Competition or Cooperation?
February 24th marked the one-year anniversary of Russia’s invasion of Ukraine. It’s a multi-tiered catastrophe, foremost in the casualties and the sheer scope of the destruction. The secondary effects spread far and wide within the first few months of the conflict and the repercussions will last for decades.
It’s certainly not the end of civilization as we know it, but when the hostilities finally abate, Ukraine is likely to benefit from vast amounts of international assistance and hopefully will emerge stronger than ever.
The fate of Russia, and that of the hapless Russian populace, looks far bleaker. Many international companies have ceased operations in Russia and foreign investment in Russia likewise fell off a cliff. Trade sanctions are likely to remain in place long after the air raid sirens in Ukraine go silent. Even if trade sanctions eventually ease up, it’s unlikely that the European nations will rush back to the Russian market. No sense in strengthening a vicious and unpredictable neighbor. Russia is likely to be an isolated pariah, to a greater or lesser extent, for a long time to come. Eventually Russia might become a case study in the benefits of international trade.
To quote 19th-century philosopher Pyotr Kropotkin: “Competition is the law of the jungle, but cooperation is the law of civilization.” Would cooperation—that is, trade—have been a more productive path for the Putin regime? Yes, without a doubt. Commercial trade is at least nominally cooperative and strengthens bonds among trading partners. And although trade alliances tend to spawn sprawling, cumbersome bureaucracies, they bring stability. For all its faults, the European Union has helped its members expand into new markets, helping them thrive in a long-running stretch of peacetime.
Perhaps Russia just wasn’t destined to rely much on international commerce and the related soft power it brings. Although Russia has substantial natural resources, it’s hampered by a totalitarian government; bureaucracies that run more or less on fraud, theft, and corruption; and an economy that is just 20 percent as productive as the U.S. economy. Its belligerent mindset doesn’t help. It has been fighting wars and suppressing insurgencies almost continuously for nearly 45 years.
While the U.S. has gotten itself into a few long-running wars over the last several decades, it relies far more on international trade, and the contributions of manufacturers, than most other nations. The U.S. has just 4 percent of the world’s population but is the world’s second-largest exporter.
Inflation Continues to Fall
The rate of inflation fell again in January according to the Bureau of Labor Statistics. The annual rate in January was still high at 6.4 percent but it has fallen more or less steadily since it peaked in June 2022 at 9.1 percent. The federal government tries to keep it between 2 and 3 percent annually.
The two main tools for combatting inflation are the interest rate and the amount of money in the economy. Both continue to move in the right direction to tame inflation.
The interest rate has been nudged up by the Federal Open Market Committee for nearly a year. According to the research department of the Federal Reserve Bank of St. Louis, the federal funds interest rate has climbed from 0.08 percent in February 2022 to 4.33 percent in January 2023.
The money supply cited by economists normally is the narrowest definition, M1, which is limited to currency and anything that can be converted to currency immediately—checking account balances and savings account balances.
From 1960 to 2019, the amount of M1 in circulation averaged 16 percent of gross domestic product. After COVID-19 hit, the government propped up households and businesses by throwing vast amounts of money into the economy and the percentage of M1 relative to the GDP grew to 84 percent (January 2022). As of November 2022, it had fallen to 76 percent.
The employment picture in the U.S. continues to favor employees. Just a few years back, before the pandemic hit, the number of job openings varied from 5 million to 7.5 million or so. It climbed during most of 2020 and 2021, peaking at 11.5 million in December 2021. It decreased a bit throughout 2022, but headed north again in December. Employers are left with few options and tend to raise pay to compete for scarce labor. Pay is a price, and any rising price supports inflation. So while inflation has been falling, it would fall faster if the labor market weren’t so tight.
This is nothing new for the manufacturing industry, and perhaps all industry—mining, power generation, and so on. While there is no easy way out, many manufacturers do have options. Machines and other equipment become more productive with each passing year, so strategic investments can really pay off.
A case in point is the trend in the U.S. automobile industry. A productivity database at the Bureau of Labor Statistics shows that output per worker doubled from 1987 to 2021.