斯蒂芬·罗奇：供应链问题短期难解，美联储需积极调整政策利率以应对通胀
2018年，斯蒂芬·罗奇在CF40国际交流晚餐会上发表演讲
英文实录
Stephen Roach：19 months ago I wrote an article in the Financial Times titled ‘A 1970s-style stagflation is one broken supply chain away.’ That was 19 months ago, and the supply chain has clearly broken.
The fracture in the global supply chains was, in retrospect, something we could have seen. Heading into the pandemic, supply chains were already stretched to the maximum. There was very little slack built into global value chains. So, it wouldn’t take much to cause a break, and the break came not from the supply chain itself, but from the enormous bounce-back in post-lockdown aggregate demand that occurred in the spring of 2020.
So, it was an accident waiting to happen; it’s one that I had worried about well before the current problems have now arisen. The big surprise to me came from the explosive bounce back in aggregate demand, and the supply chains gave way very quickly in the summer of 2020. The situation has gone from bad to worse since then.
In essence, it was a shaky, fragile supply side that was coming into sharp conflict with an extraordinary bounce back post-lockdown in global demand for goods.
2.What factors do you think have caused the current imbalance between supply and demand? In fact, shortly after the outbreak of the Covid-19 pandemic, supply shortages already surfaced. In your opinion, is the cause of the current supply chain crisis different from that of the previous round? What are the structural problems behind?
Stephen Roach：To me the most relevant previous example is the supply disruptions of the early 1970s. That set the stage for a very, very serious inflation problem in the United States and around the world. I had just come out of the graduate school and started working then as an economist at the US Federal Reserve. The Federal Reserve under the chairmanship of Arthur Burns made a series of major analytical mistakes in dismissing supply shocks as transitory and as one of ‘special developments.’
It started with the quadrupling of world oil prices after the Arab oil embargo of late 1973. At the time, I was working with the research team at the Fed that was charged with monitoring the impacts of these disruptions on the US economy. Chairman Burns said: “Take out the energy component of the CPI, because it does not really relate to monetary policy.” So, we did that. And then a few months later, there was a food shock, with soaring food prices, and Arthur Burns called us into his office and said: “I’ve figured out that this is due to El Niño weather effects that are having an adverse impact on anchovies, a fish of the coast of Peru, that goes into the creation of feedstocks, the food for cattle and pork in the United States. I don’t think monetary policy should respond to El Niño weather effects that are beyond our control. So, take that out of the CPI as well.”
At that point, we objected. We told the Fed Chairman, you can’t take food and energy out. He said, if you don’t do it, I will find somebody who will. So we didn’t want to lose our jobs, and we did that. Unwittingly,we created the first core CPI. We took food and energy out and Burns was pleased. A few months later, he had a problem with used cars, home ownership, women’s jewelry, children’s toys, mobile homes, and he kept asking us to take more and more out of the CPI until finally in early 1975 we have taken maybe 60% out of the CPI, and the remainder was still going up far too sharply. Only at that point, did Burns concede that there was a serious inflation problem.
I tell you the story because the first response of today’s Federal Reserve is to view the current outbreak of sharp price increases - initially in lumber and then in energy and cars (both new and used) – as transitory, temporary — one-off developments, reflecting Covid. I was very critical of that interpretation when a year ago the Fed dismissed these problems when they first became evident.
Chairman Powell has finally conceded that he was wrong. He no longer believes that these are transitory developments that should not be addressed by monetary policy. I commend him for admitting this mistake. Treasury Secretary Janet Yellen, former Chair of the Fed, has said the same thing in front of the U.S. Congress very recently.
This is an important development and represents a major rethinking of monetary policy. The initial response of the central bank to call these now pervasive price increases temporary or transitory due purely to a Covid-related shock is wrong. The inflation we are seeing right now has actionable consequences for monetary policies that need to be addressed sooner rather than later. I commend the Fed for finally coming around to that point of view.
Regarding the structural issues, it is important to go back to the supply-demand imbalance. We now know, with the benefit of a hindsight, that supply was adequate only for a low-growth economy. Supply chains stress efficiencies, they don’t have a lot of slack built into them. What happened was we didn’t get a slow-growth rebound as we did in the aftermath of the global financial crisis. If we had a slow-growth recovery this time as we did in the aftermath of the global financial crisis, the supply side would have held, and we would not have had this inflation problem. But we didn’t get that.
