What do shipping containers and artillery shells have in common? This isn’t 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 aren’t nearly as flexible as many people, myself included, had thought.
About those artillery shells: Like many people, I’ve 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 United States 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 U.S. federal budget. Americans who complain about the expense of aiding Ukraine are either innumerate or disingenuous; it’s no secret that many people on the right and a few on the left actually want Putin to win.
But while money isn’t 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’m not going to play armchair general and prognosticate about the war.)
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’m 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.
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.
So 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’re willing to produce less of others.
Back in the 1990s, McGraw Hill issued a facsimile version of the original 1948 edition of Paul Samuelson’s “Economics,” the textbook that largely defined the modern field; I happen to own a copy. Very early in the book, Samuelson introduced the idea of trade-offs with this stylized depiction of an economy’s production possibilities:
Now, nobody doubts that there are trade-offs, that an economy can shift the mix of goods and services it produces. But Samuelson’s picture implicitly assumed that this trade-off is relatively smooth and easy. Is it?
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 in the short run, the picture may look more like this:
That is, in contrast to the story told by Samuelson’s curve, it may be very hard to produce more guns in the short run even if you’re willing to give up a lot of butter.
The revelation that economies aren’t as flexible as we thought has many implications for policy. Supply-chain constraints weren’t 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 can’t get what you need.
Quick Hits
The U.S. economy was immense in 1917, but we had to rely on our allies to provide artillery when we entered World War I.
Is Russia running out of shells?
The great garage door shortage.
Are backlogs the reason rising interest rates haven’t caused a recession?
Facing the Music
Since I mentioned the Rolling Stones.
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March 08, 2023 at 03:00AM
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Opinion | Guns, Ships and Chips: On Economic Inflexibility - The New York Times
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