Thinking About Inflation, Supply Chains, and Bidenomics

Fighting inflation was top of mind Monday when President Joe Biden convened the first meeting of his supply chain resilience council. “We know the prices are still too high for too many things, that times are still too tough for too many families,” Biden said at the White House. “We’ve made progress, but we have more work to do.” Likewise, Lael Brainard, director of the White House National Economic Council and a co-chair of the new supply chain council, said, “We’re determined to keep working to bring down prices for American consumers and ensure the resilience of our supply chains for the future.”

Of course, there’s a tension between the goal of resilience and the low prices that result from economically efficient supply chains. Indeed, attempts at “reshoring” or “friendshoring” may result in less efficiency without increased resilience. For example: The Bank for International Settlements finds that global supply chains are increasingly complex but largely originate from the same place. Now there are new intermediaries, such as India and Vietnam, between the US and China. As The Economist notes: “So these lengthening chains may be concealing the fact that supplies, for the most part, still originate in China. Attempts at true diversification have shown no progress.”

Or take the notion of the expanded “Buy American” rules on federal purchases of which Biden is so fond. As the Peterson Institute for International Economics explains:

But the downside of Buy American is higher costs to taxpayers, project delays due to shortages, friction with American allies abroad, and lost US export markets as other nations pursue their own buy national laws. …  At this time, when implementation has just begun, it is impossible to assess the added costs and delays of Buy American. But based on past experience, it seems reasonable to project that strict Buy American rules applied to federal procurement will raise the cost of new industrial policy measures by at least 7 percent, or $70 billion over the next decade.

Maybe it’s time to think about the advantages of fewer barriers to trade, though it seems unlikely given the Buy American commitments, a new managed trade regime with Europe for steel and aluminum, and the continuation of the Trump-era tariffs on China. Maybe start with reform of the Merchant Marine Act of 1920, commonly known as the Jones Act, that significantly raises US coastal shipping costs by mandating that ships be US-built and crewed by US citizens.