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Supply Chain Problems Will Linger For Longer Than Washington Has Suggested

By News Creatives Authors , in Business , at November 8, 2021

Supply chain problems are in the news. Even President Biden talks about them and has sought relief by leaning on the Port of Los Angeles to operate round the clock, seven days a week. He claims – hopes might be a better word – that shortages will lift soon, before too many children face too much disappointment during the holiday season. He has assured the American people of early relief and when that happens the nation will also enjoy a break from inflationary pressures. He is wrong on both counts.  The inflation reflects more than supply chain problems, but even if it were just supply matters, they will persist longer than he claims they will.        

Though the nation’s shortages problems have a lot of moving parts, their root lies in the post-pandemic buying surge.  Consumers, having spent little during the lockdowns and quarantines and sometimes with generous government checks in hand, have ratcheted up buying.  Overall consumer spending has grown a powerful 11.6 percent over the past twelve months, a rate of increase only surpassed by the initial, post-strictures buying surge during the summer of 2020.  As of October, the most recent month for which data are available, consumers bought goods and services at an annual rate of about $16.5 trillion.  A year ago, that figure was a $14.7 trillion.  It should be easy to see how a demand jump of almost $2 trillion in a relatively short time has strained producers. The scramble to ramp up output after a period of lockdowns has filtered throughout the nation’s productive and shipping facilities. Delays, shortages, and rising prices are a result. 

Worker shortages have exacerbated these strains. Fears of infection have kept many people away from the workplace, while government policies have kept others at home. Until recently, especially generous unemployment benefits made it more profitable for some to avoid work, especially workers with childcare responsibilities, who collected not only generous benefits but also saved on childcare expenses. As of September, the combined effect of these influences had brought work participation to a mere 61.6 percent of the civilian population down from the pre-pandemic level of 63.5 percent. The percent change looks small, but it constitutes a 5.5 million decline in the numbers of people available for work.

Even though extra unemployment benefits have expired, other generous government benefits will likely keep some potential workers at home. Recently, vaccine mandates have had an additional and detrimental effect on worker participation. Some workers have quit their job rather than comply. Others have been fired or placed on leave. An absence of comprehensive data makes it hard to know exactly how much the mandates will further constrain the workforce. Washington State’s recent announcement that some 2,000 government workers have left because of the vaccine mandate can offer a guide. Using that proportion across other states and the businesses who have imposed mandates suggests that the imposition will keep a million more out of the workforce.  

Then there is the rise in strike activity. The latest data from Cornell University’s Labor Action Trackers, records almost 200 strikes so far in 2021, more than in years. It is hardly surprising. The worker shortage provides leverage for organized labor and the inflation provides workers ample motivation to seek higher wages. True, striking workers are still technically employed, but they are not producing. So far, the cumulative amount is small compared to other influences on labor availability, but whatever the justice of the strikes they have made their own contribution to the labor shortage.  

Meanwhile, the spring-summer rise in Covid infections has added its burden on supply chains. The Delta variant has slowed production only marginally in the United States and Europe, but it has had a powerful effect in Asia. China’s strict zero-tolerance policy quickly shut down factories and shipping centers at the first sign of renewed infections. Governments elsewhere in Asia have also had to shut down factories, notably in important exporting economies such as Vietnam, Malaysia, and Indonesia. Malaysia is an important source of computer chips for cars. All are an important source of both consumer goods, especially apparel and, thinking of the holidays, toys. These economies also export production inputs for domestic American firms. 

Perhaps most significant in this mélange of trouble is the world-wide energy shortage. The post-pandemic demand surge would have strained production potentials in the best of circumstances, but policy actions have made matters worse. President Biden has shut down the Keystone Pipeline and done what he can to stop the fracking revolution. Whatever the justification for his actions, they have contributed to a 14 percent drop in North American fossil fuel production. More, the absence of this production has returned monopoly-like power to OPEC and Russia, both of which have every incentive to constrain how much they pump and so keep the price of oil high.

Green initiatives have also contributed. These shut down coal mines and marginal supplies of oil and natural gas. Now with the surge in energy demands, it has become difficult if not impossible to restart the closed operations. It has proved even harder to ramp up alternatives, such as wind, solar, and hydro, to fill the energy supply gap. China has experienced an especially severe shortfall in electricity production. That may seem a long way from the United States, but the factory closures have constrained exports of products needed in this country. 

These are not the sort of problems that dissipate quickly. On the contrary, falling temperatures this winter will increase energy demands and intensify shortages that will likely filter through all production efforts. Even if President Biden were to reverse his positions on fracking and the Keystone Pipeline, it would take months for the associated energy sources to reach users.  It may turn out that Transportation Secretary Buttigieg’s forecast of no easing until mid 2022 is optimistic.

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