Supply or demand, chicken or egg? Which is the cause of the current surge in dollar prices, and prices worldwide? Should we fault the COVID-19 pandemic, which has interrupted production of crucial goods and provision of vital services, leading to planetary shortages of labor and capital? Or should we fault the responses of the US Treasury and the Federal Reserve, those engines of global demand switched into high gear by the pandemic, pumping five trillion dollars of new money into the hands of corporations, banks, and consumers?
The question is stupid. But it is also, like most stupid questions, misleading, since those asking it are less concerned with theory of inflation than war of position. Deficit worriers and debt apocalyptics want to use the moment to kill Biden’s spending plans, and must therefore argue demand; those whose political fortunes are premised on an expansion of government social spending must, in their turn, argue supply.
Debates about inflation are always political because the US Treasury and the Federal Reserve have powerful tools to control a rising price level, unlike deflation. Since they can, those who suffer from inflation expect they should do so. Lowering the interest rate in the midst of a deflationary crisis, like 2008, or early 2020, may or may not spur investment and restore prosperity, but there is little doubt that raising the interest rate can kill inflation directly, by putting the economy into recession. The Federal Reserve can’t always end a recession, in other words, but it could start one at any time, as occurred the last time the US economy saw sustained inflation, in the 1970s. Then, with the Reagan administration elected in a landslide victory with a mandate to control inflation, Paul Volcker raised the prime rate from 11 to 20%, introducing the severe recession of 1981 and kicking off a decades-long debt crisis in the developing world.
The inflation crisis of the late 1970s is seen in most economic histories to have spelled the end of so-called Keynesianism and the beginning of neoliberalism. Reagan and Thatcher were elected with mandates to control inflation and restore growth, with pledges to attack the declared sources of the economy’s ills: unions, social spending, rebellious Arabs. The combination, then, of economic stagnation, high unemployment, and consumer good inflation stood as a repudiation of existing economic policies. Now, again, inflation emerges in a moment of political-economic incoherence, with its own contradictions. The ideology of the Reagan Revolution—monetarism—staggers on, indicated by the Fed’s announcement that they intend to raise rates quickly and repeatedly in 2022. But it exists cheek-by-jowl with an augmented asset Keynesianism, assisted by a battery of strange new cannons designed to blast paper, bond, and asset markets with different kinds of money. Such interventions are now accepted, tacitly or not, as a necessary part of the repertoire of central bank tactics in an era of depressed growth, as we have seen since at least 2008. The notion that so-called Keynesianism went away—if by that we mean an economy held up by government spending—is mostly therefore a myth. Rather, the so-called neoliberal era has witnessed a kind of military or corporate Keynesianism. Government expenditure as a share of GDP rose to about one third under Reagan, a level at which it has stayed, political rhetoric notwithstanding.
A supply shock and a demand surge—to pick one or the other as the source of inflation is like asking whether the millions of COVID dead in the US were killed by a virus or by governmental ineptitude. COVID-19 affects the economy first and foremost by infecting labor, by removing workers from the production process. Workers get sick and die. In response, employers and governments shutter productive sites, barring workers from selling their labor-power. Even if there is no political response, there will be labor shortages as workers get sick or fear contracting or transmitting the disease. By infecting labor, the virus infects capital, particularly circulating capital. As producers shut down, other producers are forced to slow or shutter their processes because they can’t source the necessary inputs. This will tend to cause prices for these scarce inputs to rise, since relatively trivial inputs, in value terms, can bring entire factories to a halt and therefore lead to huge losses. For car producers, with fleets of nearly completed vehicles now standing idle for lack of microchips for their backup cameras, those chips become exceedingly valuable.
