Here’s what’s really hurting the economy

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

That’s because Frank Pepe’s in Manchester, Connecticut had this sign on their door.

“Note: the dining room will be closed from 4 p.m. today due to staff shortages.”

So I ate in my SUV, no problem (the pizza was amazing), but I figured 1) this can’t be good for Frank Pepe, and 2) the note on the door is literally a sign of the times.

A sign that we live in a world where supply shortages – workers, oil, semiconductors – are commonplace, affecting the economy at a rate not seen in decades. The implications for inflation, Fed policy, a possible recession and our global well-being are immeasurable.

Supply shortages are everywhere these days, some Captain Obvious, others obscure. In some cases, economic downturns are caused by falls in demand. That 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 an event like the February-April 2020 COVID recession, when people didn’t venture out to buy things.

Supply shocks can also lead to downturns or recessions. “There were two mega supply shocks in the 1970s,” economist Nouriel Roubini told me during the recent Yahoo Finance All Markets Summit. “One was the war between Israel and the Arab states that led to a surge in oil prices in 1973, and the second was that [1979 Iranian revolution] which also led to an increase in oil prices. This time, the spike isn’t just in an oil crisis, but in natural gas, food, fertilizers, industrial products and semiconductors.”

A closed sign is posted on the door of the Main Street Pub in Clifton, Virginia on December 30, 2021.  - The pub has struggled with ongoing staffing issues during the pandemic.  (Photo by Heather SCOTT/AFP) (Photo by HEATHER SCOTT/AFP via Getty Images)

A closed sign is posted on the door of the Main Street Pub in Clifton, Virginia on December 30, 2021. – The pub has struggled with ongoing staffing issues during the pandemic. (Photo by Heather SCOTT/AFP) (Photo by HEATHER SCOTT/AFP via Getty Images)

Since the outbreak of COVID, the global economy has been hit by both supply and demand shocks that have angered executives around the world. The roughly $5 trillion in stimulus our government has poured into the economy has spurred demand for cars, homes, and meme stocks and so on. Given the supply constraints mentioned above, it’s hard to recall a period of such pronounced supply-demand imbalances.

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One effect was inflation, which currently stands at 8.2% – still close to the 40-year high of 9.1% we saw in June. Can we see how much of this is coming from the demand side, how much from the supply? Phil Levy, chief economist at Flexport, says that while Europe’s energy woes point to a supply shock, excess demand is the bigger problem.

“Most of what we see [higher] Prices come from demand, which has increased – and supply can’t quite keep up with the pace,” says Levy.

The causes of supply bottlenecks

Let’s take a closer look at these supply shortages, the causes of which include the pandemic, the Great Resignation, Russia’s invasion of Ukraine, deglobalization and climate change – or a combination of these factors.

Putin’s invasion of Ukraine has cut off supplies of wheat, corn and grain, and even sunflower seeds. His stranglehold on Europe’s natural gas supplies, plus the sabotage of a pipeline there, plus the boycott of Russian oil and gas means less energy for Europe and beyond. There are already slowdowns and production halts. Winter is only 60 days away and rationing for warmth is a definite possibility.

This is a global supply problem. How about this recent Wall Street Journal headline: “New England risks winter outages as gas supplies tighten. Grid officials warn of strains as the region competes with European countries for supplies of liquefied natural gas.”

Speaking of New England, climate change can wreak havoc on supplies, as you might find this Thanksgiving when your cranberry sauce is prohibitively expensive or even non-existent due to shortages. Why? The extreme drought in New England that Zachary Zobel, a scientist at the Woodwell Climate Research Center in Massachusetts, told Grist is the result of climate change. Climate change is disrupting the supply chain in many other ways and on a much larger scale.

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The chip shortage has also hit industries around the world — including auto, as GM CEO Mary Barra recently told me. But it’s not just the big corporations that are being hit by low chip inventories. My alma mater, Bowdoin College, recently encountered supply chain issues while attempting to complete some buildings.

“Due to chip shortages, the companies that make the controls for our AV systems have announced delivery delays of 12 to 24 months, and we are cautioned that networking equipment will be similarly challenged,” Michael Cato, chief information officer. “This complicates our planning in a number of ways, including timing financial budgets and navigating the multi-year timeline of construction projects.”

There could also be a shortage of manpower to complete these projects. The big resignation has hit many companies, but also the government. John McQuillan, CEO of Triumvirate Environmental, which handles commercial and hazardous waste, has a business that requires government approval — a process he says has slowed.

“We want to increase our processing capacity but you have a number of regulators who have resigned. The more experienced tend to be older. I have four or five cases pending in the United States, Canada and Mexico right now. And in all the cases I hear, it’s, ‘We’re understaffed, the key person has retired, or we’re waiting to hire someone for that position.’”

What do we have in our anti-inflation toolkit?

What can you do if you have a supply problem? Remember they are a significant cause of inflation and possibly recession. Ideally, the Federal Reserve can dampen inflation by raising interest rates. Unfortunately, the Fed’s traditional tools of raising interest rates and shrinking its balance sheet aim to dampen demand, not increase supply. This does not mean that politics and the private sector are helpless.

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Michael Spence, Nobel laureate in economics and professor emeritus at Stanford, writes in Project Syndicate that higher interest rates and liquidity starvation “threatening 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 calls for tariffs to be scrapped. He also says efforts must be made to improve productivity. “Many sectors – including the public sector – are lagging behind and concerns about the impact of automation on employment linger.”

In a recent report from the Center for American Progress, a liberal Washington think tank, chief economist Marc Jarsulic advocates expanding COVID-19 vaccine uptake to reduce labor and production shocks and provide additional support for increasing child and provide home care and reduce restrictions on working-age immigration to increase labor supply.

“Measures like these are not part of the standard anti-inflation toolkit, but given the changing economic environment, they should be,” says Jarsulic.

In fact, all of these supply issues could yield a silver lining, argues Financial Times columnist Rana Foroohar in her new book, Homecoming, The Path to Prosperity in a Post-Global World, noting: “The supply chain disruptions of the past few Years have now lasted longer than the combined oil embargoes of 1973-74 and 1979. This is not a blip, it is the new normal.”

The book argues that “a new age of economic localization will reunite place and prosperity. The location-based economy and a wave of technological innovation are now making it possible to keep operations, investments and prosperity closer to home, wherever that may be.”

We hope Foroohar wrote the Silver Lining playbook.

This article was published in a Saturday morning brief on October 22nd. Get the Morning Brief delivered straight to your inbox by 6:30am ET Monday through Friday. Subscribe to

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