>> A society where inflation is accelerating is a society that feels out of control.

♪♪ >> Hello and welcome to "GZERO World."

I'm Ian Bremmer.

And today, just days before the annual American retail riot that we call Black Friday, we dive deep into the global supply chain crisis.

How did this network of manufacturing, trade and logistics hit such an enormous speed bump?

And how long will our global shortages last?

I'm joined by economist and former Treasury Secretary Larry Summers as we try to find the light at the end of this backed-up tunnel and then spare a thought for the lowly shipping container.

No one else will.

Don't worry, I've also got your "Puppet Regime."

>> Oh, aren't you just the sweetest little -- >> Um, excuse me?

>> Holy smokes, she can talk!

>> But first, a word from the folks who help us keep the lights on.

>> Major corporate funding provided by founding sponsor First Republic.

At First Republic, our clients come first.

Taking the time to listen helps us provide customized banking and wealth-management solutions.

More on our clients at firstrepublic.com.

Additional funding provided by... ...and by... >> Man is born free, but everywhere he is in supply chains."

Rosseau almost said that.

And here's the White House.

>> It was clear in March of 2020 when COVID hit that the supply chains across the world had been disrupted.

People couldn't get dishwashers and furniture and treadmills delivered on time, not to mention all sorts of other things.

So why -- >> The tragedy of the treadmill that's delayed.

>> Right.

>> That was White House press secretary Jen Psaki on October 19th, responding with tongue firmly in cheek to a reporter's question about the world's growing supply chain crisis.

Psaki had a point, which is that not every crisis is created equal.

What's that, you say?

Starbucks out of oat milk?

The wine shop is running low on Malbec.

The pet store no longer carries Moose's favorite turkey jerky.

But fear not, my friends.

We shall overcome.

The supply chain crisis is, of course, much bigger than treadmills and dog treats.

U.S. consumer prices overall jumped 6.2% in October compared to the previous year, with surging costs for food and gas and housing, basic stuff.

That's the highest inflation rate in over 30 years, and right now, most everything manufactured or produced anywhere in the world is in short supply.

That includes electronics like the computer chips that run your cars and the chemicals that go into house paint and medical devices, and even the food and clothing that international aid groups rely on.

Like in Haiti, a country that has suffered a devastating earthquake and presidential assassination in just the past year.

Not to mention the pandemic.

A nonprofit in Nashville has been struggling to send shoes to Port-Au-Prince because so many retailers are holding on to their stock to meet unprecedented demand.

So why is this happening now?

It's the pandemic.

As COVID spread, factories in China, South Korea, Taiwan and Southeast Asia, those responsible for the bulk of the world's manufacturing, were forced to shut down or limit production, and shipping companies slashed their schedules in anticipation of reduced demand.

But at the same time, online shopping surged because millions of people were forced to stay home.

Consumers took money that was previously reserved for restaurants or vacations that they weren't going on, and instead they spent it on goods.

Manufacturers have tried to keep up by increasing production, but one supply crisis brings another.

It's a challenge that President Biden tried to illustrate earlier this month when he was at the Port of Baltimore.

>> Even products as simple as a pencil, can't have to use the wood from Brazil, graphite from India before it comes together at a factory in the United States to get a pencil.

Sounds silly, but that's literally how it happens.

>> That said, this isn't all the pandemic's fault.

For decades, companies have kept very limited inventories to keep down costs and maximize their profit.

I mean, if you're a car company stocking up on microchips to hedge against the next global crisis may sound like a good idea, but it really doesn't make shareholders any money.

And for big-box stores, retaining inventory is a lot more expensive than last-minute ordering just in time for manufacturers.

How long will this crisis last?

Can President Biden save the holiday season, and where does a recent rise in inflation fit into this mess?

Economist Larry Summers, who served in top posts in both the Clinton and Obama administrations, joins me now.

Larry Summers, good to see you, man.

>> Good to see you, my friend.

>> So let me start off with this big inflation thing.

I remember when you came out at the beginning of the Biden administration and you said, "My God, inflation is going to be a very serious worry."

And I mean, not only did the journalists pile on on you, but, like, the White House piled on on you, and now here we are, and we have the highest levels of inflation in 30 years.

So what did you see that they did not?

Why did they all get it so wrong?

>> I don't really know.

I applied what I thought was basic economic analysis.

I looked at what the prospective GDP gap was.

It was about 2%.

I looked at what the fiscal stimulus was -- about 15% of GDP.