Again, I’ll go back to the extraordinary rapid rebound in the economy in the aftermath of the lockdown. Many, including myself, did not think that the economy would come back as sharply as it did. The Federal Reserve certainly did not, which is why they were very aggressive in providing monetary stimulus. The problem with that approach is that the combination of extraordinary monetary stimulus — sharp expansion of the balance sheet while cutting interest rates immediately to zero again — was reinforced by the end of the lockdown.
A lockdown basically shuts down your economy. You saw that in China with a record decline in GDP in Q1, 2020, but when you go from a complete lockdown to just a partial reopening, that’s a big surge in economic growth. If the central bank is providing aggressive monetary stimulus at a time of surging economic growth refelecting the end of the lockdown, then you get an explosive growth in aggregate demand. That then exacerbates the pre-existing problems on the supply side that I warned of 19 months ago.
3. Freight costs tracked by the Baltic Exchange Dry index have fallen by about one-third in the past month. Moreover, the US government has asked the Ports of Los Angeles and Long Beach to operate 24/7. Do you think the supply chain crisis will be resolved soon? Or, how long do you expect the crisis to last?
Stephen Roach：I don’t think it’s going to be resolved soon. If economic growth slows a lot because of this new Omicron variant of Covid, then we will see some moderation of inflationary pressures. I don’t know the full extent of the new variant, but from everything I’ve read, it’s not likely to exact a sharp curtailment in economic activity like the first wave of Covid-19 did or even the echo effects of the Delta variant. But that remains to be seen. It’s hard to know if that’s going to occur.
If there are no Covid-related major disruptions to aggregate demand, then even if economic growth slows somewhat – you’ve already seen a slowing in China – the level of aggregate demand is still very high, and it’s the level of aggregate demand relative to the level of aggregate supply that is out of balance in causing the current outbreak of inflationary pressures. It’s interesting that you haven’t seen nearly as much of that in China as has been the case in the United States and in Europe and elsewhere around the world. But it’s clearly a problem here with our CPI now running slightly above a 6% y-o-y rate.
4. The US inflation hit a 20-year high in October. To what extent have supply chain difficulties pushed up inflation? How do you see the inflation trend?
Stephen Roach：I’ve already covered that. The fragile supply chain is a necessary but not sufficient condition for this rapid inflation. I think inflation is going to stay well above the Fed’s 2 percent target for easily the next year, and possibly longer. In my opinion, that requires the Fed to be much more aggressive in going after inflationary pressures than it initially signaled would be the case.
I’ve written and followed up with a series of articles arguing that the Fed has the wrong approach to deal with this inflation. It’s addressing what it now admits belatedly as inflation surprise by tapering its balance sheet. I think that’s an ineffective tool to deal with an outbreak of pervasive and enduring inflationary pressures.
It’s very debatable as to what type of impact the balance sheet has on anything other than financial assets. The Fed should be focused on slowing the growth rate of aggregate demand, and it needs increases in real interest rates to do that. Based on the latest CPI, the Federal funds rate adjusted for inflation is -6%. I went back and looked at the lowest the real Federal funds rate was in the early 1970s and it was -5%. If the Fed made a huge mistake back then, it now risks making a comparable mistake today. It needs to be much more aggressive in dealing with inflation through the policy rate, rather than the balance sheet.
5. According to the U.S. Bureau of Labor Statistics, in October, the average hourly earnings rose 4.9% year-on-year, and the unemployment rate fell to 4.6%. Some think that the ongoing wage hike is among the main drivers of inflation, and the Phillips curve has been “awakened” with its slope in the past four quarters significantly steeper than in the decade before COVID-19 broke out. Do you share this view?
Stephen Roach：I hesitate to say that the current inflationary outbreak is driven by a surge in labor cost. If wage inflation continues at this current higher rate, then it’s quite possible that the labor cost’s contribution to inflation will increase. With the sharply falling unemployment rate and unprecedentedly large number of workers dropping out of the labor force, changing jobs, and resigning their positions, there are significant labor shortages in many key industries, and that certainly can lead to more pervasive cost pressures that would exacerbate those Covid-related price shocks that we’ve seen thus far.
