The cycle of higher unemployment and prices must be broken.
I am not an economist, but having been around the block more than a few times over the past decades, it sure looks like financial déja vu!
My career started in the mid-1970s. At that time, the economic arena was swirling from extraordinary events that, together, created the perfect storm for hyperinflation. The aftermath of the US political crisis Watergate, staggering gas lines and shortages caused by the rolling Middle East oil embargos, and questionable Federal Reserve tactics led us to double-digit inflation. At that time, I was pricing administrator for a division of a global electronic connector manufacturer. Among my responsibilities was keeping the multi-thousand-part price book up to date. This task historically was done once every one or two years. In the environment we were in, however, I was updating prices two to three times each year!
It’s with this perspective I find myself trying to read the proverbial economic tea leaves of where we are headed in 2021 and beyond.
The past couple years, like in the mid-70s, have been filled with extraordinary events. Washington has been in gridlock; tariffs are finally resulting in shifts in where product is produced and shipped; a pandemic has displaced millions of workers and sent more home to work. Manufacturing facilities are reducing onsite staff, resulting in lower output and product shortages. Governments are responding with economic stimuli in the form of direct cash to citizens, enhanced unemployment benefits for those out of work, and low-cost loans to business and industry.
The common denominator in both eras is a series of extraordinary events that prompted society and especially government to react. With no playbook to follow, the responses might best be characterized as stabs in the dark, with the intent of thwarting the current crisis – hopefully while not creating another.
But many differences exist between then and now. Take technology, for instance. In the ‘70s great strides were taken to develop chips to advance the “integrated circuit.” PCBs became the platform of choice and wire-to-wire circuits were replaced by through-hole technology. Software and firmware became linchpins to harness all electronics so they could be more readily available as useful tools.
More important was where these new technologies were applied. Apple introduced the first truly “personal” computer, touching off a race to bring phenomenal computing power to the masses. The vast majority of this technology was developed to make people more productive. Ledgers gave way to spreadsheets, which could be updated and manipulated far more easily than a person with a calculator or adding machine. Ditto word processing as it advanced from the typewriter to PC-based software. And databases could be created and stored on an individual desktop, not in the bowels of the IT department.
Back then technology increased worker productivity. The new technology was expensive; however, the higher cost was offset by increased productivity – a hallmark that our industry has been at the forefront of since its infancy. By increasing user productivity, technology contributed to ending hyperinflation. That’s where the difference between then and now appears so pronounced. Much of the technology being developed today does not make people more efficient but instead cuts the cost of a task or process by replacing humans doing basic or even complex tasks with machines driven by artificial intelligence (AI).
The pandemic created high unemployment all while technology is being developed to reduce the need for employees, thus magnifying the number of people who are unemployed. If government one way or another steps in to subsidize the unemployed, providing the wherewithal for people to buy products, creating shortages, that’s one of the causes of inflation. Inflation then raises the cost of hiring people, hence making AI more affordable, which displaces even more employees, and the spiral continues.
Virtually every industry is reporting price hikes at record rates, and those increases typically are well in the double digits. Industry colleagues I speak with now rate rising inflation as a concern on par with the inability to find competent employees, even when unemployment is at high levels. The problem is real, and if not dealt with wisely could mushroom into a prolonged period of high inflation.
What does this have to do with economics? Returning to the “normal” economic cadence in which people are working and factories are running is critical to avoid long-term high inflation. Hopefully, as the pandemic eases and society embraces a return to “normal,” those on the employment sidelines, whether because of caution, fear or government incentives, will choose to join the job market and fill the many open positions. Filling the huge number of open job requisitions may enable capacities to increase and ease the shortages of critical materials and components – all of which may contribute to easing inflation. Conversely, if our current state continues, we may relive the era when prices increased double digits every year, and shortages were the norm rather than the exception.