- Never before have economists been so divided about the outlook
for the global economy. - The economy has entered into a new era highlighted by supply chain shortages, rapidly rising inflation, and a really quick increase
in interest rates that have plagued the economy since 2020.

And consumers, businesses, and governments are more uncertain
than they've ever been. Monetary policy and the
actions of central banks, like the Federal Reserve, are certainly the biggest
lever in the economy at any point. And so it's impossible
to understand the changes

that we've gone through
over the last four years and, in a broader sense,
over the last two decades without understanding the shifts in monetary policy over that time period. I'm Joey Politano. I'm an economic analyst,
a data journalist,

and the writer behind Apricitas Economics. So to understand the new normal, it's first important to
understand the old normal, the very old normal that the
global economy existed in before the 2008 recession. Normally, a free-market economy

is going to be demand-constrained, and that's a fancy word just
to say that what's built, made, and sold is set largely
by the level of demand for those specific goods and services, with some surplus capacity,
surplus inventory,

and, in some cases, surplus workers, meaning factories could
run at 80% normally, so they have room to run at 100% in case there's a surge in demand they can then absorb by producing more. And this is really what
Hungarian economist János Kornai

explored in examining
the free market system: The state of default
is a state of surplus. Take autos, for example. In a normal time period, the amount of autos
produced is very sensitive to demand for new and used vehicles.

Auto manufacturers will almost always have some spare capacity. They have the ability to
produce, say, 14-15 million cars, but in an average year,
they're only going to produce, say, 10-12 million. Because the economy is demand-constrained,

it's really important to get
the level of demand right. Getting the level of
demand right can be hard, but that's the job that
the Federal Reserve has when setting interest
rates of monetary policy. And they have to set the level of demand

to the right amount in
order to hit two targets: price stability and full employment. But if the level of demand
in the economy is too low, you end up in this downward spiral where workers get laid
off, demand falls further,

less demand means more layoffs. And no downward spiral in American history has been bigger than the 2008 recession. - [Reporter #1] The Dow
tumbled more than 500 points, - [Reporter #2] Shock and panic evident

on the faces of those
on the trading floor. - We are in the midst of a
serious financial crisis. - In the lead-up to the 2008 recession, the U.S. was focused on
trying to cut back stimulus,

reduce spending, and
tighten monetary policy. And as the recession was happening, they reacted very slowly. - [Reporter #3] Administration officials are talking with lawmakers, looking for a way to move forward after the defeat of the
$700 billion rescue plan.

- What that meant was that the level of demand in the economy rapidly fell below normal levels
into this demand shortage. Let's zoom back in on the car example. People are getting laid off,
interest rates are still high, the ability to afford a car is very low,

prices for used cars start
dipping as people get laid off, and therefore demand for new cars starts falling off a cliff. That demand shortage then
reverberates through the industry. People are laid off,
factories start closing, investment starts dipping dramatically,

and that in turn further
exacerbates the demand shortfall. And that's how you ended up
with the 10 to 12% unemployment that was seen post-2008. - [Reporter #1] Drastic
measures being taken

to try to contain the outbreak of a mysterious pneumonia-like virus. - [Reporter #2] Country after country, Europe's retreating into lockdown. - [Reporter #3] Coronavirus
officially hitting the U.S. Here's what we know...

- It's early 2020. The U.S. has had more than a
decade of very slow growth, very weak employment, and COVID-19 is just
hitting the entire country. This time, the Federal Reserve and policymakers in Washington

are key to not repeating
the same kind of mistakes they had in 2008. The Federal Reserve and
the federal government came out swinging. You have the CARES Act,
the American Rescue Plan, the massive amount of stimulus checks, the extremely rapid response
by the Federal Reserve

lowering interest rates,
loosening monetary policy, doing direct lending
to affected businesses, governments, and institutions. All of that serves as a giant
jump-start to the U.S. economy. This was enough to break us
out of that demand shortage,

but it meant we entered
into a new kind of problem, a supply-constrained economy. This is something that's
very rare in U.S. history outside of wartime. What a supply-constrained economy means is that it's not constrained by demand,

it's constrained by your
access to materials, labor, transportation, and other resources, which were in extremely
high demand during Covid. For example, when the pandemic hit, global car production had to stop, and then it had to rapidly start up.

As it's restarting, you have this massive surge in
stimulus from the CARES Act, from the American Rescue
Plan, from stimulus checks, and from low interest rates, which meant demand for
cars recovered rapidly. At the same time, demand was spiking,

supply was actually cratering. The demand shortage of the
2010s led to an underinvestment in car manufacturing in the U.S. for more than a decade. And so when the pandemic hit, there was a lack of spare capacity, a lack of shock absorbers.

