Thursday, March 3, 2022

Time for Supply

At Project Syndicate essay, with Jon Hartley. It's not the first, and it won't be the last on the issue! 

Now that surging inflation has refocused everyone's attention on the long-ignored supply side of the economy, the question is how best to support broad-based growth, efficiency, and innovation. The answer is not necessarily deregulation, but the need for smarter regulation is increasingly apparent – even to progressives.

STANFORD – The return of inflation is an economic cold shower. Governments can no longer hope to solve problems by throwing money at them. Economic policy must now turn its attention to supply and its cousin, economic efficiency. 

The issue is deeper than delayed goods deliveries and a year’s worth of sharp price increases. From the end of World War II to 2000, US real (inflation-adjusted) GDP per capita grew 2.3% per year, from $14,171 to $44,177 (in 2012 dollars). Americans became healthier, lived longer, reduced poverty, and paid for a much cleaner environment and a vast array of social programs. But since 2000, that post-war growth rate has fallen almost by half, to 1.4% per year. And it’s worse in Canada and Europe, where many countries have not grown at all since 2010 on a per capita basis. 

Nothing matters more for human flourishing than long-term economic growth. So, no economic trend is more worrisome than growth falling by half, especially for the well-being of the less fortunate. 

The eruption of inflation settles a long debate. Sclerotic growth is not the result of demand-side “secular stagnation,” fixable only with massive fiscal and monetary stimulus. Sclerotic growth is a supply problem. We need policies to increase the economy’s productive capacity – either directly or by reducing costs. 

How? The simplest and most important thing governments can do is to get out of the way. Byzantine regulations and capricious regulatory authorities stymie business. We do not need thoughtless deregulation, but rather smarter regulation that is simple, effective, avoids disincentives and unintended consequences, and is not distorted to protect current business and prop up regulatory empires. That means adding sunset clauses to regulations, regularly re-evaluating existing measures, and instituting a right to external appeal. 

The United States needs infrastructure. The problem is not money. The problem is that building anything in America has become almost impossible, owing to the thicket of regulations and lawsuits that will stop or drive up the costs of any project. 

Start by repealing the Jones Act, a 1920 law that requires all intrastate shipping to use expensive US merchant marine vessels (in practice, it is the “Send It by Truck Act”). Repeal the Davis-Bacon and Related Acts, which deliberately add to the costs of building highways. Reform the National Environmental Policy Act, which allows people to sue to stop and delay projects on specious environmental grounds. Overhaul the Nuclear Regulatory Commission. Not one new nuclear plant has been built since the NRC was founded in 1975. 

Protectionism reduces supply. Tariffs and trade restrictions make products more expensive and deprive other countries of the dollars they need to buy from America. Yet the Biden administration has kept longstanding restrictions and even the Trump administration’s tariffs in place. It also doubled the tariff on imported lumber last November, just as construction costs were skyrocketing. 

High housing costs in the parts of America with good jobs create barriers to opportunity and force people to make long commutes that contribute to congestion and emissions. The cause is clear: restrictions on land use and zoning and building codes that make it impossible or expensive to build and to build densely. Rent controls help today’s tenants at the expense of today’s landlords, but also deny opportunities to newcomers, especially the poor, and ruin the rental housing stock. 

America’s failing public schools are another barrier to opportunity and productive capacity. Again, money isn’t the issue: Nationally, K-12 schools spend an average of $13,000 per student. New York’s dismal public schools spend $28,000. The problem is teachers’ unions and politicized education bureaucracies, which are now busy dumbing down curricula. A solution that puts students first is more educational choice and competition. 

Many Americans are neither working nor looking for work. It is not for a lack of jobs. Employers are begging people to work. One problem is that many people lose a dollar or more of benefits for each additional dollar they earn. Disincentives add up across programs such as food stamps, housing subsidies, health insurance subsidies, educational subsidies, disability payments, and more. Reforming entitlement programs to limit the overall disincentive to perhaps 50 cents on the dollar would help. 

Labor laws and regulations are rife with cost-increasers and disincentives. Detailed regulations cover working hours, scheduling, mandated benefits, and more. Occupational licensing requirements, unions, regulatory compliance burdens, and payroll and income taxes all raise the cost of employment. 

The US needs workers. The country needs truck drivers, child-care providers, teachers, nurses, and construction workers. It needs entrepreneurs. It needs taxpayers to fund a bankrupt welfare state. All these workers are standing at the borders. Immigration reform that increases economic migrants is a prime supply policy. “Creating jobs” with policies such as the Green New Deal is now a cost, not a benefit, as those workers must stop doing something else. 

To raise revenue with minimal economic distortion, taxes should feature low marginal rates, a broad base, simplicity, and predictability. The US system is the antithesis of this description. 

