Inflation is skyrocketing. The latest figures released this week showed inflation surging to 8.5%, with gasoline prices up some 50 percent year-over-year, bacon 28 percent, used vehicles 26 percent. Not, of course, that we needed government figures to tell us this: Gas is north of $4 dollars a gallon and milk at the grocery store has become a big ticket item.
There’s broad consensus on the root cause of this skyrocketing inflation: Disrupted by pandemic and war, the global market isn’t working. An international energy shortage is driving not only gas prices up, but also everything that needs fuel to be moved from one place to another. There’s a shortage of semiconductors, too. Then there are supply chain kinks – whether logjams at ports or shuttered facilities in China amid the COVID zero policy — that are stalling both production and delivery of goods. And, of course, Russia’s invasion of Ukraine, and responsive Western sanctions, threaten global supply of everything from nickel to soybeans to energy. The world is a chaotic, conflict-driven, uncertain place; globalization as it currently exists assumes the opposite.
There’s less consensus on what should be done in response. Most commentary focuses on the Fed’s monetary policy. The Biden Administration seems to think that the inflation wave will break any second, and everything will reset. The first is a band-aid; the second a baseless assumption. The Fed’s recent history has exacerbated this crisis: Efforts to juice the economy at the beginning of the COVID-19 crisis are part of what pushed demand and, with it, prices up. As for the assumption that inflation will break? We’re more than two years into the pandemic and production in China is still hit and miss. Russia continues its offensive against Ukraine. The worst of the consequences for resource supply have not yet hit. Wait until winter.
We need more than immediate, reactive, tactical measures. We need a gameplan for domestic resilience so that this crisis does not continue indefinitely and does not recur. We need to rethink our permissive approach external dependencies; to make sure that we can make more – and more of what is foundational to economic functioning — at home. This doesn’t mean we hunker down in a fortress America, abandoning ties to global markets and seeking total reshoring. That would make cars a whole lot more expensive. What it means is that we think, critically, about what can and cannot be sourced externally, and from whom.
We need a gameplan for domestic resilience. We need to to make sure that we can make more – and more of what is foundational to economic functioning — at home.
The answer should be broken down into three categories: First, goods that demand domestic production, supplemented where necessary by proximate allies like Canada and Mexico; second, goods where production can take place in partnership with the entire set of US allies and partners, including those halfway around the world; and third, goods that can be left at the whim of the international market, even when that market is composed of geopolitical adversaries, like China and Russia.
That first category, the domestic production category, should cover all critical or foundational inputs into national and economic security. Yes, this includes missiles and UAVs. But it also includes foodstuffs and pharmaceuticals, necessary ingredients for a safe population. It includes the set of goods, like energy and critical materials, that are critical to the production of everything else. When the prices of these go up, all other prices do, too. That’s a lesson we’re learning in real time.
These products are the building blocks of a functioning economy. In them, the US needs a domestic buffer of capacity – and to protect that capacity. Where supplementing is necessary, the US should prioritize cooperation with neighboring allies and partners, like Canada and Mexico, with whom trade is relatively insulated from international crisis.
The second, allied production category should feature products that drive the quality, and differentiation, of the US economy. Domestic building blocks are critical for survival. But growth rests on what is built on top of them: Advanced technologies that grant the US a competitive edge, for example, as well as complex products like cars that integrate and create demand in a wide range of other industries.
For these, a foundation of domestic production remains necessary. Core technological elements must be protected for the sake of retaining national edge; investment in additional manufacturing drives a high-quality real economy at home and, with it, high-quality jobs and returns. But we can afford here to partner with the broad network of US allies and partners, especially those who bring distinctive comparative advantages to the table: Think Germany in cars and India in pharmaceuticals. What we cannot afford is to rely on, or share advanced technologies with, adversaries like Russia and China who risk using their place in the supply chain to exert coercive leverage and steal American innovation.
And then, in the third category, is the superfluous stuff: T-shirts, say, or cellphone cases. These are economic accessories. There’s profit in them, sure. But there isn’t outsized profit or growth – and nor is there necessity. While real domestic options would be a plus, national and economic security don’t depend on it. These can be the realm of OG globalization.
This is a framework for prioritization. It should inform investments across the US economy, whether those are coming from Wall Street or Washington. If it does, if we can operationalize it, then we can break not only the inflation wave but also the inflation cycle.