As inflation badly cramps the economy and the Biden administration’s political prospects, the president looks like he might tap out: After a late May meeting, Biden essentially deferred to the Federal Reserve to tame rising prices.
Observers trying to diagnose the cause of inflation have mostly focused on the start of the pandemic in early 2020, pointing to excessive stimulus, supply-chain chaos, public-health policy, and corporate profiteering as possible factors. But the roots of our current inflation go back further than the past two years. To understand why we’re jammed up now, we have to look to the 2008 financial crisis and subsequent economic recovery. The failure to adequately rebuild from that crash left the US with a less resilient economy — one that is now struggling to keep up with the demand of an adequate post-crisis response.
In other words, don’t blame Biden for the inflation we’re suffering now. Blame Barack Obama.
For years before the pandemic, consumers’ incomes stagnated and their spending was anemic. In response, deliberately shed the physical capacity — stores, factories, logistics infrastructure — necessary to keep up with an economic boom. That came back to bite the US following the pandemic. Encouragingly, the American economy is now building up the resilience it failed to develop for years. But this response could be threatened by an excessively austere response to rising prices, imperiling our ability to make the necessary inflation-fighting investments.
“Imagine you haven’t been to the gym in two years. Then one day you work out as hard as you can, and the next morning you are so stiff and so sore you can barely get out of bed,” Alex Williams, a research analyst at the think tank Employ America, said. “Is the correct response to never go to the gym again, or to keep going back to the gym to build up your strength?”
The economy before the pandemic
By now it’s clear that the federal response to the last major economic crisis fell short. The Obama administration, wary of sparking inflation or political sticker shock, deliberately undershot the economy’s needs with a post-2008 stimulus that was smaller than it should have been. Then, following the 2010 midterm-election losses, the administration pivoted to cutting the deficit instead of making Americans financially whole. The
did its best to juice growth by keeping interest rates near zero percent, but with no fiscal help, the economy never really experienced a boom. This was the era of the “secular stagnation” hypothesis: The US and its Western allies had simply lost their growth mojo and would no longer be able to generate healthy demand.
Years of feeble job growth, worsening inequality, and weak consumer demand influenced the long-term decision-making of investors and executives. Since the demand outlook appeared lacking for years after the
, it didn’t make sense to pour a lot of money into costly capital investments, or capex, because those would only pay off in a high-growth environment. (There’s no reason for, say, a shoe manufacturer to build a new factory, hire more workers, and stock up on inventory unless they think future demand is going to vastly outstrip what they’re able to produce now.) And in the years After 2008, a boom in demand didn’t appear to be coming anytime soon. In an economy like that, capitalists look to compete on margins: cutting inventory, buying back their own stock, and deferring new equipment purchases. As Reuters put it in a 2014 article, corporate America in the late 2000s subscribed to an ethos of “anything but capex.” During the Great Recession, companies slashed $300 billion in planned capital investments, and by 2015 that spending still hadn’t been replaced.
“We’d been building up efficiency by trying to strip away capital investment, which is good for firms because capital investment is expensive,” Yakov Feygin, the associate director of the Future of Capitalism program at the Berggruen Institute think tank, said.
While the underinvestment in physical capacity after 2008 was particularly pronounced, this wasn’t the first time the recovery from a recession underwhelmed when it came to supply chains. Over the past 30 years, America has experienced a number of capacity-less recoveries. According to Federal Reserve data, industrial capacity utilization (how much of our ability to make stuff we actually use) flatlined in the 1990s and has dropped after each recession since.
Past parsimony leads to present pain
The cost-cutting and lack of investment in capacity left many businesses and industries are unable to adjust to the pandemic’s economic disruptions. As Williams of Employ America wrote in a May report, “US consumption and inflation are tightly linked to the constraints stemming from plant and equipment, which are often primarily located or manufactured overseas and subject to their own logistics constraints. , there is little ability to meet demand by redirecting production to domestic capacity.” When companies spend decades refusing to invest in the infrastructure that allows them to make more stuff and their old equipment suddenly needs to make a lot more stuff, things are going to break down.
Williams examined a few crucial sectors that have been the source of a disproportionate amount of inflation. Take semiconductor chips, which are a key component in the production of electronics — from cars to smartwatches. The US was a leading manufacturer of the chips until the early 2000s. But after the dot-com bust, Williams notes, the US outsourced the making of chips to East Asia instead of trying to rebuild its once world-leading industrial base. The result was an “intentional” loss of physical capacity.