US health care and insurance are a bloated government-created oligopoly. Market-oriented reforms can cut costs and improve performance. The US can no longer just throw more money at the problem. 

Alas, getting out of the way is terrible politics. Economic regulation largely serves to protect constituency A at the expense of constituency B, and it comes at the expense of economic efficiency. Supply policies do not come with simple, emotionally appealing watchwords like “stimulus.” They require painful reforms to thousands of different markets and regulations – a great spring cleaning of economic life. And politicians prosper by proffering new ideas and new programs, not by promising difficult reforms or using unfashionable terms like “supply side,” “free market,” or, heaven forbid, “neoliberal.” 

But there is hope. Progressives, in particular, are noticing the problem. Spurred on by a “YIMBY” (“yes in my backyard”) movement, even California is beginning to crack down on zoning restrictions that prohibit housing construction and price the poor out of areas with economic opportunity. The Obama administration was early to criticize occupational licensing and zoning. Progressive writers such as Ezra Klein, Derek Thompson, and Matthew Yglesias are decrying supply-side restrictions on growth. If they want to call it “supply-side progressivism,” a “progress agenda,” or an “abundance agenda,” fine. 

For now, the Biden administration’s “comprehensive strategy” to focus on “modern supply-side economics” is merely a re-branding of its boondoggle-filled “infrastructure” bill and the ill-conceived Build Back Better welfare-state expansion. Nonetheless, in doing so they recognize the problem. They, or their successors, may follow with effective strategies. 


  1. You lost me at the "free" trade and open borders. The Chinese have used "free" trade to steal our intellectual capital and gut our manufacturing. All we have gotten in return is crappy cell phones and the plague. Every cent we made off of "free" trade has been burned to deal with the plague. It wasn't worth it.

    "Free" trade was a great idea for the UK when Britannia ruled the wave and the sun never set on the British Empire, and for the US in the aftermath of the Cold War. But now the world has gotten real again. It is the world of Thucydides, Machiavelli, and Hobbes.

    Trade is now a tool of foreign policy not part of economic policy. I do think we should remove all trade barriers with those of our allies that are democratic and committed to the rule of law. To me USMCA does not go far enough, and we should have similar agreements with Japan, Australia, the UK and other NATO countries.

    I would rather be a poor man standing on my own two feet, than a rich man on my knees kowtowing to Xi Jinping.

    As for your open borders idea. It suffers from many of the same defects as "free" trade. Yes, we need more skilled labor. No, we don't need more illiterate peasants, MS 13 members, drug dealers, or welfare drones. We also need to ensure that every able bodied American citizen has a good job at a living wage. We don't need to import workers so Hollywood executives have cheap nannies and gardeners.

    The "free" trade open borders economy has made a lot of money for urban elites who profit from investments in China and benefit from cheap domestic servants. It has devastated wide swaths of the country with joblessness, drug addiction, and hopelessness. And, it has poisoned our political and social dialog. Despite all the miracles of modern medicine life expectancies have gone down amongst the excluded classes.

    This is the real crisis that our idiot leftists want to label as the distribution of wealth. Piketty, like most Frenchmen is recycling the slogans of the Jacobins, 200 years after they lost all relevance. Joel Kotkin is an analyst who has a much better understanding of the nature of the crisis.

    1. Good post by John, good rejoinder from Fat Man. A great deal of the two posts is also applicable to Australia, although things aren't as bad here, they are still moving in the wrong direction.

    2. I agree with much of "Fat Man's Comment. The US must have the most counterproductive immigration policy in the world. We now have open borders that has allowed 2 million unvetted and unvaccinated illegal aliens into the country along with huge amounts of contraband. Meanwhile we send home Indian Engineers with advanced degrees unless they can win the visa lottery. Allowing a controlled flow of unskilled immigrants is fine to fill the jobs cited by Cochrane. But the current policy is a disaster. Think about the cost that will be incurred by local governments for years to come. On free trade, I could not care less if the US no longer produces low end cheap manufactured products but to cede our expertise in high end manufacturing to the mercantilist CCP is no longer tenable. Some of the problem can be attributed to onerous environmental and other regs that discourages production of rare earth metals and other critical inputs and which can be rectified by reform. It is a difficult path to get it right and industrial policy always becomes political and results in massive misallocation of resources. Somehow a middle path needs to be found that balances free trade efficiencies with national security priorities as we face implacable adversaries in China and Russia.

    3. It is often forgotten that the benefits from a move to freer trade are net benefits. There are winners and there are losers, with the winners winning more than the losers lose. That doesn't make the losers happy.

      Compensate the losers.

    4. @Alan K wrote: "I could not care less if the US no longer produces low end cheap manufactured products but to cede our expertise in high end manufacturing to the mercantilist CCP is no longer tenable."

