Managing the breakdown of global supply chains
Dr. Tenpao Lee, Economist and Professor Emeritus at Niagara University, believes the U.S. economy is moving to an era of so-called “stagflation,” a state that occurred in 1973/74 featuring inflation, an elevated unemployment rate and lower GDP (no/minimal economic growth). But, the downturn may not be as drastic as it was back then due to some differing conditions.
Dr. Lee attributes the current downturn to the breakdown of global supply chains caused by the COVID-19 pandemic. Specifically, he says, the aggregate supply (AS) curve shifted to the left significantly more than the aggregate demand (AD) curve shifted to the right. “When AS shifts to the left, prices will rise (inflation), production will slow (lower GDP), and jobs will begin to be scarce (higher unemployment),” said Dr. Lee. “Historically, this happened in the early 70’s, during the Nixon and Ford administrations and the then-famous ‘energy crisis.’”
“Now, instead of an energy crisis, we’ve experienced a pandemic that made production more expensive due social distancing and global supply chain breakdowns,” continued Dr. Lee. “That has caused the AS to shift to the left significantly. He went on to say that today differs, however, as monetary and fiscal policies will shift aggregate demand to the right, bringing escalated prices (inflation), but also increased GDP (economic growth) and lower unemployment. The overall GDP effect will be determined by whether aggregate supply shifts more or less than the AD shifts.
“I think the AS has shifted to the left more than the AD has shifted to the right during the pandemic. Nevertheless, we will have inflation, for sure, as both AS and AD react to inflation.”
Inflation & QE
According to Dr. Lee, prior to the pandemic, we did not have inflation, even with QE (quantitative easing or increased money supply), fiscal stimulus programs, and as aggregate demand shifted to the right (higher prices and higher GDP). The main reason for that was that supply also shifted to the right (lower prices and higher GDP) simultaneously due to a healthy global economy and technological development.
Dr. Lee believes there is no quick solution to solve the problem of “stagflation,” unless the pandemic is contained, recognizing the need to rebuild the global supply chains, even as the pandemic continues. In other words, government policies should emphasize the aggregate supply side (neo-classical approach to expand aggregate supply and the capacity of the economy via technological development), rather than aggregate demand, a Keyensian approach to expand aggregate demand via monetary and fiscal policies.
“For example, aggregate supply could be expanded using a neoclassical approach like accelerating productivity via technological development by incorporating information technology as a part of the infrastructure, such as 5G.”