6. Is wage inflation transitory, or will it have sustained impact on US inflation expectations? Do you think it’s worth heightened attention? Will the Fed adjust its monetary policies in response?
Stephen Roach：The Fed is very mindful of the linkage between wages and inflation, and they would add in – as would I – that the key is to focus on productivity-adjusted compensation, or unit labor costs.
Because if wages are going up at the same pace as productivity, then it’s really not a problem. But productivity has been a problem in the U.S. for the last 15 years. Yes, we have new ways of doing things today — like the zoom interview we are currently conducting — that might be contributing to faster productivity growth. But these developments are not pervasive enough to offset the surging wages that are coming from sharply plunging unemployment rate and the massive resignations that have reduced the supply of labor.
So, the Fed is correct in focusing on the interplay between the labor market and Covid-related supply-demand imbalances that we addressed earlier. But the bottom line is whether it’s the price shocks that have gone from temporary and sporadic to more enduring and pervasive, or whether it’s the wage pressures as an outgrowth of the sharply falling unemployment rate, they are all pointing in the same direction. That reinforces the need for the Fed to be more disciplined in tightening monetary policy.
Our monetary policy is far too easy right now. We should not be running a nominal federal funds rate that is zero when inflation is as high as it is and when labor costs are rising as rapidly as they are. If that continues, that will be a major policy mistake.
7. Other countries and regions such as the UK and Europe are also having supply chain issues. Are their problems the same as those faced by the US? What are the choke points in global supply chains?
Stephen Roach：It’s not a coincidence that we’ve seen similar impacts in Europe and the UK. They benefit in a similar way from the global dispersion of production and assembly through global value chains. They’ve also experienced fairly rapid post-lockdown recoveries – less so for Europe than the U.K. but they have a similar post-lockdown mismatch between supply and demand that has been evident in the U.S.
Moreover, their composition of aggregate demand is very similar to that of the U.S. where the post-lockdown bounce-back in aggregate demand has been concentrated in consumer durable goods, which have literally gone up far more rapidly in this post-lockdown period than has ever been the case in the past.
I wrote an article about this several months ago (“Hitting the Limits of Pent-Up Demand” in February 2021). I’ve studied consumer durables ever since I was in graduate school. The models we have long used to understand the behavior of consumer durables are called stock-adjustment models. They reflect the fact that durable goods last for a long period of time, and when you buy a lot of them in a short period of time, then you usually don’t buy many more over the succeeding period because you just don’t need to do that. You don’t need to keep buying a new car, for example. You drive your car for several years until it wears out and then you buy a new one. The same with appliances or furniture in your house, etc. So, we’ve been surprised by the ongoing surge of long-lasting durable goods.
To a large extent, the rebound in demand in China has been less focused on durable consumer goods than is the case in the US, the UK and Europe. Maybe that’s why your CPI price pressures are less of a problem than ours.
On the choke points in global supply chains. Imagine a global supply chain which draws together components from all over the world and assembles them in factories in China and East Asia. The key ingredient you need and the key process for it to run smoothly is a very efficient transportation system. The big choke point globally has been on the shipping end where we don’t have enough capacity in our container shipping industry to satisfy the aggregate demand. In particular, we don’t have enough slack in the port facilities in the U.S. especially in the west coast but also south and to some extent the east coast. The same is true of Europe and the UK. For the land-based transportation, the trucking industry is also another choke point. We don’t have enough drivers.
So, the supply chains work best when the transportation system functions smoothly and seamlessly. And they are not doing that now.
And, of course, there is also a major choke point in semiconductors, with a lack of supply. That’s had a major impact on virtually all sophisticated goods with electronic components, from motor vehicles to appliances.
8. In your opinion, how can the above-mentioned difficulties be addressed / how to solve the supply chain crisis facing the world?
Stephen Roach：The reality of the supply chain dilemma is that there is no easy quick fix. It takes a lot of time to alter supply chains. I have studied supply chains very carefully. In his former capacity at Apple before he became CEO, Tim Cook was in charge of Apple’s supply chain. It took him 15 years to create this very efficient extraordinary supply chain that produces iPhones and computers.