The pandemic was first and remains foremost a supply shock, and then a labor shock. In this respect it resembled a strike, as the prescient writers at Chuang noted in their article “Social Contagion: Microbiological Class War in China,” published in February 2020, at the start of the pandemic, and later revised into a book with the same name. It removed labor from production and thus removed capital from production. But it also required a supply surge in key sectors—producers of pharmaceuticals and medical supplies were fed vast amounts of capital with which to ramp up production. This combination of shock and surge completely disordered the infrastructure of international trade. The world’s container shipping fleet was not just stalled by the pandemic but scrambled, given an entirely new and newly challenging itinerary—delivering crucial medical supplies to far-flung ports while obeying COVID safety precautions—which left many ships and crews in limbo for months or years.
In the US, at least, this supply shock has persisted even where its effects have been muted by stimulus money. In the first quarter of 2020, GDP fell faster and farther than ever before—the pandemic scotched one third of all economic activity in the US. But by summer 2020, output had, at least nominally, increased just as quickly, boosted by a third, so that overall activity was only down by 20 percent. (One third of two thirds added to two thirds is more or less four fifths). Counting output by the dollar only tells us so much, however, since much of the economic activity lost was in employment, and much of the activity restored was from direct transfers. Thus, during the pandemic, the poverty rate decreased alongside overall median earning—society become more equal. Wages rose, too. But this may be largely a mirage: In the first months of the pandemic, official unemployment rose to twenty-two percent. By year’s end, it had fallen to 6 percent. But the jobs that returned were not of the same type as those that left, and many low-wage positions never returned, so that earnings were, on the whole, higher in 2021 than in 2020.
The economy that emerged in 2021 was different from the economy of 2020 not only by a scale factor but by a qualitative measure, too. The Treasury and the Federal Reserve could replace what was lost as a matter of volume, but not of proportion. Employers were prohibited from hiring certain types of labor, while consumers were prohibited from purchasing others. The collapse of spending on leisure, hospitality, travel, and other in-person services was matched by a boom in spending on durable goods, which is now up by twenty percent over pre-pandemic 2020 levels. This spending on durable goods translates rather directly, in the US at least, into shipping volume, as the majority of those goods are now produced in Asia. Container volumes from Asia to Europe and the US recovered much more quickly than growth as such did.
In the pandemic, discretionary income shifted immensely. Instead of going out to eat, people cooked or ordered in; instead of traveling, they bought durable goods like electronics. But the nature of work also changed. Millions of people shifted to home-work, which required new electronic equipment and more space. Children were forced into ill-conceived and damaging experiments in online learning, themselves requiring flotillas of new electronics and domestic space in which to learn. The pressure on households that homework and homeschool produced led to a crush of sales in new homes. Meanwhile, on the supply side, producers had let inventories run low and scaled back orders, anticipating a huge pandemic downturn, not a rapid about-face of the global economy. The ability of these producers to raise output in the face of new demand was limited, especially given the low rates of capital investment in prior years—it was not simply a matter of purchasing more circulating capital, but of investing in fixed capital, something that could not be done quickly. Many firms were already operating chiefly by trying to conserve constant capital (means of production) and avoid costly new investment. And even if they could ramp up output, they could not find shipping berths. The world’s container fleet had been scattered by the pandemic, and was in no position to carry an increased volume of durable goods from East Asian producers to the US and Europe. Container shipping volume increased by twenty percent in 2021.
Standard economic theory—including Marx’s—says that when supply cannot meet demand, prices will increase, especially in markets where sellers set terms. But economic theory also tells us that where prices increase, profit-seeking capital will flood into that line of production, raising output, satisfying demand, and causing prices to fall. Sustained price increases can occur only where continued shortages prevent increases in output, or where capitalists, small enough in terms of their share of the market to benefit more from higher prices than increased output, restrict output and take profits in high unit price rather than increased volume. But while this may be true of energy producers, or of shippers, it can’t be the case for producers who control a substantial fraction of their markets, like producers of computer chips, who therefore stand to lose outright from shortages. We are left with the conclusion that the supply shock—particularly the shock to labor supply—together with the demand surge, is the cause of current inflation. Neither would, on its own, have produced this effect.