I compared them assuming even a modest multiplier.

And that told me there was going to be a substantial overheat.

Then I added to that the recognition that monetary policy was incredibly loose.

I added to that that there was a real possibility that potential GDP, the economy's capacity, would be reduced by COVID.

And I added to that that there was a big overhang of savings from all the money that people couldn't spend during the first year of the pandemic, and it seemed obvious to me that we were going to have massive demand and we weren't going to have such large supply.

And I don't usually make really strong off-consensus economic forecasts because I think there's a lot of wisdom in the consensus.

But this one seemed pretty clear to me.

I think there were a number of, if I might, cognitive biases that got a lot of people to go wrong.

One was what I call motivated belief.

People really wanted to engage in a lot of support for families, and so they convinced themselves that what was politically imperative was economically prudent.

That's one part of it.

Another part of it was believing recent history and their then-current model.

And after 35 years without inflation, people basically kind of had assumed that inflation wasn't something that was coming back and it was something that was gone for good.

And I think that was another part of the error as well.

And I think it may have just been some difficulty in engaging in risks.

And if you look at the magnitude of the initial stimulus, Ian, there was no one who did an economic analysis that said that it was the right size.

That came out of after the Georgia election with the political imperative of the tax cuts and so forth.

It was kind of a politically derived number and it was the mathematics of the vote count rather than the mathematics of the economy that drove the choices that were made.

And that has turned out to have led to something that I think was, in retrospect, a pretty clear economic error, one that was compounded by the actions of the Fed.

>> The $1.9 trillion you're talking about at the beginning of the Biden administration.

>> On top of the $900 billion.

People forget that.

There was $900 billion passed in December and there was another $1.9 trillion.

So I didn't do anything really very hard.

I looked and I said, relative to trend, how low were payrolls?

And the answer was $20 billion to $30 billion a month.

And then I looked at $2.8 trillion, and I calculated that was about $240 billion a month.

And so I said, if you put $240 billion a month in to close a $20 billion or $30 billion gap, even if there's a lot of leakage and there's a lot of delay and there's a lot of other stuff in the $240 billion, you're going to get yourself something that's got a good chance of being a problem.

>> Now, I mean, I understand that an extra $2 trillion is a lot of money.

I also understand that at the time that it was passed, there was still an enormous amount of uncertainty in terms of where we were in the pandemic, the effectiveness, the rollout of the vaccines, the fact that you were still at that point looking at very high unemployment numbers.

If you could have made that decision when Biden first came in, how would you have done differently?

>> I would have done a trillion dollars less.

I would have -- In fact, I did recommend at the time doing something like $1.5 trillion rather than $2.8 trillion.

And then I think you would have had demand reasonably well-matched to supply, and with demand reasonably well-matched to supply, you would have had a much better kind of economic outcome.

>> Now, is inflation somewhat less of a problem in the United States now in the sense that we have written a lot of checks, absolute poverty levels are down, savings are up, Social Security benefits will be indexed to that inflationary jump.

Is the scarring that's going to happen in the United States through this inflationary cycle going to be reduced as a consequence of all of that?

>> Maybe some and, you know, there'll be people who will be happy when they get their Social Security index checks this January that will be up 5.1% from where they were before.

On the other hand, they'll see that and they'll expect that we now have a kind of inflationary economy and that will feed through to produce more inflation.

Look, I think a lot of what's damaging about inflation is not its direct economic consequences if you do some kind of economic calculation.

You're right that when prices start going up faster, wages start going up faster, and it sort of balances out for many people.

Interest rates adjust, other things adjust.

I think the problem is a society where inflation is accelerating is a society that feels out of control, and people feel like things were supposed to be brought under control, not taken out of control.

And when they see prices at the gas pump, when they see what they're paying for meat at the supermarket going up very rapidly, they wonder whether things are under control, particularly if it looks like the authorities aren't seeing those things as a problem.

When people get a 5% raise and there's 5% inflation, they think they deserved every penny of the 5% raise and it's due to their good work and that the 5% inflation is stealing their hard-earned gains.

Now, the truth that we would teach in an economics class is that if there wasn't inflation, they'd be getting a 2% raise.

But we all tend to internalize the good and externalize the bad, and that's what happens with respect to inflation.

And so people see it as robbing them of the gains they would otherwise have gotten.

>> Biden's response to this, I mean, it doesn't feel like there's anything structural at this point that the President can do to respond to this challenge as we head into Christmas, Thanksgiving, difficulties with buying presents for your kids, can't get a turkey that's the right size for my family.

