Supply incentives against inflation and recession

Even with rising interest rates, a global recession can be avoided if measures are taken to support the proposal to curb inflation, suggests Nobel laureate in economics, Stanford professor emeritus Michael Spence. Current inflation is dominated by supply rather than demand factors, and its roots are much deeper than it seems, he lists:

• 1) there is no longer an excess of labor and capacity caused by the integration of developing economies into the global economy in recent decades, which means that the relative prices of many goods will rise;

• 2) in response to increased shocks and geopolitical tensions, supply chains are diversifying and localizing – more sustainable globalization costs more and prices will reflect this;

• 3) 75% of the world's GDP is produced in countries with an aging population - the labor force is shrinking, and productivity gains to compensate for this have not been seen for two decades.

Measures to support price stability should, first, reverse the "creeping protectionism" - trade and investment are rapidly expanding supply in response to rising global demand, but trade barriers have only grown in recent years.

Second, rebalancing labor markets where shortages have become the norm will require higher wages, even for jobs with enough workers. This will cause inflationary pressure for a while - but with excess demand, it will increase constantly.

Third, the digital transformation of economies needs to be accelerated – digital technologies, along with wage increases, are crucial for productivity growth.

These measures should be applied at the public, private and international levels. Otherwise, central banks will have to deal with inflation alone, and the only effective way for them to do this is to reduce demand, which could lead to a recession, Spence concludes.

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Review of economic blogs from Econs.

Grigory Bazhenov 2022-07-04