Dark clouds of US-China conflict and Republican Party trickery loom in 2022
- Next year, Covid-19 will be tamed but containing inflation will be a tougher challenge. The global economy will undergo major structural changes, and pandemic-induced labour disruptions may finally tilt the balance of power to workers
This year has felt like a roller coaster, as hopes rose and fell with pandemic statistics and shifting political winds. The new year looks much the same, except that there will be midterm elections in the US in November – the stakes of which could not be higher.
Given all the uncertainty, it would be foolhardy to make predictions with any confidence. Still, I will offer my best bets.
For starters, Covid-19 will be tamed, though not eradicated. Enough people will have been vaccinated in enough parts of the world to allow most people in most places to overcome the fear that has gripped us for the past two years.
But restarting the global economy will not be as straightforward as shutting much of it down was.
The price system can offer reliable guidance for marginal decisions – the economy needs a little bit more of this, a little bit less of that – but it is not as good at handling big structural transformations like the shifts from agriculture to manufacturing, manufacturing to services, and peace to war (or vice versa).
We are already seeing many hiccups, and there could well be more. We should be prepared for large changes in production and consumption patterns: more Zooming and e-commerce, less in-person shopping in bricks-and-mortar retail stores. Demand for commercial real estate may decline, while demand elsewhere in the sector may rise.
The labour market has been disrupted like never before, and some of the changes might prove permanent. Many workers are asking whether their jobs are even worth it. Why endure so much stress under such poor conditions for so little pay?
Labour scarcities in the US have persisted even after the expiration of enhanced unemployment benefits. Workers are demanding more, and this may finally tilt the balance of power towards labour after four decades of capital taking an ever-larger share of the economic pie.
The new scarcities will be reflected in prices, and there will be unfortunate asymmetries in these adjustments. Price increases from shortages tend to be disproportionately larger than price reductions from surpluses, which means that inflation is likely, and whoever is in power will be blamed for it.
The problem is that while we know how to control inflation when it arises from excess demand, what we are experiencing now is different. In the current context, raising interest rates will increase unemployment more than it will dampen inflation, giving workers one more thing to worry about.
Equally worrying, the waning effect of earlier fiscal measures enacted around the world to mitigate the pandemic’s economic fallout might lead to a weakening of growth. Much will depend on the fate of the recovery plans that have been proposed in many countries.
More and better day-care facilities will enable more women to join the labour force; doing more to control the pandemic will reduce fears about working and reopening schools; and investments in better infrastructure will reduce the costs of moving goods and people.
In any case, a concerted global effort to increase vaccine supply and ensure equal access for the poor would do far more to alleviate inflationary pressures than interest-rate hikes would. We should be celebrating the fact that, well over a decade since the onset of the Great Recession that began in 2008, global aggregate demand is once again robust.
Having abandoned respect for truth, budgets, democratic accountability and pluralism, the Republican Party represents a clear and present danger to both the US and the rest of the world. Prudence dictates that investors account for the global economic uncertainty generated by this political dynamic.
Under Trump’s influence, Republican Party’s slide into lies continues
But, as we saw in 2008, markets often do not acknowledge large looming risks until it is too late. Whether they will do so in 2022 is anybody’s guess.
The second dark cloud is geopolitical: China and the US are in an escalating rivalry, and other countries are increasingly finding themselves in the crossfire. To be sure, the conflict today looks markedly different than it did just a year ago, in the Trump era, when anything that benefited China was assumed to be at America’s expense, and when there was little concern about human rights or democracy.
The conventional wisdom is that the US and China are too interlinked economically to wage a real 20th -century-style cold war. But even if that is true, significant decoupling is still possible.
Some commentators have also voiced concerns about the loss of know-how that comes from excessive offshoring to countries like China. But the political calculus in the US is probably not based on fine calculations of economic costs and benefits.
Moreover, the dynamic economic consequences are complex. For example, the industrial policies that the US is now adopting in response to what it sees as its new competitive threat may prove to be a spur to growth both in the short run and over the long term.
The policies we choose now will have consequences for decades to come. We may have brought an end to the pandemic roller coaster but, in 2022, we must act just as wisely and as quickly to enact strategies that will lead us into a better post-pandemic future.