Bring Back Supply-Side Economics
Bring Back Supply-Side Economics
Sometimes a single highly visible event perfectly illustrates broader global trends. Such an example is the large container ship Ever Given being stuck in the Suez Canal, blocking the passage of other vessels. It’s unclear how long this situation will last, or how much trade it will disrupt, but it is representative of a systemic problem: Insufficiency on the supply side, not lack of demand, is the major obstacle facing the world economy.
For a more close-to-home example, Americans have the recent news from Texas, where significant parts of the state lost electrical power in record-cold temperatures. The entire system came very close to going down.
The policy debate in the US has been obsessing over the demand side. Is President Joe Biden’s $1.9 trillion American Rescue Plan best defined as aid, stimulus or a bit of both? What will happen with inflation and interest rates? How will the Federal Reserve respond?
Those fractious questions dominate my Twitter feed, yet the most important issues of 2021 concern the supply rather than the demand side. What’s needed is a new, revitalized version of supply-side economics.
The biggest question in the US right now is how rapidly vaccinations will proceed. Yet only 8.5% of the new appropriations — under the most generous calculations — are directed toward vaccine supply and anti-Covid-19 efforts.
The biggest question for the world is whether the wealthier nations will put up the estimated $25 billion needed to jump-start a global vaccination campaign in a (relatively) timely manner. So far it appears that they will not — again, a supply-side issue. There did not seem to be much interest in putting such an expenditure into the American Rescue Plan, even though the resulting resumption of trade and migration would undoubtedly have benefited the US by far more than $25 billion.
Major stories about supply-side problems receive only fleeting notice in the US media. Poor infrastructure and distribution are making it difficult for the 270 million inhabitants of Indonesia to get vaccinated, yet very few Americans are paying attention. Indonesia is not usually the focus of attention — and people are not sufficiently obsessed with the supply side.
In the corporate world, there was the big announcement that Intel plans to move full speed ahead to produce more high-quality semiconductor chips and to put more chip factories in the US. That switch has come after years of disappointing results from Intel. Can it set things straight? Right now there is a chip shortage in automobile manufacturing, and given the potential fragility of Taiwanese chip supply, US national security hangs in the balance.
To be clear, the demand for the chips is there — this is very much a supply-side problem.
And it’s one that afflicts more mundane sectors, such as entertainment and sports. At the Miami Open tennis tournament, many of the world’s best players are out of the competition, due to difficulties with scheduling, travel constraints and health precautions. Until they return, fan interest will be limited. Once player supply and suitable seating and attendance arrangements are taken care of, demand will follow.
Supply-side economics got a bad name because it was associated with too many economists who insisted that tax cuts would be self-financing, or who insisted on tax cuts above all other possible supply-side improvements. Yet all economists ought to proudly announce that they are supply-side economists, first and foremost. That is pretty far from the world we live in, especially as social media have made US monetary and fiscal policies a touchstone for the entire world to debate, often in highly emotional terms.
The supply side is likely to receive more attention as the Biden administration pivots to its planned infrastructure bill. Still, attention should focus on the most important and binding supply-side constraints, rather than using these policies as a canvas for debating the political situation in Washington. Politics alone cannot identify the right supply-side questions to ask.
In the meantime: Have you heard about the problems with the Panama Canal?