Policy makers should not have been caught off guard by rising prices and shortages of goods and labor. Virtually the entire post-pandemic agenda is based on policies that fuel demand and discourage work, making supply-side constraints completely predictable.
STANFORD – Rising inflation, skyrocketing energy prices, production bottlenecks, supply shortages, plumbers not returning calls – all of this shows that economic orthodoxy has just hit a wall. of reality called “offer”.
The demand is also important, of course. If people wanted to buy half of what they buy, the bottlenecks and supply shortages of today would not occur. But the Federal Reserve and the US Treasury have printed trillions of new dollars and have sent checks to almost every American. Inflation shouldn’t have been so terribly difficult to predict; And yet it has taken the Federal Reserve completely by surprise.
The Fed’s excuse is that supply shocks are transitory symptoms of stifled demand. But the Fed’s job is, or at least it should be, to gauge how much supply the economy can offer, and then adjust demand to that level and not to a higher level. That the Fed is surprised by a supply issue is as if the military is surprised by an invasion.
The current shortage should change ideas. You may come to have a renewed respect for the real business cycle school, which focuses precisely on supply constraints and warns of death from thousands of outages stemming from supply inefficiencies. Arthur Laffer, whose namesake curve announced that lower marginal tax rates spur growth, must be laughing at the record revenue corporate taxes are generating this year.
Likewise, one hopes to hear nothing more that comes from Modern Monetary Theory, whose advocates advocate for the government to print money and send it to the people. They proclaimed that inflation would not follow, because, as Stephanie Kelton puts it in The Deficit Myth, “there is always slack” in our economy. It is difficult to ask for a clearer proof that denies what is asserted than what is currently being experienced.
But the United States should not be in a tight supply situation. America’s real (inflation-adjusted) GDP per capita barely surpassed its pre-pandemic level this past quarter, and overall employment is still five million below its previous peak. Why is the supply capacity of the US economy so low? Obviously, there is a lot of sand in the gears. Consequently, the task of economic policy has been turned upside down, or rather reoriented to where it should have been all along: focused on reducing inefficiencies on the supply side.
An underlying problem today is the intersection of a labor shortage and the fact that there are Americans who are not even looking for work. Although there are more than ten million job openings listed (three million more compared to the pre-pandemic peak) only six million people are looking for work. In summary, the number of people working or looking for work has decreased by three million, from a constant level of 63% of the working-age population, it fell to only 61.6% of that population.
We know two things about human behavior: First, if people have more money, they work less. Lottery winners tend to quit their jobs. Second, if the rewards from work are higher, people work more. Our current policies offer a double whammy: more money for people, but much of that money will be taken from them if they work. Last summer, it became clear to everyone that people who received higher benefits while unemployed compared to the benefits they would earn working were not going to return to the job market. That problem is still with us and it is getting worse.
Remember when commentators warned a few years ago that we would have to send basic income checks to truck drivers whose jobs would soon be eliminated by artificial intelligence? Well, we started sending checks to people, and now we are surprised that there is a shortage of truckers.
Virtually all of the policies on the current agenda compound this disincentive, adding to supply constraints. Consider child care as one small example among thousands. Child care costs have been heralded as the latest “crisis,” and the “Build Back Better” bill proposes a new right with undefined limits. Yes, indeed, a right, as the bill states that: “all families requesting assistance … will be offered child care assistance” regardless of cost.
The bill triggers costs and disincentives. It stipulates that child care workers must be paid at least as much as elementary school teachers ($ 63,930), instead of the current average ($ 25,510). Suppliers must be licensed. Families pay a fixed and growing fraction of family income. If families earn more money, benefits are reduced. If a couple marries, they pay a higher rate, based on the combined income of the two spouses.
Since payments are claimed as a fraction of revenues and the government assumes the rest of those payments, one of two situations will occur, either prices will skyrocket or price controls must be instituted quickly. To add to the absurdity, the proposed legislation requires states to implement a “tiered system” of “quality,” but gives everyone the right to a top-tier job. And this is just one small element of a huge bill.
Or consider climate politics, which is headed for a rude awakening this winter. This was also predictable. The current policy approach is to end the supply of fossil fuels before reliable alternatives are ready on a large scale. Review question: If supply is reduced, do prices go up or down? Europeans facing rising energy prices this fall have just heard about this answer.
In the United States, lawmakers have devised a “whole government” approach to strangling fossil fuels, while repeating the mantra that “climate risk” threatens to bankrupt fossil fuel companies due to low prices. . We’ll see if the facts embarrass anyone at this point. Pleading with OPEC and Russia to open the valves that we have closed will only go so far.
Last week, the International Energy Agency declared that current climate promises will “create” 13 million new jobs, and that this number would double under a “net zero emissions scenario.” But we are facing a labor shortage. If truckers cannot be hired to unload ships, where will these 13 million new workers come from, and who is going to do the jobs they were previously doing? Sooner or later, we have to realize that we are no longer living in the year 1933, and that using more workers to provide the same energy is a cost, not a benefit.
It is time to unbolt the shackles created by our governments that are imprisoning the supply. Government policies prevent people from building more homes. Occupational licenses reduce supply. Labor law reduces supply and opportunities – for example, laws that require Uber drivers to be classified as employees rather than independent contractors.
The problem with infrastructure is not money, it is that laws and regulations have made infrastructure absurdly expensive, if it can ever be built. Subways now cost more than a billion dollars per mile. Hiring rules, mandates to pay union wages, “buy American” provisions, and lawsuits filed under environmental pretexts hamper construction and reduce supply. We regret that there is a labor shortage; Yet thousands of would-be immigrants are desperate to come to our shores to work, pay taxes, and jump-start our economy.
A supply shortage coupled with inflation is a huge wake-up call. Supply and efficiency must now be the priorities of our economic policy.
John H. Cochrane es integrante senior de Hoover Institution.
Translation from English: Rocío L. Barrientos
Copyright: Project Syndicate, 2020