      I should begin by thanking him for his endorsement. He recognizes that some simple things such as mining rare earths have been shut down by regulatory actions. But, I think the issues are bigger and more complicated than just giving out permits. I think that the following excerpt points out that high end vs low end does not capture the complexity of the problem:

      "So let's talk a bit about the synthesis of Paxlovid (PF-07321332), Pfizer's protease inhibitor drug for the coronavirus. ... Small-molecule drugs are wonderful things ... but they have logistic complications of their own. Let's list some: ...

      "That multistep work means that there are a huge variety of reagents that can be involved in such syntheses, and every new drug arrives with its own list. ... this is one of the absolutely more important parts of drug production on scale: what reagents do you need, how much, and where are you going to get them? What steps of the process are going to be done where, and by whom, and for how much money? A given drug (or its constituents) can go through two, three, half a dozen facilities in completely different countries during this work ...

      "... if you track almost any drug's production down to the earliest stages, you will almost invariably come to a whole bunch of offshore suppliers. These are mostly Chinese, although there are some Indian ones and other countries in the mix as well. What they tend to have in common are lower labor and capital costs and a higher tolerance for the presence of a large number of smelly, unattractive, and sometimes downright dangerous chemical production facilities. We simply do not have a lot of that capability here in the US any more; it's been declining for decades because it's so much cheaper to have someone else do it. ..."

      "Making Paxlovid" By Derek Lowe • 5 Jan 2022 • • Derek Lowe has a PhD in organic chemistry and has worked for several major pharmaceutical companies. He writes a blog: "In the Pipeline", which is hosted on the Science Magazine website. I highly recommend it. I have learned from it a great deal about the biological science behind the plague and its treatments.

      The implications of this situation for national security are frightening. How can we fight a war against a country that can cut off our supplies of medicines? If the Chinese Communists take over Taiwan and cut off the supply of computer chips that run our military equipment how will we resist them?

      I do not claim that every step of every process must be inside the the US. Some things can be in Central and South America, and others in South or Southeast Asia. But no strategic supply chain should be allowed to go through the China/Russia Axis of Evil. We need the most searching inquiry into all of our supply chains and a policy of protecting ourselves from their vulnerabilities. Trade policy must become the servant of Foreign and Security policy.

    5. I see the immigration issue as fairly straightforward: we need more legal skill-based immigration, and less illegal immigration. It's shocking our political class cannot come to this compromise.

      I might go a step further and disallow immigrants access to our social benefits system for some period of time. This will reduce any misplaced incentives for people to come.

      Across the spectrum, there are so many win-win compromises that can't be reached because politics is broken. It's a big issue.

  2. Really, the private sector would build millions of new housing units along the West Coast if allowed. Much needed.

    I suspect some sort of federal bonuses for areas that move un-zoned property is needed.

    1. Tried that. A lot of them caught fire and were burned to the ground with the green left blaming "global warming".

  3. This comment has been removed by the author.


    Has the crowd funding site been set up yet?

  5. "The US needs workers. The country needs truck drivers, child-care providers, teachers, nurses, and construction workers."

    Instead it gets government workers and bankers.

    Worse yet, those government employees (with extra time on their hands) feel it is their imperative duty to shut down the productive aspects of society.

    What an effed up country we live in.

    Of the graduates at Stanford in the past several years - what percentage went into the professional services (doctors, architects, engineers, musicians, teachers, etc.) and how many went into government and finance?

    And why should anyone go into the professional services when both finance and government have a hot connection to the central bank?

    The federal reserve is given the moniker - "Lender of LAST resort", not lender of first, second, and only resort.


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  6. Free trade critically relies on the assumption that everyone plays by the rules and no one cheats. That assumption does not hold with China, which cheats and steals at every opportunity. Therefore, we cannot have free trade as long as China--or communist China, at least--is in existence.

    1. And firms in the West do not know this, do not put it into their prices, and are otherwise throwing money away, acting like charities.

  7. John, you state: "But since 2000, that post-war growth rate has fallen almost by half, to 1.4% per year. And it’s worse in Canada and Europe, where many countries have not grown at all since 2010 on a per capita basis."

    The following chart from Federal Reserve Bank of St. Louis' FRED database does not indicate support for your statement (quote above): .
    The traces shown in the chart are:
    Red -- Gross Domestic Product by Expenditure in Constant Prices: Total Gross Domestic Product for Canada/Population, Total for Canada;
    Green -- Real Gross Domestic Product/Population, Total for United States
    The abscissa is calendar time spanning from 1962 through 2020 (time increments are annual, end of period). The ordinate is displayed in percentage change year-to-year.
    There is no significant difference evident between the growth rates of real GDP/capita of the two national series. The traces indicate that the correlation between the two countries is strongly positive. The trend lines in both countries are essentially of the same in magnitude and direction.

