts, and government subsidized capital expenditures all aimed at propping up inefficient and poorly fit local workers and firms are impairing the free flow of goods and services needed to alleviate the shortage economy.

As stated by the Economist “[t]he government is trying to claim that labour shortages are good, because they will raise economy-wide wages and productivity. In reality, putting up barriers to migration and trade will, on average, cause both to fall.”

Further, “[a]round the world, economic nationalism is contributing to the shortage economy. Britain’s lack of lorry drivers has been exacerbated by Brexit. India has a coal shortage in part because of a misguided attempt to cut imports of fuel. After years of trade tensions, the flow of cross-border investment by companies has fallen by more than half relative to world gdp since 2015.”

However, there is the prospect of alleviation of some of these pressures driving the shortage economy: “energy prices should ease after the winter. In the next year the spread of vaccines and new treatments for covid-19 should reduce disruptions. Consumers may spend more on services. Fiscal stimulus will wind down in 2022: Mr Biden is struggling to get his jumbo spending bills through Congress and Britain plans to raise taxes. The risk of a housing bust in China means that demand could even fall, restoring the sluggish conditions of the 2010s. And an investment boost in some industries will eventually translate into more capacity and higher productivity.”

The Economist concludes by warning leaders not to use these pressures to walk back early decarbonization efforts, instead of investing in greater green capacity. Further, they advise that the solution to these shortage issues are not to further restrict and blame migrants nor to misallocate resources to more inefficient and less global supply chain solutions.

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