Research shows that supply chains are very sticky, which means they don’t change easily. It’s very hard to alter them. There have been a lot political commentary saying we don’t need supply chain, just bring everything back home. This is the argument for moving from offshoring to what has been called reshoring, bringing back the offshore production. It’s not that easy to do. It’s going to take a lot of time.
The Biden administration, 5 months ago, released a large report on addressing American supply chain problems. They offered a lot of constructive actions, building more capacity, training workers, improving our transportation system, but none of these recommendations can be implemented quickly. So, the idea that we can assemble a taskforce and come up with a quick recipe to address the supply chain is probably a mistake. We’re going to be living this for quite some time.
As I look back on this period, I think we went much too far with the efficiency benefits of supply chains. We’ve been in a slow-growth period since the GFC. Growth was relatively slow in the years before that, too. So, we’ve gotten used to slow growth. When you have a slow-growth environment, you can run your supply chains in a very tight way. You don’t have to allow for major surges in demand. That was a mistake we made.
In the future, we need to build more slack in the global supply chain. This will be costly, because the benefits to consumers and businesses are that very tightly-run supply chains cut costs and allow you to purchase components and goods at a cheaper price. So if you build in a contingency buffer to guard against the types of demand surges that we’ve seen recently, that will cut into the efficiency dividend that we’ve gotten accustomed to from global supply chains.
The lesson here is we do not have enough slack built into our global supply chains, and we don’t have enough flexibility as a result. We need to think about that key consideration more carefully in the years ahead.
9. How will the supply chain crisis affect the global economy? And how to deal with the potential effects?
Stephen Roach：The world has clearly come a long way in embracing global value chains in the last 20 years. It’s very difficult for me to think that we are going to move away from global value/supply chains in the years ahead. The world is very tightly integrated, so we’ve got to come up with a better way to run this integrated world.
We made big mistakes in the years before the global financial crisis, but you can hardly blame policymakers at least the economic policymakers for a once-in-a-hundred-years pandemic. That’s a pretty extraordinary shock which will be with us in one form or another for probably some time to come. I’m not an epidemiologist, but that’s the standard view. The latest Omicron variant is just another indication of the staying power of the virus.
The global economy faces some major challenges in addressing these types of problems that underscore fragility to its network of interdependencies as underpinned by global value chains. This will send a lot of strategists, policymakers and researchers back to the drawing board to rethink the role of value chains in an interdependent world and how to manage them better going forward.
10. In case of a massive outbreak of Omicron dealing further blows to the economy, how much room is there left for U.S. policymakers to respond?
Stephen Roach：On the worst-case basis, if Omicron becomes a very serious variant that is highly transmissible and is not responsive to the extraordinary vaccines we have, that’ll be a major blow to the U.S. and the global economy. There’s no question about that.
The market over the last several days has been somewhat worried about that. The experts right now don’t know a lot about it, and they are hopeful that it’s not going be that disastrous. But in the event that they are wrong, we certainly don’t have much policy ammunition to deal with another major shock.
The balance sheet of the Federal Reserve has expanded too excessively, the policy interest rates are at zero, our fiscal deficits are at record settings. We could continue to print money and the central bank can continue to inject liquidity in the financial markets, and we could embark on another spending program. But there are long-term consequences of doing that that we have yet to address, mainly because interest rates have been held at zero for so long.
In a period where inflation is moving up, I think that’s a very challenging period to maintain interest rates at the zero bound. That raises even deeper questions about the potential extent of further fiscal stimulus in this environment.
So, the short answer is we don’t have too much ammunition left.
Additional comment:
I’m struck by the comparisons with the early 1970s, because that’s when I started working at the Fed as a professional economist and watched the way the Fed made serious mistakes in diagnosing the problem. The current situation is different. There are a lot of similarities in terms of the sudden outbreak of price pressures. But one thing important to know is that while we had horrible inflation problem in the ‘70s and early ‘80s, that inflation outbreak came before we had supply chains. Supply chains were not a factor back then, and they are now. That adds a different wrinkle to the comparison that’s important to think about in diagnosing the source of the problem and the potential cure for it. But this is not the 1970s, but there are some similarities that we need to mindful of. And there are some differences like I just eluded to that we need to carefully think about as well.