About the author: Christopher Smart is the chief global strategist and director of the Barings Investment Institute.
It’s like a bad dream where the bad guy approaches with a big club and you can’t scream or run. Here comes Fed Chairman Jerome Powell pulling out the most fragile tools to provide price stability, and all we can do is sit back and wonder how painful it will be. The only uncertainty over the next 12 months is whether the economy will be bad or worse.
With an economic system that seems brutal and unpredictable, is there any wonder about the growth of political discontent? But there are, in fact, policies and procedures that can help reduce wild interest rates and support the Fed’s efforts to restore interest rates gently. Such strategies may not be effective at this time, because the fall of the stock is seen as the worst prices, but it reduces the collateral damage from future movements.
Job flexibility: Nimble companies are at the heart of America’s economic success, but managers are often quick to fire workers when they fall flat before they can bring them back when they want to come back. Selling low and buying high is the worst form of financial management, beyond damaging performance and culture. It is also compounding the problems of inflation where companies take every last pilot, dock worker, and waiter.
In contrast, European companies kept workers to do their jobs, offering them low wages and government subsidies. American managers ignore jobs they see as burdensome and wasteful, but the European approach has worked well for the problem. Unemployment was lower than in the US after the pandemic began and is now even lower despite more people working. Deflation also looked more likely, until the Russian invasion disrupted global markets.
Service delivery: With all the talk of post-pandemic retirements, America could also benefit from having a more flexible and flexible workforce. Women are now reclaiming their place in the workforce, after suffering a lot from layoffs and family sacrifices. But the current participation of 56.8% of women is less than countries like Canada, United Kingdom, and Norway. It’s a tough issue, but flexible policies and affordable child care can increase the number of workers and reduce high wage volatility.
Net migration, which has fallen sharply since 2016, may also help. Not only do immigrants add jobs, they are often more willing and able to move to where the job is needed, which helps reduce the demand for labor when businesses are desperate.
Financial goals: 2020’s staggering unemployment rate has also brought a huge boost to families, whether they want it or not. Many did, but the $2.5 trillion surplus sitting in US bank accounts led to inflation and consumer inflation not seen since the 1980s. As inflation continues to rise, the government is left with less tangible tools like gas tax holidays and lower interest rates to ease the pain while working against the Fed’s intended cooling.
Adequate management of incentives is difficult even without a problem, but the government needs better ways to provide aid. These include more modern Internal Revenue Service systems, improved ways to reach non-filers, and faster payment methods. If ledger technologies and digital dollars make money transfers easier and cheaper, returns can be improved and reduced as the recovery begins.
Oil notes: Long gone are the days when business schools celebrated the virtues of “just in time” service delivery, which made work easier and more profitable. The pandemic itself provided a wake-up call about the dangers of personal protective equipment, but the growing recovery shows that we need more warehouses stocked with everything from laptops to garden gnomes.
Obviously, companies can’t keep everything, but they can create reliable supply lines to avoid rising prices for scarce supplies. This does not mean moving all the factories to America, but it involves connecting many suppliers and taking more than one port.
Contest details: It’s easy to blame corporate greed for high prices, as the Biden administration has done, blaming meatpackers and oil drillers. However, inflation has increased in areas where there is less competition to keep prices low. Analysts have noted how growth in the aviation, mobile phone, and healthcare industries has kept prices high compared to European equivalents.
Fixing this requires complex changes in law and policy to strike a balance between coordination that makes it more efficient and competition that keeps prices down. Even a small change in the margin, however, makes the Fed’s battle easier.
Any changes that lead to fluctuations in the markets for goods and services can help stabilize prices through changes in supply chain. Any measure that reduces the Fed’s assets also reduces the collateral damage of bankruptcy and unemployment. None of these changes are automatic or easy, but without even trying, we’re just looking for a bad guy with this team.
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