What do shipping containers and artillery shells
have in common? This is not a trick question. The answer is that both have been
in very short supply at some point over the past three years. And these
shortages tell us something disturbing about modern economies: They are not
nearly as flexible as many people, myself included, had thought.
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About those artillery shells: Like many
people, I have been closely following the war in Ukraine. Everyone knows the
broad outlines of the story so far: Vladimir Putin’s Russia invaded in February
of last year, expecting a quick victory over Ukraine’s much weaker army, but
the Ukrainians, astonishingly, defeated the would-be blitzkrieg and the war has
turned instead into a brutal slugging match.
No matter how valorous, Ukrainians on their
own would have no chance in such a match. But they have received crucial aid
from Western nations that see Ukraine — as do I — as a crucial front in the
defense of democracy.
Can the West afford to provide aid on a
sufficient scale to turn the war’s tide? Of course, and easily, because Western
economies are vastly bigger than Russia’s. The US has committed about $80
billion so far, which sounds like a lot — and is a lot, from the point of view
of the combatants — but is only a bit more than 1 percent of the US federal
budget. Americans who complain about the expense of aiding Ukraine are either
innumerate or disingenuous; it is no secret that many people on the right and a
few on the left actually want Putin to win.
Targeted production and supply chainsBut while money is not really an issue
here, getting Ukraine the specific things it needs in order to fight turns out
to be more problematic. Nobody expected a sustained war of attrition to break
out in the 21st century, and while we have vast production capacity in general,
it turns out that we have limited capacity to produce key military goods. The
most pressing problem, reporting suggests, is that Ukraine is firing artillery
shells faster than the West can produce them — and increasing production
quickly is apparently very hard. (Russia seems to be having similar and
probably worse problems, but I am not going to play armchair general and
prognosticate about the war.)
Nobody expected a sustained war of attrition to break out in the 21st century, and while we have vast production capacity in general, it turns out that we have limited capacity to produce key military goods.
The point is that often, converting general
economic capacity into the production of particular goods and services that are
suddenly in high demand turns out to be quite difficult. Which is the same
lesson we learned in 2021, as the world economy began to recover from the
initial pandemic recession.
This story may be a bit less familiar to a
broad audience than the outline of the Ukraine war, but it went like this:
While consumer spending bounced back quickly from its plunge in the first half
of 2020, fear of infection led people to spend their money differently from
before. Broadly speaking, they were slow to resume consumption of in-person
services and compensated by buying more physical stuff: shunning the gym while
acquiring a Peloton, avoiding restaurants but buying more kitchen equipment.
But the production and delivery of goods
depends on a complex supply chain, which is normally invisible to most of us
but turns out to have limited capacity and to be more fragile than almost
anyone suspected. And this supply chain was quickly overwhelmed. Most visibly,
scores of container ships found themselves steaming back and forth outside
clogged ports, and even cargoes that had been successfully unloaded spent many
days waiting for someone to take them to their destinations.
The result was a global shortage of the
shipping containers that carry much of the stuff of modern commerce, and an
incredible surge in shipping costs.
That surge is now, I am happy to say,
behind us. But there are still some lingering shortages of key products. In
particular, world automobile production is still being held back by shortages
of some semiconductor chips.
The point is that often, converting general economic capacity into the production of particular goods and services that are suddenly in high demand turns out to be quite difficult.
Our shipping issues, then, prefigured the
problems the West is now having in supplying Ukraine with ammunition: There was
plenty of overall production capacity, but not enough of the specific kinds of
capacity we needed at that moment, especially once you consider the complex
logistics that also need to be in place in order to get goods where they need
to go.
Butter for gunsSo what does this say about economics in
general? One of the most basic ideas in the field is that economies can make
trade-offs, producing more of some things if they are willing to produce less
of others.
Now, nobody doubts that there are trade-offs,
that an economy can shift the mix of goods and services it produces. But are
these trade-offs relatively smooth and easy?
In the long run, the answer is almost
surely yes. But to paraphrase John Maynard Keynes a bit, in the long run,
sadly, quite a few Ukrainians may be dead.
What both the supply-chain crisis and the current ammunition problem suggest is that it may be very hard to produce more guns in the short run even if you are willing to give up a lot of butter.
What both the supply-chain crisis and the
current ammunition problem suggest is that it may be very hard to produce more
guns in the short run even if you are willing to give up a lot of butter.
The revelation that economies are not as
flexible as we thought has many implications for policy. Supply-chain
constraints were not the sole reason inflation took off in 2021, but they were
clearly an important part of the story, with implications for future monetary
policy. And in general, economic inflexibility suggests that we should be
taking more precautions against the possibility of future disruptions,
especially for strategic goods, but possibly more widely.
But all of that demands a much longer
discussion. The main point for now is that it turns out that the Rolling Stones
may have had it backward: Modern economies generally do a very good job of
getting people what they want, but sometimes you just cannot get what you need.
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