Likewise, after the 2008 housing bust, the federal government largely left the businesses that support the housing market out in the cold. American companies that produce the subcomponents that go into a completed home — plumbing, windows, wood products — hemorrhaged demand and started cutting costs. As with semiconductors, much of this manufacturing moved to East Asia. Even as the housing market recovered throughout the 2010s, producers on this side of the Pacific held back on rebuilding their productive capacity for fear that the vulnerable economic recovery could slip back into another downturn.
Domestic energy production also suffered from a dearth of government support. While the Obama administration fostered a fracking boom in the early 2010s that attracted lots of speculative capital, Washington did little to support domestic producers in the face of a retaliatory production surge from OPEC and a subsequent oil-price collapse. As a result, many of the newly minted American frackers, and the backing investors of them, never reached profitability during the original so-called boom. When oil prices dropped, these producers didn’t have the buffer and went bust. Now, even as oil prices soar, producers and investors scarred by the losses of the Obama era are reluctant to invest in more energy production out of fear that history will repeat itself.
The global economy — and America in particular — seems to be in a very different economic regime, where rising consumer demand means widespread economic growth over the long-term is back on the cards. But it takes a lot of time to build out a new domestic manufacturing base to keep up with this demand, even for products as simple as sink pipes (never mind complex items like semiconductors), and producers living with the wounds of the last cycle may be reasonably concerned that by the time their new plants come online, the Biden boom may have gone bust. Hence the focus on “capital discipline”: Fear of future overcapacity leads to present under-capacity, skyrocketing prices, and shortages.
Breaking the boom-bust cycle to stabilize prices
The gap between supply and demand that we’ve seen during the pandemic isn’t a new phenomena. Throughout the history of capitalism, we have rocked between shortages and gluts of physical stuff, with volatile impacts on prices. Economists and policymakers have wrestled with ways to calm this recurring dynamic for a long time. But for a variety of complicated reasons, they have rarely put stabilizing mechanisms into practice.
At the 1944 Bretton Woods conference to establish an international structure for economic governance, John Maynard Keynes proposed a Commodity Control organization that would operate institutions like the World Bank and the alongside International Monetary Fund. As Keynes had been saying since the 1920s, private economic players lack the storage capacity or financial ability to sit on excess inventory of oil, grain, and other commodities for years until prices rebound. Instead, they cut production, which leads to later
. So at the post-World War II conference, Keynes proposed an international authority that would maintain reserves of volatile commodities and would buy up these materials when prices were low on the direct market, keeping producers busy. When prices soared, these reserves would then release their accumulated stores. Similarly, during the last major bout of inflation in the 1970s, the Carter administration proposal proposals for a similar concept. The idea was to not only stabilize the supplies of various commodities that were running short at the time, but also to improve relations between the industrialized global North and the commodity-producing global South. But neither Keynes’ idea nor the Carter administration’s plan came to pass.
The one-two punch of COVID-19 and the war in Ukraine may finally push similar proposals into reality. In the European Union, member states have set up a voluntary energy buyer’s cartel, a sort of buy-side OPEC. The consortium will drive harder bargains with energy producers enjoying record margins and ensure that the continent has ample gas supplies in long-term storage. The Biden administration has made moves in this direction as well. This spring, it announced that it was releasing millions of barrels of oil from the Strategic Petroleum Reserve — a stockpile of oil held by the government and used in times of severe supply shortages — and promising to buy back 60 million barrels in the fall. That latter part is crucial: Echoing a plan originally proposed by Employ America, the buyback signals to producers that the federal government will guarantee future sales, encouraging increased production instead of short-term profiteering amid the shortage.
Stable prices allow firms and investors to plan for the longer term, making growth possible. It’s hard to see in our current moment, but to build an economy that can keep prices from getting out of whack during supply shocks and booms, policymakers need to ensure that demand keeps up during economic lulls to prevent capacity from deteriorating. The Obama administration’s economic team — including many economists now heaping criticism on Biden — mostly abdicated this area of economic management during the last downturn, running the economy cool and depriving the US of the ability to make the things it needs. And that’s why the president is now paying the price for the skinflint policies of his old boss.
Alex Yablon is a Brooklyn-based journalist who writes about politics and policy. His writing has appeared in The New Republic, Slate, Foreign Policy, Jewish Currents, and other outlets. He has worked for Netflix’s Patriot Act and The Trace.