You’ve not touched on this: there’s immense institutional inertia on the *private sector* side in favor of cheap labor and against capital investment. For the better part of the last 20 years overinvesting in capital has been very risky, because you can’t defer debt service or installment payments in a downturn, but you can sack people. Basically every industry has tried to become “nimble” in this regard, aided by the weak labor market making it possible to throw people at problems instead. Even capital-intensive ones have moved to lease capital and push risks off on large leasing firms, increasing short-term costs to access productivity-enhancing equipment and foregoing the benefits of accumulation.
That will take some time to change, even though the skilled blue-collar labor shortage in particular seems set to continue almost regardless of what we do on the policy side over the coming decade. The Fed might succeed in generating a brief blip that convinces C-suites that the 2010’s are coming back, but the second interest rates go down it’ll be right back to “not enough people”.
Looking at construction, pre-fabrication, and consulting engineering, where I am now, almost *no one* at the senior level believes this to be the case, but almost everyone at the operational level does. I have actual clients where VP’s are screaming upward that they need more and better capital across the board to reduce hiring spend and get prices under control, and CEO’s are basically just sticking their fingers in their ears and belting out “LALALALALA I CAN’T HEAR YOU NEXT YEAR WILL BE 2009!!”
Policy may be slow, but corporate culture shifts are slower. We’re going to be here a while. Invest and plan accordingly, as regards inflation.
This is, of course, all basically right. But supply side reforms shouldn't mean forgetting the lessons of the past two years about the shortsightedness and risks of a fragile, excessively offshore supply chain. The covid disruptions in China and need to have flexibility to respond to Russian military aggression should have reminded us that a neoliberal trade policy based on the most rosy Pax Americana assumptions of the 90s was foolishly risky. The trick is to keep the good parts of those policies without repeating or perpetuating the mistakes. Some of the tariffs on basic products from overseas countries might make sense, even if it means a little short term pain, to ensure we aren't overly at risk if shipping was disrupted, etc. But tariffs on stuff from Mexico or Canada? That's dumb.
Particularly frustrating to see that CA’s solution is “Millions in California to Get up to $1,050 in ‘Inflation Relief’.” [1]
> “Millions of Californians will be receiving up to $1,050 as part of a NEW middle class tax rebate. That’s more money in your pocket to help you fill your gas tank and put food on the table,” he [California Governor Gavin Newsom] tweeted.
We did something similar in GA with “Kemp: $1.1 billion in Georgia tax refunds begins this week.” [2]
> House Bill 1302, which Kemp signed into law March 23, will give a refund of up to $250 to single filers, up to $375 to single adults who head a household with dependents and up to $500 to married couples filing jointly.
So this a general problem across states and it seems that the state and local support funds in ARP were too large and it’s giving rise to these counterproductive actions. It would’ve been great if we had already passed BBB with some provisions to claw back excess state and local support to prevent this.
Minor correction: The FAA did *not* change the number of hours to obtain a Commercial Pilot's License. I know, because I have one. They changed the qualifications to be a first officer on a scheduled airline passenger service. Previously, the captain had to have an Airline Transport Certificate (1,500 hours experience) but you could be an F.O. with a CPL (250 hours). Now you need an ATP to be an F.O.
To mitigate the damage, the FAA introduced a "Restricted ATP" that allows you to be an F.O. (but not a captain) with less experience than the full ATP, but still a lot more than CPL.
This doesn't change the gist of your argument, but the text should be clarified.
And also upgrade and modernize our seaports! But we legally cannot. Singapore has spent a lot of money and effort modernizing and upgrading their seaports recently. Now, I am not expecting Singapore-levels of efficiency here in the US (yet), but it is worth noting that some of the things Singapore is improving are actually illegal to do in the US, not just difficult. Singapore is using dredging and land reclamation to make more space but using foreign dredging companies in the US is actually illegal, so we only have like 5 dredging companies and 16 dredging ships (that do not perform well by international standards) for the entire country, and many projects get only 1 or 0 dredging bids. Union contracts also make it very difficult to add any automation to ports. Everything has to be done by a person, no matter how comparatively inefficient it is. And last year's infrastructure law made it illegal to use any of the money for automation at seaports. Not that improving seaports will be a panacea for inflation, but currently American seaports are some of the most inefficient in the world, so improving them should at least help.
I recall one idea you had was that in a fiscally constrained environment, politics would normalise as both parties tried to advance their own economic ideas instead of culture war ranting. Instead, I suspect that we are going to get even more culture war ranting as both parties try to protect their friends. The Democrats want to protect typically minority workers protected in not-too-efficient public sector jobs (like subway conductors). The Republicans want to protect their new friends in the white working class, who may have jobs in basically corrupt private sector industry (like construction). There is, of course, a strong crossover between the two groups.
