What’s needed now are tried and tested policy reforms to boost potential growth, raise supply and alleviate inflationary pressures.
have resulted in a critically weakened energy security environment and are now being hastily undone, as most recently evidenced by German and British decisions to build new coal power plants.
A belief in a “new normal” narrative with less travel played a role in governments failing to better preserve labour supply in services. Personal or business travel demand – or for that matter, general services demand – is not surging and is only beginning to recover to pre-pandemic levels. Even so, demand is overstretching the diminished supply created over the past two years.
However, the same policymakers who have been wrong-footed in the last year or so are developing policies that may make matters even worse by interfering with these critical equilibrating incentives.
In the US labour market, employment is some 1 million short of pre-COVID trends. These missing workers are needed to improve services supply. Thus, monetary tightening to rein in labour markets may lock in permanent labour supply shortages and a loss of income – a more dire “new normal”.The good news is that looking back to the 1970s can be instructive.
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