And so you got a rapid, rapid surge in used vehicle prices followed by a significant increase in new vehicle prices, followed by vehicle repair, vehicle insurance, and so much more, until the shock reverberated throughout the entire economy.

So in a really important way, the demand shortage of the 2010s led to the supply-constrained environment of the early 2020s. When Kornai studied supply-constrained economies, he cited the endemic shortages of the Soviet Union,

where people struggled to get basic necessities, queue times were long, and stores regularly ran out of inventory. That doesn't happen in the same way in market economies. Instead, you get these massive increases in prices as producers try to balance demand with supply.

So the post-Covid burst of inflation, especially the burst in energy, food, consumer goods, electronics, cars was a direct result of this supply-constrained environment enwrapping the entire global economy all at once. This is part of why inflation was so global, so sudden,

and caught so many off guard. This kind of supply-constrained environment had not been seen in most countries for decades, if not longer. So how do we get out of a supply-constrained economy? Since 2022, the Federal Reserve has been raising interest rates

and tightening monetary policy in order to catch up with inflation. In an ideal world, price increases will return to the kind of normal levels we saw before the 2008 recession without the kind of employment losses and shrinking economy that we saw during the 2010s.

Easing out of the supply-constrained era is going to mean different things to different people and
different organizations. For individuals, it'll deliver important reductions in
cost of living, inflation, and the shortages that have
plagued the economy since 2020.

But it will also mean a cool
down of the rapid wage growth and hiring that benefited people so much during the early pandemic. For governments, there is a renewed focus on securing supply and industrial policy. Think about the CHIPS Act, which is spending billions of dollars

to try to secure semiconductor
manufacturing supply chains that crippled U.S. industry
during 2021 and 2022. Or the Inflation Reduction Act, another set of industrial policies meant to secure supply chains
in clean tech industries.

Businesses in this new era are going to feel a lot
more cross-pressure. A company like Samsung
not only has to contend with the domestic politics of South Korea, but pressures from countries
like China and the U.S. to invest in one and
not invest in the other.

And so lots of places are going to
have to make tough decisions about where they choose to build and how they choose to
organize their supply chains. The economy is not a static thing, and so understanding more
about monetary policy, understanding more about
the economic regime

that you're living under can help ease some of the
fundamental uncertainties that have been so prevalent since Covid, and help you make better
decisions in your day-to-day life. - [Narrator] Want to dive deeper? Become a Big Think member,

and join our members-only community, watch videos early, and
unlock full interviews.

How COVID-era monetary policy changed everything | Joseph Politano

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Economists' Divided Outlook and the New Economic Era

Economists are highly divided on the global economic outlook.

The economy faces supply chain shortages, rising inflation, and rapidly increasing interest rates.

Consumers, businesses, and governments are experiencing high levels of uncertainty.

Monetary policy and central banks play a crucial role in the economy.

The Old Normal: Demand-Constrained Economy

Before 2008, the global economy was largely demand-constrained.

Production was determined by demand, with surplus capacity and inventory.

The auto industry is used as an example of a demand-constrained sector.

The Federal Reserve's role is to manage demand to achieve price stability and full employment.

The 2008 recession was a significant downward spiral caused by insufficient demand.

In the lead-up to 2008, stimulus was cut, spending reduced, and monetary policy tightened.

The recession led to a demand shortage, impacting various sectors like the auto industry.

High unemployment (10-12%) resulted from the demand shortage.

The COVID-19 Pandemic and Supply-Constrained Economy

In early 2020, the US faced slow growth, weak employment, and the COVID-19 pandemic.

The Federal Reserve and government implemented significant stimulus measures.

This led to a supply-constrained economy, a rare situation outside of wartime.

The auto industry is used as an example of supply constraints due to pandemic disruptions and high demand.

Consequences of Supply Constraints and Inflation

The demand shortage of the 2010s contributed to the supply-constrained environment of the early 2020s.

Supply constraints led to significant price increases across various sectors.

The global, sudden nature of inflation is attributed to the supply-constrained environment.

Easing Supply Constraints and the Path Forward

The Federal Reserve is raising interest rates to combat inflation.

The goal is to reduce inflation without causing significant job losses or economic contraction.

The transition will have different impacts on individuals, governments, and businesses.

Governments are focusing on securing supply chains and implementing industrial policies (e.g., CHIPS Act, Inflation Reduction Act).

Businesses face increased pressure from domestic and international politics regarding investment and supply chain organization.

How COVID-era monetary policy changed everything | Joseph Politano

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