The New Supply Economy – Niskanen Center


By Jonathan S. Hartley


Suppose President Biden wants to salvage a meaningful first-term bipartisan political agenda from the wreckage of the Democrats’ Build Back Better plan. In this case, there are plenty of opportunities to deal with the rising cost of living, a long-term trend now amplified by a sharp surge in inflation.

To achieve this, President Biden should give serious thought to “supply-side” reforms of the economy. The administration is beginning to embrace the concept of a supply-side agenda – in a recent speech, Treasury Secretary Janet Yellen touted “Build Back Better” as a form of “modern supply-side economics” that aims to boost productivity and reduce inequality – but the approach should extend far beyond this bill.

All of this may sound toxic to Democrats who associate “supply-side economics” with the intellectual movement advocating for Ronald Reagan’s tax cuts. However, when economists talk about the supply side of the national economy, they have something much larger in mind. The basic idea is to achieve growth by boosting productivity in all its forms, including making it easier and more attractive for workers and businesses to engage in higher value global economic activity. Some extreme versions of this idea (such as “real business cycle theory” and “short-term monetary neutrality”) view monetary policy and fiscal stimulus as unfortunate attempts to stimulate growth by stimulating demand. Various iterations of these sentiments can be diverted by political economy into narrow “pro-business” agendas rather than genuine “pro-free enterprise” agendas. Indeed, you can avoid these cliffs while recognizing the power of the argument that the economy’s supply is blocked. This can be done not just by a glut of container ships, but by pathological trends in education, housing, and health care that limit how much American workers can produce. Indeed, the basic goods and services that make work possible have become too expensive.

As Samuel Hammond, Daniel Takash and Steven Teles have argued in their article “Cost-Disease Socialism”, these restrictions have arguably become a constraint on US economic growth and the mobility of low-income households. The book by Brink Lindsey and Steve Teles The captured economy and Matt Yglesias One Billion Americans both echo these arguments. These are similar problems to those that early proponents of supply attributed to very high marginal tax rates in the mid-20th century: a significant slowdown in economic growth and economic mobility of the middle and lower class.

Even when separated from fiscal policy, “supply side” may seem like a dirty word to Democrats. But they should recognize that the first side of the offer was not Ronald Reagan, but John F. Kennedy, who cut shockingly high top marginal rate taxes by more than 90% (as an incentive more than for the Keynesian revival). President Bill Clinton has also addressed the supply side of the economy with bipartisan economic initiatives on free trade and welfare reforms.

Progressives like Ezra Klein refer to this desperately needed new supply-side economic agenda as “supply-side progressiveism,” while libertarians and free-market conservatives call it “supply-side liberalism.” of the offer”. Whatever we call it, people on both sides can agree that the cost of living, especially in health care, housing and education, is a growing problem that public policy must address. This is the start of a roadmap for a new supply-side policy agenda.

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