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Introduction: Forgotten Problems, Forgotten Solutions
Extraordinary times often warrant, when they do not demand, extraordinary measures. All the more so, it would seem, when the measures in question are not as extraordinary as first meets the eye.
That is the situation in which we now find ourselves. On the one hand, we face an inflation flare of a kind we’ve not seen for some forty years – in this case a challenge that divides into short term, medium term, and long term components.
On the other hand, we have ready means of addressing all three components of the challenge that will strike some as quite ‘out of the box,’ all while that impression is entirely attributable to our having forgotten how we addressed challenges like those of the present the last time we faced them.
It might be helpful, then, to do a little reminding and, then, proposing in light of the reminders.
The Shape of the Problem(s): Three Supply-Side Dysfunctions – Short, Medium and Long Term
Start with the right diagnosis of the challenges we must address. The crisis of early 2020 was different from that of 2008. The latter was a demand side crisis, while the former was a demand and supply side crisis. This meant it was necessary to counteract not only a sudden demand contraction, but also a sudden supply contraction.
Unfortunately, the previous administration ‘fought the previous war’ in 2020 – addressing, apart from vaccine production, only the demand side of our economy. That was better than nothing, but it resulted in much more money’s entering circulation in our economy with no corresponding boost in supplies – ‘too much money chasing too few goods.’
There is the proximate cause of the present inflation as it first manifest in 2021.
Meanwhile two additional supply side challenges, one of them very long term, the other quite new, have worsened the supply contraction of 2020.
First, for decades the US has been in effect giving its productive capacities away to other, low-wage economies. One of these – Xi’s China – has in consequence grown into a strategic rival. That in turn intensifies our long-term vulnerability both to supply chain disruptions and, more existentially, to productive decline.
Second, another strategic rival – Putin’s Russia, allied ‘without limits’ to Xi’s China – has now invaded Ukraine, the breadbasket and energy hub of all Europe. He has thereby imperiled the world’s food and energy supplies along with all the other productive inputs that Covid has denied us. This has brought great uncertainty and consequent price-volatility to markets for these essential supplies.
What we have, then, are (1) short term inflationary pressures rooted in Putin’s invasion of Ukraine, atop (2) medium term inflationary pressures rooted in Covid disruptions at home and abroad, atop (3) long term productive atrophy rooted in Clinton and Bush era relinquishment of American productive prowess to our rivals abroad.
A sensible approach to inflation must address all three of these parts of the inflation whole. All three are ‘supply-side’ problems, but their structures are different and hence there solutions are different as well. Happily, we have time-honored means of addressing all three.
For the Immediate Term: Stockpiling & Preemptive Buying Repurposed
Let’s start with the short term. Here the problem is less about supplies as such, which remain adequate to meet global demand, than about war-induced uncertainty of supplies – especially food and fuel – and hence price volatility with respect to them.
There are two mutually complementary, time-honored solutions to this short term problem – stockpiling and preemptive buying.
Stockpiling was first introduced in both China and the West during Biblical times – think Joseph and Pharaoh’s grain supplies. While it was originally developed to deal with supply fluctuations, it is also well suited to dealing with what in market economies are the closely related problem of short-term price fluctuations – not a problem in Han Dynasty China or the Egypt of the Pharaohs, which didn’t have commercial economies.
Preemptive buying (a.k.a. ‘preclusive purchasing’), used in wars immemorial but finding full flower during the Second World War, is stock-piling either (a) to deny supplies to an adversary, (b) to act in anticipation of possible future supply shocks and associated price spikes, or (c) both.
The US currently stockpiles petroleum, some medical equipment, and some strategic minerals. We also stockpile some agricultural products, and there are plans to stockpile more kinds of foods and fuels. Unfortunately, however, since the Second World War we have linked stockpiling to strategic buying and selling only a few times. It is as though, having forgotten inflation, we have forgotten these tools and their price-modulatory powers.
We maintain a Strategic Petroleum Reserve (SPR), for example, that is very well adapted to counteract price spikes even though formed originally to assure supply in the face of disruptions a la mid-70s OPEC. Currently, however, it releases reserves only sporadically (including once last November and twice since the Ukraine invasion) and replenishes them even less frequently.
Meanwhile, the nation maintains no grain reserves at all, even though (a) we once did, (b) many other nations – notably China – still do (even to the point of strategic ‘hoarding’), (c) the State of Washington has done so since our nation’s last price spikes, associated with QE, back in 2011, and (d) the Department of Agriculture (DOA) still has billions of pounds of cheeses (Swiss, Cheddar, American, etc.), purchased as a means of domestic agricultural price support, in caves throughout the country.
What we should do to address the shorter term, war-induced component of our inflation problem, then, is obvious. It is to rediscover, and adapt to present circumstances, the stockpiling and preemptive buying and selling methods we’ve used in the past but since forgotten.