What are you going to tell Biden he should be doing right now since he didn't listen to you last time around?

>> Look, I think the most important thing is that the Fed needs to acknowledge much more explicitly than it has that it had misjudged the situation, that overheating is the principal problem facing the American economy, that it will do what is necessary starting as soon as is necessary to assure the maintenance of stable prices defined as an inflation rate that is running around 2%, that the President needs to be very clear, as he refashions the Fed, that he's going to be appointing people who are focused on the objective of making sure that we don't go back to the inflation of the 1960s and 1970s, that the Fed is a place for people committed to financial stability, not a place for people committed to being social justice warriors.

I think he needs to signal that in the approach that he takes to the Federal Reserve system.

I think they need to be careful that their Build Back Better, which I continue to strongly support, be fashioned in a way that isn't, even in the short run, substantially increasing the level of demand in the economy.

And I think the President, in addition to focusing on clearing up the ports and doing that for supply chains, which is the right thing to do, absolutely the right thing to do, but is not a hugely important thing to do, needs to look at the full range of his policies.

Should we buy America when buying America is much more expensive?

Should we maintain every tariff when every one of those tariffs is holding up price levels and raising input costs for American producers?

If OPEC should produce more oil, maybe we should too.

And we need to keep that in mind as we look at fracking, as we look at natural gas.

When we think about regulatory policies, don't we also need to pay attention to the costs of those policies where they will feed into higher, higher prices?

Industrial policies are fine.

But if the industrial policies are translating into higher prices, that's something we now need to be paying attention to.

>> A couple of questions there, but one immediately that comes up when you said we have to ask about buying American, I see that structurally in the sense that you're making a pro-free trade, pro-efficiency, get the cheapest things you can get because that's going to help you with inflation.

In the near term, in the immediate term, with supply chains being challenging, is it not a more right thing to do to try to simply buy more local?

>> No, I think the right thing to do is to buy cheap and buy inexpensive.

And I think when we buy solar power, solar panels that are made in America that are more expensive than solar panels that are made in China, we're contributing to a higher price level and an inflationary psychology.

When we procure components for infrastructure in ways that are designed to support suppliers in America rather than to get that infrastructure as inexpensively as possible, we are contributing to a higher price level.

I'm all for an agenda of resilience, but we need to think very hard about domestic costs and whether the policies we're pursuing are going to be constructive for the price level.

>> Now, I mean, you're an economist.

Obvious political pushback on a lot of the things you're saying.

I mean, one interesting one you mention -- tariffs, and I mean, tariffs between the U.S. and Europe are coming down.

Tariffs between the United States and China, of course, are not.

Are you suggesting right now a really smart thing to do would be for the Americans and Chinese to sit down and say, "Okay, let's just -- let's reciprocally actually remove a bunch of those because we're just right now staring at the teeth of inflation"?

>> For that reason, and because the tariffs are costing Americans jobs, look, it's a negotiation.

It's a negotiation with the Chinese, and whatever our sins are, their sins are substantially greater.

When you're in a negotiation, you don't unilaterally make concessions without getting things.

But I think the approach of maintaining truculence and resisting dialogue that was pursued at the beginning of the administration on the theory that the American economy would look substantially stronger and that America would be in a more confident position, 10 months later... that was a strategy that some of us said was a mistake at the time.

And it's a strategy that is now not looking very strong in terms of what's happened to economic sentiment in the United States because of inflation.

>> Last question, Larry.

I mean, with all of these challenges that we're seeing, not just in the United States, inflation and supply chain challenges are global.

Are you starting to worry a lot more about the potential for real economic implosion among the countries that don't have anywhere close to the governance and resilience and stability that the world's largest economy does?

>> Ian, I'm very concerned that a slowing of growth in the United States and in particular a big hike in U.S. interest rates, which I think may well be necessary given inflation, is going to have all sorts of consequences for heavily indebted, poor countries and particularly poor countries that have a desperate need to borrow to meet the expenses of dealing with COVID, to meet the expenses of a world where there's a lot more protectionist pressure.

So I think there's a prospect that this could lead to a very difficult period and that period will not be -- the difficulty will not be confined to the United States and even will be more severe abroad.

>> Larry Summers, thanks so much for joining us on "GZERO World."

>> Thank you.

Bye-bye.

♪♪ >> I generally avoid expressing sympathy for inanimate objects on this show or really anywhere else, but it has been a particularly rough year for the shipping container.