My suspicion is that both parties will fight like rats in a sack to defend useless or grossly inefficient occupations. The idea that parties should try to manage the economy efficiently will become eroded, in favour of pointless make work.
I could use a bit more clarity on what some of the holdups are. Take the jones act for example, my understanding is the WH can issue a temporary waiver. So even if there is coalition politics or strategic disagreement as to if getting rid of it permanently is a good idea, it could still be eliminated temporarily to ease temporary pain.
Matt has been calling out ‘the main choice groups’ for dictating bad legislative strategy on abortion. But even in that case he’s not telling me it’s NAARAL to blame—So I’m not really even sure what the main choice groups are right now. Who is behind the jones act? Would they settle for temp waivers at this moment but others are holding out for permanent repeal? What’s actually happening?
"In a tight labor market, allowing more imported construction materials doesn’t mean fewer jobs; it means a transition of jobs out of nail-making factories into making houses with nails. And that means an overall more prosperous economy."
I agree. But, it's often hard to do politically, when the nail factory jobs are located in swing states and have well-organized unions, while the making-houses-with-nails jobs are scattered throughout the country, and much less well-organized.
Yeah, You’ve been pushing these ideas for a while now. I’m still skeptical. I feel like the combination of Trump, the pandemic, and now the invasion of Ukraine have all really really emphasized the strategic dangers of de-industrialization. Long term America should figure out how to make a whole lot more things in America, by Americans. Preferably well paid unionized ones. Rather than ranting about inefficiencies and how it doesn’t square with their ‘90s models, economists would do better to use their brainpower to figure out what needs to be done to make it work.
Idea for a public policy that could ease supply constraints in tax advisory jobs: let the IRS build its own online tax prep software. So much of the goat rodeo of last tax season was taxpayers getting mixed up on the amount they received in EIPs and CTCs, and almost none of that would have happened if these taxpayers could have used online tax prep software that already had that information in its database.
Another idea: pass the "direct pay" tax credits in Build Back Better. If Manchin is so concerned about inflation, why is he endorsing make-work for people working in tax equity?
Third idea: replace the 179D deduction revamp in Build Back Better with something that doesn't require a small army of tax consultants to navigate. Energy efficiency as a service contracts and pay for performance programs at utilities have become more common—asking the tax code to measure performance on energy efficiency is unnecessary in those situations. Repeal section 179D and instead add a paragraph to section 168 that says a taxpayer can get 100% "bonus depreciation" on a deep energy retrofit if they make an energy efficiency improvement in the course of the trade or business of selling avoided electricity demand ("negawatts"). Achieves the same thing as old 179D with far less work for places like Alliant Group.
"But when the economy is a bit overstimulated and also hit by negative demand shocks, it’s the perfect time to talk about boring neoliberal stuff like free trade." --> Typo? Shouldn't this say "negative supply shocks"?
"You can have really prolonged labor market slumps, creating periods where protectionism really does create jobs."
I think it's important to note that traditional free trade theories don't dispute that protectionism can create jobs in specific industries or potentially net create jobs in the overall economy in the short run. The argument for free trade is that this is (1) bad for consumers (who should always be the top priority in economic thinking -- everyone is at all times a consumer) and (2) bad for producers in the long run due to malinvestment and lack of incentive to invest, innovate, etc.
Speaking of cracking, America has insufficient cracking capacity to produce adequate supplies of gasoline. This is going to be somewhat alleviated by recent events where refiners are able to restore capacity lost due to Covid but since every refiner in North America is currently competing for the industrial services companies workers and equipment required to do this it is taking time. There are shortages of personnel and equipment required to do this. Nevertheless refinery throughput is climbing rapidly towards the 95% at which it has been hovering for decades.
The usual methodology of pundits is to attribute the drop in refinery throughput capacity to the malign oil companies and their evil executives. So, naturally, this is completely false. The thing that happened was that Covid hit. Annual shutdowns or outages as some call them, were scaled back. Not because anyone anticipated reduced demand but simply because these shutdowns require many hundreds and sometimes thousands of specialist workers to come onsite, They work out of mobile trailers used as offices, lunchrooms and some pretty impressive portapotties. And this could not be safely accomplished. So the scope of work was severely scaled back to the minimum, in some cases, that permitted continued operations at reduced capacity. This happened everywhere.
That throughput capacity begins to inexorably degrade the minute these plants are brought back online. Deferred maintenance made the problem now of restoring capacity even larger. But we are catching up.