Labor is unlike all the other commodities. It is the one commodity which cannot be dispensed with. One can imagine, theoretically, a capitalism without grain, without oil, without microchips, and even one without land. But a capitalism without labor is a logical contradiction—this is because capitalist class relations are based upon exploitation and not just ownership: the reproduction of labor is the logical basis for the accumulation of capital. Individual capitalists may substitute capital for labor, automated checkout machines for cashiers, but the class as a whole cannot dispense with labor altogether. Labor, too, is not a simple thing that can be directly administered—commodities can be purchased directly, but capitalists can only purchase labor-power—that is, to say, purchase the compelled yet free activity of workers, which is inherently unpredictable. Whether to work, or how to work, is a matter of free decision, and moreover can’t be contracted directly. It is therefore much easier to break the link from one side than the other, and easier to break it than to put it back together. Where commodities produce other commodities directly, where machines produce machines without the mediation of labor, capital can directly move goods from place to place. Workers can be fired, or banned from entering their workplaces by the state, but they cannot be directly forced to work. The state can shut down a plant. And it can put money in the hands of unemployed workers, parents, consumers, lenders, and capitalist producers—no one says no to money. But since hiring workers and seeking employment is, in capitalism, a matter of free (though compelled) decision, all the government can do is attach terms to its gifts.
That wages, the prices paid for labor, are increasing now and more quickly than in half a century seems indisputable. Wherever workers were laid off by administrative fiat or medical peril—in hotels, bars, restaurants, shops—they now will receive a premium for returning, for the simple reason that many have chosen not to return, and this is true even where capitalists are able to raise prices. The effect is overstated, however, as I said above, since most pandemic job losses were concentrated in the lowest-paying sectors. The working part of the proletariat has become wealthier as a share of the proletariat, but the fate of the class itself is less clear. For sure, across 2020 and 2021, stimulus payments, increases to the child credit, eviction moratoria, and other measures sharply reduced poverty in the US, as attested by data and numerous studies. But now that those transfers have stopped, in full or in part, the picture is more complicated. Unemployment has fallen quickly from double digits, but that number, too, is misleading, since unemployment can fall while workers are still, on the whole, leaving the workforce—the unemployment rate counts those workers who are seeking employment, not those who are unemployed. The more significant measure is the Labor Force Participation Rate (LFPR), which captures all those people who are unemployed yet not seeking employment. While the unemployment rate has fallen, the LFPR has only recovered half of what was lost.
The LFPR has been declining since the turn of the millennium—a result that can only be partly attributed to changes in the demand for labor, since the rate is also determined by demographic trends, such as rising life expectancy. But since 2008 at least, its sharp downward turn can only be explained by low demand for labor, and in particular for certain types of labor. The arc of the LFPR across my lifetime shows it rising and falling from 60 percent in the 1970s, up to 80 percent, and then finally settling back toward 60 percent now, in the 21st century proper. That early rise had primarily to do with new demographic entrants, chiefly a higher rate of labor force participation among white, middle-class mothers. The converse to that flow of new labor is the exit of men from industrial jobs over the last several decades, a process that accelerated in 2008. These effects are hard to measure, however, since LFPR is measured with the entire population as its denominator, and therefore gets affected by purely demographic trends—rising life expectancy, as well as the relative size of generations. One would expect that, as life expectancy increases, so would labor force participation decline, as people spend a larger portion of their lives in retirement. The COVID-19 pandemic, complicatedly, presents a powerful decrease in life expectancy but also a corollary rush to early retirement—some portion of what has been called the “Great Resignation” is older workers deciding to leave the labor market early. Whether for fear of getting sick or dying, unwillingness to get a vaccine, the onerousness of pandemic-era work, or because transfer payments or rising asset values made it possible, early retirements may account for up to half of the change in the LFPR.