First, assign the Department of Energy (DOE) and its Office of Fossil Energy and Carbon Management (OFECM) the task of quickly developing a plan for more frequent buying, selling, and exchanging of petroleum by the SPR. The SPR should use the same channels it does now, save now both (a) to purchase petroleum during all monthly price dips and (b) to resell during subsequent spikes.
Similar plans should be quickly developed for other essential fuels – including natural gas, which the SPR is already planning to stockpile; home heating oil, which the some northern states’ Northeast Home Heating Oil Reserve stockpiles now; and any other essential fuels. The same should be done in respect of rare earth minerals – the stuff of which electric vehicles (EVs) and batteries are made, as demand is already growing for these and China, of course, is already hoarding accordingly.
Second, the President should assign a counterpart task to the Department of Agriculture – in essence, an SPR for all essential grains and other storable foodstuffs that enter into national food supplies. Here too the problem we face is no fundamental shortage of national or global food supplies, but rather a Putin-wrought uncertainty and associated price volatility.
As DOE and its SPR will do with fuels, then, USDA should do with foodstuffs, purchasing essential food products on the domestic and global markets several times a month during the frequent significant price dips that characterize current markets for wheat, corn, other grains and dairy and resell cheaply to Americans. The government should contract with private wholesalers for distribution, as the USDA has done for decades to avoid unnecessary storage or logistical challenges.
It is important to understand that this is not a matter of being ‘prescriptive’ or trying to buck market ‘fundamentals’ through ‘price controls.’ For again, it is only uncertainty and associated short-term (even weekly, when not daily or hourly) price swings that are the source of this component of the inflation challenge right now. Buying during the dips will both neutralize that volatility and lock-in low prices for working Americans – we’ll be engaging in a familiar practice that actuaries, derivatives traders and economists call ‘smoothing,’ or ‘collaring.’
Even orthodox economists understand this, along with the fact that only the federal government is ‘big’ enough to do this kind of smoothing. J.M. Keynes is sometimes quoted as saying that ‘the markets can remain irrational longer than you can remain solvent.’ That is true of all private sector actors, but not of the US government.
For the Medium Term: Military Delivery and Logistics
Turning now to the medium term, here it’s the delivery of (warehoused) supplies that is the problem, for domestic production of what we still produced circa 2020 has resumed with the waning of Covid. And here too we can lever the strengths of our public sector to help boost the private sector as we crank our economy back into motion.
First, the National Guard and/or other military transport units, working with private sector storage industry and the Departments of Commerce and Transportation, can handle current trucker shortages and attendant warehouse overflows. This they can do by mapping logistics and transporting goods till we have adequate private sector labor.
Second, we can also temporarily subsidize agricultural and delivery labor to boost supplies of the same, since these are seasonably variable (agricultural labor at harvest times, transport labor before holidays). We can do so till stored or stacked inventories clear or till transport firms and agribusinesses pay labor enough to attract them back into their industries. (Watching military deliveries proceed would seem likely before long to look much like ‘money on the table.’)
For the Long Term: Making America Make Again
Turning finally to the longer term, it is crucial – indeed a matter of national security – that we reverse the long trend of the 1990s and early 2000s pursuant to which America surrendered its productive powers in the name of an illusory “post-industrial” economy. We know now that this was a foolish mistake, and that America must become a Republic of Producers again even for its tech and service economies to flourish.
This will require a coordinated effort on the part of government, business, and labor alike, just as our spectacularly successful World War II mobilization did. It is for this reason that I have in these pages many times called for the establishment of a National Development Council, patterned after the War Industries Board and War Production Board of the two World Wars, to coordinate a rapid doubling or tripling of the nation’s productive capacity in the industries of today and tomorrow.
Like its predecessors, the Council will include relevant Cabinet officials, state and local government leaders, and leaders of private sector industry and organized labor. Also like its predecessors, it will have its own financing arm – the already existing Federal Financing Bank (FFB) within Treasury, suitably upgraded to function much as – though far more accountably than – did the World War I era War Finance Corporation (WFC) and the World War II era Reconstruction Finance Corporation (RFC).
With that structure in place, we will be repositioned to repurpose many of the modes of public and private, local and national, labor and capital collaboration that made such astonishing successes of our earlier mobilizations – things like the ‘GoCo’ (government-owned, company-operated) method of quick factory construction, expeditious public construction of homes and schools for moving workers and their families, rapid public extensions of power and transport networks, and the like.
The name of the game must be each sector doing what it does best, with all sectors working together, as Americans, in this time of great peril and great opportunity.
Conclusion: Problems Solved, Productive Republic Recovered
As we celebrate, this week, the anniversary of the end of the Second World War in Europe even while Vladimir Putin pursues another such war, there could be no more auspicious time than the present to recapture that great American model – the World Wars I & II model – of public-private collaboration in the cause of world-class production and national security.
That is how we’ll end inflation from short term to long term. The key to our best future lies in our near-past, precisely because that’s the last time we saw times like our present. Let’s start the wheels turning right now.