You’ve not touched on this: there’s immense institutional inertia on the *private sector* side in favor of cheap labor and against capital investment. For the better part of the last 20 years overinvesting in capital has been very risky, because you can’t defer debt service or installment payments in a downturn, but you can sack people. Basically every industry has tried to become “nimble” in this regard, aided by the weak labor market making it possible to throw people at problems instead. Even capital-intensive ones have moved to lease capital and push risks off on large leasing firms, increasing short-term costs to access productivity-enhancing equipment and foregoing the benefits of accumulation.
That will take some time to change, even though the skilled blue-collar labor shortage in particular seems set to continue almost regardless of what we do on the policy side over the coming decade. The Fed might succeed in generating a brief blip that convinces C-suites that the 2010’s are coming back, but the second interest rates go down it’ll be right back to “not enough people”.
Looking at construction, pre-fabrication, and consulting engineering, where I am now, almost *no one* at the senior level believes this to be the case, but almost everyone at the operational level does. I have actual clients where VP’s are screaming upward that they need more and better capital across the board to reduce hiring spend and get prices under control, and CEO’s are basically just sticking their fingers in their ears and belting out “LALALALALA I CAN’T HEAR YOU NEXT YEAR WILL BE 2009!!”
Policy may be slow, but corporate culture shifts are slower. We’re going to be here a while. Invest and plan accordingly, as regards inflation.
This is, of course, all basically right. But supply side reforms shouldn't mean forgetting the lessons of the past two years about the shortsightedness and risks of a fragile, excessively offshore supply chain. The covid disruptions in China and need to have flexibility to respond to Russian military aggression should have reminded us that a neoliberal trade policy based on the most rosy Pax Americana assumptions of the 90s was foolishly risky. The trick is to keep the good parts of those policies without repeating or perpetuating the mistakes. Some of the tariffs on basic products from overseas countries might make sense, even if it means a little short term pain, to ensure we aren't overly at risk if shipping was disrupted, etc. But tariffs on stuff from Mexico or Canada? That's dumb.
The biggest problem with supply side reform is, by the time it works, the next administration and the other party might get the credit.
Particularly frustrating to see that CA’s solution is “Millions in California to Get up to $1,050 in ‘Inflation Relief’.” [1]
> “Millions of Californians will be receiving up to $1,050 as part of a NEW middle class tax rebate. That’s more money in your pocket to help you fill your gas tank and put food on the table,” he [California Governor Gavin Newsom] tweeted.
We did something similar in GA with “Kemp: $1.1 billion in Georgia tax refunds begins this week.” [2]
> House Bill 1302, which Kemp signed into law March 23, will give a refund of up to $250 to single filers, up to $375 to single adults who head a household with dependents and up to $500 to married couples filing jointly.
So this a general problem across states and it seems that the state and local support funds in ARP were too large and it’s giving rise to these counterproductive actions. It would’ve been great if we had already passed BBB with some provisions to claw back excess state and local support to prevent this.
[1] https://www.bloomberg.com/news/articles/2022-06-27/millions-of-californians-to-receive-up-to-1-050-in-inflation-relief
[2] https://www.gpb.org/news/2022/05/12/kemp-11-billion-in-georgia-tax-refunds-begins-week
Minor correction: The FAA did *not* change the number of hours to obtain a Commercial Pilot's License. I know, because I have one. They changed the qualifications to be a first officer on a scheduled airline passenger service. Previously, the captain had to have an Airline Transport Certificate (1,500 hours experience) but you could be an F.O. with a CPL (250 hours). Now you need an ATP to be an F.O.
To mitigate the damage, the FAA introduced a "Restricted ATP" that allows you to be an F.O. (but not a captain) with less experience than the full ATP, but still a lot more than CPL.
This doesn't change the gist of your argument, but the text should be clarified.
And also upgrade and modernize our seaports! But we legally cannot. Singapore has spent a lot of money and effort modernizing and upgrading their seaports recently. Now, I am not expecting Singapore-levels of efficiency here in the US (yet), but it is worth noting that some of the things Singapore is improving are actually illegal to do in the US, not just difficult. Singapore is using dredging and land reclamation to make more space but using foreign dredging companies in the US is actually illegal, so we only have like 5 dredging companies and 16 dredging ships (that do not perform well by international standards) for the entire country, and many projects get only 1 or 0 dredging bids. Union contracts also make it very difficult to add any automation to ports. Everything has to be done by a person, no matter how comparatively inefficient it is. And last year's infrastructure law made it illegal to use any of the money for automation at seaports. Not that improving seaports will be a panacea for inflation, but currently American seaports are some of the most inefficient in the world, so improving them should at least help.
India and Vietnam are not our allies just yet. Matt and Noah Smith have several more substacks to write before that happens.
I recall one idea you had was that in a fiscally constrained environment, politics would normalise as both parties tried to advance their own economic ideas instead of culture war ranting. Instead, I suspect that we are going to get even more culture war ranting as both parties try to protect their friends. The Democrats want to protect typically minority workers protected in not-too-efficient public sector jobs (like subway conductors). The Republicans want to protect their new friends in the white working class, who may have jobs in basically corrupt private sector industry (like construction). There is, of course, a strong crossover between the two groups.
