A Benjamin Cole post
Call This Fight 9-6, Summers
Scott Sumner recently declared the global economic go-slow is mostly defined by limited supply. This is scarcely credible, as global supply lines are thick and lightly tapped. Name a single product or commodity that is scarce, in which demand is outstripping supply. Beats me. Everyone wants more business (we talk U.S. housing markets later).
Yet, Sumner is right in one regard; surely every economist agrees that taxes and regulations on productive behavior should be as light as possible. So, inevitably in every democratic (or even autocratic) society, there is always work to do on freeing up supply. Then, there are some demographic issues in developed nations and China, but higher wages create in more supply. Indeed, mere demand, not even higher wages, is causing U.S. labor supply and participation rates to rise presently (yes, U.S. federal “disability” programs, military and civilian, should be sunsetted).
Heavyweight economist Larry Summers says the global problem is demand. As I blogged recently, Summers seems to prefer fiscal deficits to boost demand, but may have held the door open to quantitative-easing-financed tax cuts in a recent post of his. I sure hope so, as QE-financed tax cuts are my favorite macroeconomic tool. See Summers blog, “The Case For Expansion.”
A Telling Anecdote: The Auto Industry
U.S. auto sales hit an all-time record in 2015 of 17.47 million vehicles, up about 75% from the 2009 nadir. Bravo. And yet new U.S. vehicle prices have hardly budged…since 1995. Yes, 20 years of scant inflation in auto prices. This is remarkable. Automobiles source parts and inputs globally, and vehicles are big and bulky, difficult to ship (in comparison to garments, commodities, phones or any other consumer product one can think of). https://research.stlouisfed.org/fred2/series/CUUR0000SETA01
So why such dead U.S. auto prices? Answer: The global auto industry has excess capacity. Demand may hit 97.8 million units in 2016, leaving 27.4 million units of unused capacity.
I ask Scott Sumner, “How is this a supply problem?”
The globe’s ability to produce commodities, goods and services is a blessing, and should be exploited fully. The human race should be living better than ever, everywhere on the globe, all the time. People want jobs everywhere. But something is choking off production. We have the means of supply, and abundant capital—so what is crimping output?
The globe’s central banks are too tight, and are suffocating demand and growth. This is obvious. Scott Sumner says the People’s Bank of China is too tight. Fine. But look at Marcus Nunes’ excellent graphs on U.S. NGDP. Surely the Fed is too tight. The ECB is not too tight? Well, maybe the Bank of Japan is showing some game.
Always in discussing the U.S., a caveat must be made for housing. In U.S. cities and suburbs, there are ubiquitous neighborhoods that criminalize robust housing construction. Blogger Kevin Erdmann has done stellar work in this area. I see no solution. The Fed simply has to help generate enough demand to bring the whole economy to robust growth, and tolerate inflation from the housing sector. We can hope for marginal improvements in housing supply, or possibly the U.S. tax codes, or other regulations.
In democracies, there are always structural impediments. Monetary suffocation and zero inflation is not the answer, and do not fix structural impediments. Tight money does not teach anyone a lesson; it just creates socialists. Or worse.
To Scott Sumner and the Fed, I say: Print more money, print more money, print more money until it is Full-Tilt Boogie Boom Times in Fat City. Then keep printing more for a few years.
Wake me up after that.