Fear of getting sick is obviously a big part of the changes in labor force participation during the pandemic, but it can’t explain all of it, especially for younger workers, given the demonstrated lack of precaution in the US. Unavoidable here is the thesis that the stimulus payment, unemployment extension, child tax credit, and other programs, such as eviction moratoria and assistance with rent, healthcare, and other costs, have made it possible for workers to leave—never to return—to, jobs they hated but needed in order to survive. Workers chose unemployment then, not only because they had to, but because they wanted to, and because pandemic support made it possible not to work, and even in some cases to increase their income while working less. But this story of free choice is itself partial: for workers with children, or sick family members, leaving work was not a choice but a requirement. Part of the story of the pandemic, too, is a massive expansion of unpaid care labor, as children were expelled from schools and thrust into the care of their families and hundreds of thousands of Americans sickened or killed by the novel coronavirus in their homes.
Inflation drags on now, in January 2022, as does the pandemic. The Omicron wave has chilled the reopening of the economy, and cut into growth expectations, which one might expect to check inflation by reducing demand. But Omicron has also extended the supply shock, shutting down crucial Asian producers, and slowing shipping volume. The logjam at US ports will persist through at least the first half of the year, and perhaps for the entirety of the year, so all signs point to continuing inflation, unless the Federal Reserve chooses to slam the brakes really hard. Though the debt apocalyptics and austerians appear to have won the debate, history indicates that the supply shock—and particularly the labor shock—is the primary driver of inflation, though this is an inflation ratified by monetary policy.
Could we be entering into a new era of persistent inflation? It seems unlikely, since all the long-term economic drivers point to deflation. This is easiest to see in the death toll, but also in the labor force participation rate. The price of labor is temporarily increasing, and with it the prices of goods and services. But the value of labor and the price of labor are not identical—capitalists typically pay as wages only some portion of the reproduction costs of labor, of the class of laborers. Other costs are borne by the state, by charitable associations, and the like. Further, some portion of wages is paid after the fact, through pension, social security, and the like. Every proletarian who died earlier in the pandemic, who is not working, and who will not claim their social wage, is a devaluation, a deflation. It means that the goods those workers produced were, in fact, cheaper than they might have been. That worker required less wealth to reproduce, but they did the same amount of work, therefore cheapening all commodities. If we look only at rising wages, and do not examine the larger devaluation of the class of proletarians, we miss the dark forest of deflation for inflation’s spiky trees.
It is by now a critical commonplace that the COVID-19 pandemic offers a foretaste of the political economy of climate change. Whether the novel coronavirus can be linked directly to the ecological wreckage of capitalism, novel viruses can be. The era of climate change selects for more pandemics. Nor can the supply-chain issues at present be entirely disentangled from emerging climate disruption. The damage to the fossil fuel infrastructure in the Gulf Coast by hurricanes and freezing winter storms interrupted the production of natural gas, plastics, and various chemicals. Off the coast of California, where scores of container ships wait for berths at the ports, so that they can unload the goods they could not deliver by Christmas, one ship’s anchor struck an underwater pipeline, causing a spill. Complex entanglements abound, and much of the story of the pandemic will take decades to decipher, if it can be deciphered at all.
If we can’t make predictions at least we can take stock of some forces at play—large-scale disasters, disasters that reach planetary scale, as is the case with disease, and as will be the case with, for example, rising sea levels, have the effect of producing material shortages for technical reasons, chiefly by removing labor and therefore access. This will have the effect of producing inflation, locally. But the longue durée dynamics of climate change are certainly deflationary, in the final instance. Climate change will render the concept of sunk, stranded assets quite literal, as some portion of the industrial footprint of capitalism is swallowed up by melted ice. Devaluation—first, and foremost, of labor—will occur even as the necessaries of life become more dear. Vast portfolios will be leveled, and new fortunes sought among the ruins. As in a war, disaster profiteers will use their earnings to buy up assets on the cheap. Inflation will be, then, that bow of the ship rising as the ship itself sinks. You can keep running up, but you can’t escape the waters.