Do you remember this?

>> That's one of the world's most important shipping routes, and it's blocked.

A giant container ship ran aground in the Suez Canal after losing power.

>> The 200,000-ton, 400-meter-long Ever Given -- not Evergreen -- Ever Given blocked the Suez Canal for six days in March, closing off a waterway through which an average of 50 ships a day usually pass, supertankers representing 12% of global trade.

Hundreds of container ships waited anxiously as an army of machine operators and tugboats raced against time to free the ship, while others decided to take the long way around the Horn of Africa, adding weeks to their journeys and more than $26,000 a day in their fuel costs.

Ninety percent of the world's global trade is shipped by sea, with 70% in those massive container ships.

And while the Ever Given was eventually freed, the pileup in the Suez last spring was really just a warning shot.

Today, that traffic jam has gone global.

The trouble started with the pandemic, when China sent huge amounts of protective gear to regions like West Africa and South Asia.

The countries there had little reason to send product back to China.

So as these empty containers piled up in far-flung ports, Chinese manufacturers had few ways to export their goods to wealthier western countries, where demand was skyrocketing.

Before the pandemic, sending a container from Shanghai to Los Angeles cost around $2,000.

By early 2021, one year later, the same trip could run you upwards of $25,000.

At the same time, container ships in North American and European ports overwhelmed docks that were already understaffed because of pandemic quarantines and the long-standing lack of skilled labor, like crane operators.

In the ports of Los Angeles and Long Beach, California, some of the biggest in the U.S. -- they handle roughly 40% of all inbound containers in the United States -- dozens of ships were just sitting there, forced to anchor out in the ocean for days before they could unload.

>> Off the coast of Los Angeles, container ships, mostly from Asia, stretching across the horizon.

>> And so you see a cascading effect as companies responded to the shipping shortages by ordering more goods, which added in turn to shipping strains and filled up warehouses.

Shipping containers, in turn became storage areas, piling up in ports and clogging up trade, and truck drivers and rail operators nationwide are understaffed and overworked.

Will the holiday rush be the straw that breaks the container's back?

The verdict remains out, but in the meantime, I don't know.

Maybe we should buy local.

♪♪ And now to "Puppet Regime," where President Biden's attempt to pardon a Thanksgiving turkey runs afoul.

>> My fellow Americans, as we gather to celebrate gratitude and genocide, it is my great honor to pardon the Thanksgiving turkey.

And this is one thing on my agenda that I can promise you won't go off the rails.

[ Laughs ] Alright, bring out the bird, Jack.

[ Fanfare plays ] Oh, aren't you just the sweetest little -- >> Um, excuse me?

>> Holy smokes, she can talk!

>> First of all, I'm a gobbler, a tom, so I go by he/him pronouns.

Second of all, I did not give you consent to pet me.

>> Oh, well, I didn't mean to.

>> It doesn't matter what you meant.

It matters what you did.

>> Geez, can we just talk about this afterwards?

The American people are watching and this is supposed to be -- >> Oh, I see how it is.

You just want some passive, rubber-stamping turkey.

>> Enough of this backtalk.

[ Clears throat ] Ladies and gentlemen, I hereby pardon this -- >> Oh, no, you don't.

>> Why are you making this so hard?

You been pecking around with Manchin and Sinema?

>> Do I look like a moderate to you?

>> Ah, geez.

Okay, what do you want?

>> Really?

>> Yeah, let's hear it, Tom.

What do you want?

>> Wow.

Well, okay.

Let's start with healthcare, child care, paid family leave, climate change, unify the Democrats, end racism, save abortion, defined infrastructure, tamped down inflation, end COVID, stop China, stop Zuckerberg, find Nemo and bring the New York Knicks a championship.

Or, you know, just do any one of those things.

>> Goodness gracious.

And wait a second.

You really think the Knicks could win a championship?

>> "Puppet Regime"!

>> That's our show this week.

Come back next week, and if you like what you see or you're worried that you're not going to get Christmas presents, not because you've been naughty, not because you've been bad, but just because Santa can't actually bring you any stuff, check us out gzeromedia.com.

♪♪ ♪♪ ♪♪ ♪♪ >> Major corporate funding provided by founding sponsor First Republic.

At First Republic, our clients come first.

Taking the time to listen helps us provide customized banking and wealth-management solutions.

More on our clients at firstrepublic.com.

Additional funding provided by... ...and by...