Labor supply has also become an issue. The greater sensitivity of workers to health risks and lifestyle choices alter the propensity to work. Labor force participation has become less secure, fueling record increases in job vacancies. Labor costs inevitably start increasing across-the-board as companies’ efforts to attract new workers force them to also raise pay to retain those they already have.
While the on-the-ground evidence of supply disruptions is multiplying, the dominant macroeconomic mindset is still overly fixated on insufficient aggregate demand. Several of the recent policy remarks by the Federal Reserve serve, once again, as an example.
This will come as no surprise to behavioral scientists. Cognitive traps (rear-view framing, confirmation bias, blind spots, etc.) can slow the shift of policy makers’ focus to supply disruptions, which have become the main cause of the economic malaise of today and tomorrow. Instead, they reinforce some approaches, particularly in monetary policy, that inadvertently amplify the stagflationary winds that are starting to blow across a growing number of countries.
Cognitive biases are particularly problematic at a time of big changes in the operating environment. This was clear in the aftermath of the 2008 financial crisis with the overly cyclical economic mindset that delayed policy responses to what constituted a structural and secular shock several years in the making. We are seeing it today with one that is evolving too slowly from demand to supply.
The longer it takes for national and multilateral policy mindsets to adjust, the more likely we are to repeat the disappointment of the global financial crisis: Winning the war against the immediate enemy but failing to establish the peace of durable and inclusive socioeconomic prosperity, a platform for addressing dangerous secular challenges such as climate change, and anchoring genuine financial stability.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include The Only Game in Town and When Markets Collide.