    From this data, the null hypothesis, Ho: there is no difference between the two time series is unlikely to be rejected in favor of the alternative hypothesis, H1: per capita real GDP growth in Canada is worst than per capita real GDP growth in the United States.

  8. What is your position on unions in general? Should they be regulated? How?

  9. I read your article dated may 12,2020 titled "How the Fed Plans to Pay the Country's Bills" and I have a question... at one point you say the banks can by "flipping an electronic switch. Banks can convert reserves to cash and back at will." That's not how I understand fed created reserves(money supposedly created when the FED buys treasuries from a primary dealer.)My understanding is those reserves must remain within the FED system, never to be converted to cash. So, what's the real answer... are banks allowed to convert FED created reserves to cash for the purpose of lending?

    1. Reserves held at the Federal Reserve Banks can be exchanged for currency at any time when the Federal Reserve Bank in the commercial bank's city or state is open for business. The currency so obtained becomes a "vault reserve", i.e., a reserve held on the premises of the commercial bank. Currency can be exchanged for reserves at the FRB in a reverse transaction. Handling the currency, however, requires physically transporting the currency to/from the FRB from/to the commercial bank's vaults, a costly process usually undertaken for the convenience of the bank's depositors (e.g., individuals and retail businesses that transact in the physical currency).

    2. I specified FED created reserves, ie, the FED "buys" treasury debt and credits the selling banks reserve account.I believe those reserves must remain in the system to be swapped when the FED returns the treasuries. Hence, no new money is created. Do you want to change your answer?

    3. "So, what's the real answer... are banks allowed to convert FED created reserves to cash for the purpose of lending?"

      Sure, by buying back the Treasuries from the Fed and then selling them in the open market (two step process).

    4. Really!!! So the real answer is NO. Reserves remain with the FED system and cannot be converted to cash. Only when reserves are no longer reserves can the bank use that cash to "print out of thin air" "loans."

      There, fixed it for you.

    5. Mark,

      You are forgetting something. The Fed pays interest on reserves. Those interest payments can be lent back out. Principle can't be touched as long as it is held in reserve, interest payments can.

    6. Interest was never the question. The statement I objected to was that banks have an electronic switch to turn reserves into cash. Clearly, they do not... only when they are no longer reserves can they serve as basis for "lending."

      Are you forgetting that those treasuries payed interest??? Are you claiming the FED pays more interest than those banks would receive from the Bonds??? So, NO. No new money is created. Period.

    7. No, Mark, I have no intention of changing my comments that appear above. The description of the process of converting FRB reserves to 'cash' is correct as stated.

      John Cochrane's remark is famously opaque and I interpret it to be 'throw-away comment' and not one to be accorded any weight whatsoever.

      In a fractional banking system, the commercial banks regulated by the FRB Board of Governors (delegated) hold reserves in many forms, including but not limited to the banks' accounts with the Federal Reserve Banks around the country.

      Where does "new money" come from? (1) Commercial bank loans to private borrowers (persons, corporations, municipalities, state and other local governments); and, (2) FOMC quantitative easing ("QE") programs. In case (2) 'base money' is created when the FOMC purchases securities to hold to maturity through the committee's open-market activities. In case (1) M2 increases. In case (2) base money increases, which in turn increases M2. In both cases the money supply increases. If the FOMC decides to sell its holdings of financial assets, then the base money supply would contract, and M2 would likewise contract.

      A commercial bank that holds a balance with the FRB-NY in excess of its calculated reserve requirements needed to clear its liabilities in the payments system, will rid itself of the excess balance by making loans to other banks, brokers, industrials, and non-financial corporations at various terms to maturity. One might suppose that this is basis of John Cochrane's puzzling remark. And, I tend to think that that is what he was referring to.

  10. Can you be for infinite growth on a finite planet, stereotypical economist and still be taken seriously? We seem to be coming to the end of the fossil fuel splurge but even should "a miracle occur"with more energy supply the oceans will boil with a few centuries of compound rate of growth. See the website.

    1. Jim and Linda,

      First, a lot of economic growth comes from new inventions - black and white TV replaces radio, color TV replaces black and white, motorized vehicle replaces horse and buggy etc. Growth is only limited by our own imagination.

      Second, look beyond this planet. There is a whole universe out there begging to be explored. Men and women have climbed the highest mountain and explored the deepest oceans on this planet.

    2. First, the oceans will never "boil" -- surprised some still believe that nonsense. Second, only on "star trek." We will make do with what we have on this planet, and we will do quite well because evolution is still progressing.


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