Grumpy Economist: Supply
Supply retaliation, In Project Syndicate
Soaring inflation, soaring energy prices, production bottlenecks, shortages, plumbers not answering calls-economic orthodoxy has just hit the wall of reality called “supply.”
Of course, demand is also very important. If people want to buy half, today’s bottlenecks and shortages will not happen. But the U.S. Federal Reserve and the Treasury Department have printed trillions of dollars in new U.S. dollars and sent checks to almost every American. Inflation shouldn’t be difficult to predict; however, it caught the Fed completely off guard.
The Fed’s excuse is that supply shocks are a temporary symptom of pent-up demand. But the Fed’s job is-or at least it should be-to calibrate how much supply the economy can provide and then adjust demand to that level, nothing more. Being surprised by the supply problem is like the army being surprised by the invasion.
The current tightening should change thinking. The true business cycle school may regain respect, which focuses precisely on supply constraints and warns people not to die from a thousand cuts caused by inefficient supply. Arthur Laffer’s eponymous curve announced that lower marginal tax rates would spur growth, and he should sneer at the record revenue from this year’s corporate tax.
Similarly, people hope that we will no longer hear the voice of modern monetary theory. Proponents of modern monetary theory advocate that the government print money and send it to people. They claim that inflation will not follow because, as Stephanie Kelton said in “The Deficit Myth”, our economy is “always weak.” It is difficult to ask for a clearer test.
But the United States should not be in a state of supply tightening. The actual (inflation-adjusted) GDP per capita in the United States last quarter just exceeded the pre-pandemic level, and overall employment is still 5 million below the previous peak. Why is the supply capacity of the US economy so low? Obviously, there is a lot of sand in the gear. As a result, the task of economic policy has been subverted—or rather, repositioned where it should have always been: focus on reducing supply-side inefficiencies.
A potential problem today is the intersection of labor shortages and Americans not even looking for jobs. Although there are more than 10 million job vacancies — 3 million more than at the peak before the pandemic — only 6 million people are looking for work. All in all, the number of people working or looking for a job has decreased by 3 million, from a stable 63% of the working-age population to only 61.6%.
We know two things about human behavior: First, if people have more money, they will have less work. Lottery winners often quit their jobs. Second, if the rewards of work are greater, people will work more. Our current policy provides a double whammy: more money, but if it works, most of the money will be taken away. Last summer, it became clear to everyone that people who received more benefits than work income when they were unemployed would not return to the labor market. This problem has always plagued us, and it is getting more and more serious.
Remember a few years ago when commentators warned that we needed to send basic income checks to truck drivers, their jobs would soon be eliminated by artificial intelligence? Well, we started sending checks to people, and now we are surprised to find that there is a shortage of truck drivers.
In fact, every policy on the current agenda has exacerbated this inhibitory factor and increased supply constraints. Think of childcare services as a small example among thousands. Childcare costs have been declared the latest “crisis,” and the “Rebuild Better” bill introduces a new open-ended right. Yes, the right: “Every family applying for assistance…should receive childcare assistance”, regardless of the cost.
The bill increases costs and restraints. It stipulates that the salary of childcare workers must be at least as high as that of elementary school teachers (63,930 US dollars), rather than the current average (25,510 US dollars). The supplier must obtain a license. The household pays a fixed and increasing proportion of household income. If the family makes more money, the benefits will decrease. If a couple gets married, they will pay higher fees based on their total income. Since payments are declared to be a small part of revenue and the government bears the rest, either prices will skyrocket or price controls must be implemented quickly. Even more ridiculous is that the proposed legislation requires states to implement a “tiered system” of “quality”, but gives everyone the right to receive top-level placement. And this is only a small part of the huge bill.
Or consider climate policy, which will suddenly awaken this winter. This is also predictable. The current policy focus is to cut off the supply of fossil fuels before reliable alternatives are ready on a large scale. Quiz: If you reduce supply, will prices rise or fall? Europeans facing soaring energy prices this fall have just discovered.
In the United States, policymakers devised a “whole government” approach to stifle fossil fuels, while reiterating that “climate risk” is threatening the mantra that fossil fuel companies go bankrupt due to low prices. We will see if the facts shame anyone here. Pleading OPEC and Russia to open the faucets we have closed will only end here.
Last week, the International Energy Agency announced that the current climate commitments would “create” 13 million new jobs, and this number would double under the “net zero scenario”. But we are in a situation of labor shortage. If you can’t hire truck drivers to unload the ship, where will these 13 million new workers come from and who will do the work they used to do? Sooner or later, we must realize that it is not 1933. Using more workers to provide the same energy is a cost, not a benefit.
Now is the time to untie the supply constraints made by our government. Government policy prevents people from building more houses. Vocational licenses have reduced the supply. Labor legislation reduces supply and opportunities. For example, the law requires Uber drivers to be classified as employees rather than independent contractors. The problem with infrastructure is not money, but laws and regulations that make infrastructure very expensive, if it can be built. The cost per mile of the subway is now more than one billion U.S. dollars. Contract provisions, provisions for the payment of union wages, “buy American” provisions, and lawsuits filed under the pretext of environmental protection put the project in trouble and reduced supply. We lament the labor shortage, but thousands of prospective immigrants are eager to come to our shores to work, pay taxes and promote our economic development.
The supply contraction caused by inflation is a good wake-up call. Supply and efficiency must now be the top priorities of our economic policy.
Update: I vaguely know many regulations that cause bottlenecks in ports, including union work regulations, regulations prohibiting truck parking and idling, overtime regulations, and so on. But it turns out that a key bottleneck at the Port of Los Angeles is… Zoning! According to the zoning method, you cannot stack empty containers more than two heights, so there is nowhere to put them except on the truck, and the truck cannot fill a complete container. This Twitter post is very interesting because it implies that the port is at a standstill, full of FUBARed and SNAFUed, not operating at full speed, but unable to handle cargo.
Disclaimer: To my economist friend, yes, the use of the word “supply” here is not accurate. “Total supply” is different from the supply of individual commodities. When the price of a commodity rises relative to other prices, its supply increases. “Total supply” is the supply of all commodities when prices and wages rise together. This is a more difficult and different concept. Of course, I mean “the quantity produced by the general equilibrium operation of the economy, supply and demand, without any friction that we call low’aggregate demand’, but due to taxes, regulations and other market distortions.” For this Concepts, the words “supply” and “supply side” are used too much, and there are too many popular writings, I am not trying to shift the language to something more accurate.