National leaders make decisions every day. Almost always, big decisions lead to unanticipated and often negative consequences. One would hope that decision-makers would own the consequences of their decisions. Too often they do not, and seek to blame someone else. Failure to anticipate consequences has many causes: short term focus, prioritizing ideology over reality, or self-delusion that this could not happen to them. Sometimes, circumstances don’t allow time for careful consideration. Unfortunately, politicians will not own the consequences of their decisions. They prefer scoring political points to dealing with the problem.
Today’s inflationary pressures provide a great case study. Decisions over many decades on seemingly unrelated issues converged to create the inflation crisis. Let’s look at one of the big drivers, COVID. We do not know exactly how the virus mutated into a mass murderer, but we know the where: the ‘wet markets’ that sell live animals for food in China. China decided to allow them to stay open despite the fact that Chinese scientists had identified the wet markets as breeding grounds for previous viral epidemics: an exercise in self-delusion. Because China invested in becoming the world’s biggest exporter rather than in its health care systems, it resorted to massive lockdowns to stop the spread of the virus. The lockdowns disrupted world trade patterns. As a consequence of these decisions, the cost of shipping a container almost anywhere in the world octopuled.
A series of bad decisions in the United States, some dating back decades, allowed COVID-19 to kill one million Americans and threaten economic devastation. The American ideological delusion that the private sector performs better than government led us to decide that we did not need a comprehensive health care system. The same logic led the United States to decide that investing in a pandemic warning and response system was a waste of money. To make matters worse, when the epidemic struck our shores, politicians (mostly on the right) decided that COVID denial would make a peachy-keen political issue. As a consequence COVID threatened to tank the economy. To prevent an implosion, the Trump administration dumped billions into stimulus programs. Biden made the same judgment call. Stimulus payments did save the economy as intended, but they dramatically increased the amount of cash circulating.
As a consequence, Americans are flush with stimulus cash and spending like the proverbial drunken sailor. But supply chain disruptions have prevented supply from meeting demand. Other decisions played an equally big role in causing inflation. Half a century ago the world’s major economic powers decided that globalization would lead to unprecedented worldwide prosperity. That decision paid off handsomely but brought some unforeseen consequences. One such consequence, the invention of ‘just in time’ inventory and logistics management, stands out. When supply chains no longer functioned businesses worldwide had no inventory to tide them over until backlogged container ships could get into port. Short termism, this time seeking to maximize profits, struck again.
Reagan’s decision to stop enforcing anti-trust laws and permit increased consolidation in business, a policy followed by all succeeding Presidents through Trump, exacerbated the supply chain disruptions. Five American companies butcher and package four fifths of the meat consumed in the United States. A problem in one of their limited number of giant meatpacking plants will send prices skyrocketing. One company dominates infant formula production in the United States. A sanitation problem shut down its biggest plant and, as a result, supermarket shelves emptied. Trump launched his tariff wars, aiming to protect U.S. producers. The tariffs created big profits that companies distributed to shareholders rather than invest in expanding production capacity. These consequences should not have surprised us.
The abrupt rise in the price of oil and gas even better illustrates the consequences of short term political and financial thinking. To get better prices at the pump, Europe and America abandoned long-term oil and gas contracts. Without long-term contracts, investments became riskier. America’s oil and gas industry has collectively decided that short term markets – no matter how momentarily profitable – are too uncertain and rather than drill new wells prefer to use the money (much of it derived from government subsidies) to pay out dividends to shareholders. Hence, they cannot quickly ramp up production of oil and gas to meet demand and prices rise.
Decisions regarding war and peace have also played a massive role in driving inflation. Except for an isolationist minority in the American right wing, almost all political leaders in the United States and Europe agree that helping Ukraine defend itself against Russian aggression is the right thing to do. Those leaders also agree that turning the economic screws on Russia is preferable to direct military confrontation, given Russia’s 5,000 nuclear warheads. The fact that Russia is the world’s second largest exporter of crude oil and the biggest gas exporter, makes disrupting Moscow’s biggest source of money a no-brainer. It is a good cause, but why are we surprised at the consequences? Driving Russia out of the market all but guaranteed $5 gasoline at the pump. In the same way, if we had decided to let Russia conquer Ukraine unimpeded, Ukraine’s wheat exports – the 2nd biggest in the world – would not have been disrupted and world food prices would not have climbed out of control. Helping Ukraine fight for its freedom is a good cause, but we need to own it, not use it to score divisive political points.
Politicians are wasting a lot of time blaming others for inflation that they caused by the many decisions they made in the distant and recent past. They, and we, should stop whining and own those decisions. If we did that we might be able to deal with the unintended consequences.