My suspicion is that both parties will fight like rats in a sack to defend useless or grossly inefficient occupations. The idea that parties should try to manage the economy efficiently will become eroded, in favour of pointless make work.
I could use a bit more clarity on what some of the holdups are. Take the jones act for example, my understanding is the WH can issue a temporary waiver. So even if there is coalition politics or strategic disagreement as to if getting rid of it permanently is a good idea, it could still be eliminated temporarily to ease temporary pain.
Matt has been calling out ‘the main choice groups’ for dictating bad legislative strategy on abortion. But even in that case he’s not telling me it’s NAARAL to blame—So I’m not really even sure what the main choice groups are right now. Who is behind the jones act? Would they settle for temp waivers at this moment but others are holding out for permanent repeal? What’s actually happening?
"In a tight labor market, allowing more imported construction materials doesn’t mean fewer jobs; it means a transition of jobs out of nail-making factories into making houses with nails. And that means an overall more prosperous economy."
I agree. But, it's often hard to do politically, when the nail factory jobs are located in swing states and have well-organized unions, while the making-houses-with-nails jobs are scattered throughout the country, and much less well-organized.
Yeah, You’ve been pushing these ideas for a while now. I’m still skeptical. I feel like the combination of Trump, the pandemic, and now the invasion of Ukraine have all really really emphasized the strategic dangers of de-industrialization. Long term America should figure out how to make a whole lot more things in America, by Americans. Preferably well paid unionized ones. Rather than ranting about inefficiencies and how it doesn’t square with their ‘90s models, economists would do better to use their brainpower to figure out what needs to be done to make it work.
Idea for a public policy that could ease supply constraints in tax advisory jobs: let the IRS build its own online tax prep software. So much of the goat rodeo of last tax season was taxpayers getting mixed up on the amount they received in EIPs and CTCs, and almost none of that would have happened if these taxpayers could have used online tax prep software that already had that information in its database.
Another idea: pass the "direct pay" tax credits in Build Back Better. If Manchin is so concerned about inflation, why is he endorsing make-work for people working in tax equity?
Third idea: replace the 179D deduction revamp in Build Back Better with something that doesn't require a small army of tax consultants to navigate. Energy efficiency as a service contracts and pay for performance programs at utilities have become more common—asking the tax code to measure performance on energy efficiency is unnecessary in those situations. Repeal section 179D and instead add a paragraph to section 168 that says a taxpayer can get 100% "bonus depreciation" on a deep energy retrofit if they make an energy efficiency improvement in the course of the trade or business of selling avoided electricity demand ("negawatts"). Achieves the same thing as old 179D with far less work for places like Alliant Group.
"But when the economy is a bit overstimulated and also hit by negative demand shocks, it’s the perfect time to talk about boring neoliberal stuff like free trade." --> Typo? Shouldn't this say "negative supply shocks"?
"You can have really prolonged labor market slumps, creating periods where protectionism really does create jobs."
I think it's important to note that traditional free trade theories don't dispute that protectionism can create jobs in specific industries or potentially net create jobs in the overall economy in the short run. The argument for free trade is that this is (1) bad for consumers (who should always be the top priority in economic thinking -- everyone is at all times a consumer) and (2) bad for producers in the long run due to malinvestment and lack of incentive to invest, innovate, etc.
Get busy supply side reforming or get busy dyin’ - Red
Speaking of cracking, America has insufficient cracking capacity to produce adequate supplies of gasoline. This is going to be somewhat alleviated by recent events where refiners are able to restore capacity lost due to Covid but since every refiner in North America is currently competing for the industrial services companies workers and equipment required to do this it is taking time. There are shortages of personnel and equipment required to do this. Nevertheless refinery throughput is climbing rapidly towards the 95% at which it has been hovering for decades.
The usual methodology of pundits is to attribute the drop in refinery throughput capacity to the malign oil companies and their evil executives. So, naturally, this is completely false. The thing that happened was that Covid hit. Annual shutdowns or outages as some call them, were scaled back. Not because anyone anticipated reduced demand but simply because these shutdowns require many hundreds and sometimes thousands of specialist workers to come onsite, They work out of mobile trailers used as offices, lunchrooms and some pretty impressive portapotties. And this could not be safely accomplished. So the scope of work was severely scaled back to the minimum, in some cases, that permitted continued operations at reduced capacity. This happened everywhere.
That throughput capacity begins to inexorably degrade the minute these plants are brought back online. Deferred maintenance made the problem now of restoring capacity even larger. But we are catching up.