A guest post by Benjamin Cole
The supply–siders champion structural reforms to boost production and GDP, and it is easy to chime in. Of course, lower taxes and regulations on production will bring greater supply. I like it.
And it is a truism that if supply is constrained, but demand increases, you get rationing by price. In a nation with fixed productive capacity at full bore, printing more money will just increase prices, not output.
So do not print more money, say the supply-siders. Somehow institute structural reforms.
Of course, no nation appears able to bring about structural reforms, but leave that aside for a moment, and consider the U.S. economy of the 2010s vs. the one of the 1960-70s.
The Big Story is the supply side has gone global in the last 50 years. If the Federal Reserve prints more money now, and the supply-side is global, what happens?
It is a weak argument to suggest new demand from a single nation can overwhelm even global supply chains. Really, global supply cannot respond?
There was a time when Americans bought cars from the “Big 3”: GM, Ford and Chrysler. If you were nice you mentioned American Motors Corporation. All were unionized. It was perhaps a competitive market, but nothing compared to what happened in the next half-century.
Today the U.S. market is plied by multiple manufacturers, from Europe to Korea to Japan to South America and maybe India is coming.
The auto market is typical, not unique. It is difficult to name manufactured goods or commodities not sold globally. Heavy construction materials, or light bulky items like Styrofoam cups, might be sold domestically only, but beyond that get ready for China. In the 1960s, the United States was nearly an island economy. Today imports make up about one-fifth of GDP.
Long ago, even Levis jeans closed down U.S. manufacturing operations.
Services are provided globally too, such as call centers, and annoying overseas customer service centers. Architects now render services across national lines easily, as blueprints can be e-mailed across the globe more quickly then they could be mailed across town 20 years ago—not only that, blueprints can be worked on immediately and in real-time by cooperating architects.
Now, it may not seem important that call centers proliferate in the Philippines. But those one-time U.S. call-center workers are flushed back into U.S. labor markets, loosening up supply.
Films are shot wherever it is cheap, not in Hollywood and often in New Zealand. People fly to Thailand for surgery, take a vacation and come out ahead.
FOMC and Chronic Bad Predictions
For five straight years the Federal Reserve Board and the FOMC has undershot their 2 percent inflation target, as measured by the Personal Consumption Expenditure (PCE) index of prices. Not only that, they undershot their inflation target precisely when overshooting it might be expected. If a central bank does not overshoot its inflation target to get out of the worst recession since the Great Depression, when will it?
Supply-siders still have a good point, but they seem blind to globalization in the last half-century, and United States’ enviable position as a purveyor of an international reserve currency. Mostly, I suspect supply-siders are just peevishly fixated on tight-money, an apparently chronic psychiatric condition in some right-wing circles. Left-wingers have their own issues, like solving sluggish economic growth by deficit spending. It worked in Japan you know.
I will just briefly mention other defining traits of the modern U.S. economy compared to the 1960s: Unions are dead, transportation and communications and finance have been much deregulated, there are huge pools of capital to finance start-ups, and top marginal tax rates have been cut from 90 percent to under 40 percent.
The Fed should put the petal to the metal…and leave it there.