The case for modern supply-side economics
I just want to say that former Weeds co-host Jane Coasten's brilliant joke - "Between Biden, Blinken, and Yellen, I fear the US may soon descend into gerundocracy" has burned itself into my skull and now immediately springs to mind whenever Blinken/Yelllen are mentioned.
As a companion piece to this article, I strongly recommend Ezra Klein’s recent discussion of Supply-Side Liberalism on the Odd Lots podcast, https://www.bloomberg.com/news/articles/2022-09-08/odd-lots-podcast-ezra-klein-on-supply-side-liberalism
I found this an excellent overview of his current thinking on how liberals/progressives should embrace a focus on expanding supply abundance. Also goes through the large and novel challenges on addressing supply issues relative to traditional supply-side economics (e.g., tax cuts and blanket deregulation) or traditional demand side interventions (e.g., stimulus checks and cash benefits).
And in general, I highly recommend the Odd Lots podcast. It’s an exceptionally entertaining and educational survey of numerous current economic themes.
Is there a market failure that justifies government subsidies for child care?
Yellen seems to imply that raising women's labor force participation is an end in itself, but as an economist she must know that isn't true. Mothers also want to spend time with their children, so there's an opportunity cost to working.
The main question here is whether well-designed pre-K programs can reliably improve children's life outcomes (a positive externality). There seems to be some debate about the empirical evidence, with Freddie de Boer being predictably skeptical.
If he's right, wouldn't a cash child benefit be better than spending the same amount of money as tied funding for group care?
Nice bonus piece, finally making this subscription worth the investment! (j/k)
The talk about permitting reform reminds me of Jimmy Carter.
In a good way; a very good way.
Way more than Reagan, Carter was the champion of (smart) deregulation: civil aviation, trucking, natural gas and I'm sure many more that I can't recall. These -- along with the factors Matt discusses -- set the stage for a productive economy more than Reagan's actions did.
It's highly unlikely that the Democrats could pass anything similar in the next two years, but maybe this could actually be a target of bipartisan, even "Secret Congress" efforts?
Without a repeat of the 1980 election though, one hopes.
Yay on the housing shout out, Ms Yellen. Hi from Cambridge, Milan
The large discrepancy between GDP and GDI is quite interesting from a technical perspective and it has significant implications for our understanding of the economy. There are numerous hypotheses for the cause of this discrepancy and each has different implications for the current state of the US economy.
Joey Politano has a great recent article that presents some of these hypothesis in “The Trillion Dollar Question”, https://www.apricitas.io/p/the-trillion-dollar-question
1. Investment is Underestimated
2. Census Manufacturing Data is Underestimating Output and Investment
3. Profits are Overestimated
4. Aggregate Wages are Overestimated
5. Trade is Miscounted
The investment underestimation cause (#1) would imply that not only is our economy growing faster than shown in current GDP estimates but also that businesses are confident to invest in expanding supply. That would come as great relief, showing economic robustness and investments in addressing supply shortages that exasperate our current high inflation. Matt Klein has a great (paywalled) article covering this mechanism, https://theovershoot.co/p/is-the-2022h1-gdp-declinefake
In contrast, hypothesis #4, overestimation of aggregate wages, would imply a weaker labor market and that GDI is being overestimated. Politano summarizes a previous article of his that covers the technical mechanism of that discrepancy as, https://www.apricitas.io/p/labor-market-mystery-hour
> Last week we discussed the rising gap between America’s two labor market surveys—the establishment survey (which surveys businesses) and the household survey (which surveys individuals). The establishment survey shows robust job growth through both quarters while the household survey shows a slowdown in employment growth at the end of Q1.
Will be quite interesting to see how these GDP and GDI discrepancies are resolved in future revisions and which of these hypotheses turn out to be the cause. Could be a combination of multiple mechanisms and possibly causes that haven’t yet been proposed.
The history of the intellectual development of this idea is a subject I would love to see more of. I am *very* obsessive about following politics so I have read e.g. Miles Kimball's blog, which has been called "Confessions of a Supply Side Liberal" for like a decade. So the term isn't totally new, but the way that there has been this rapid movement toward a new liberal consensus around a combination of deregulation, industrial policy, and science/innovation investment that seems to have swept up basically every liberal who has the administration's ear feels like it came out of nowhere.
Yes we need to make child care more affordable, but with a child tax credit, though, not subsidizing a specific kind of child care.
But I don't think that ALL that needs to be done to increase LFPR. We need to make work more remunerative with a more generous, more wage subsidy like EITC and even better with a shift from a wage tax to a VAT for retirement benefits and health insurance.
So much of this is frustrating because I think you and Yellen have framed things far too narrowly into a binary choice between "old" supply-side and federal spending as a "new" supply side.
It's frustrating because you understand very well that the problems with housing, for instance, are not supply side problems in the sense that the housing construction industry needs tax breaks or government subsidies. The problems with housing require substantial reforms in other areas and no amount of federal "investment" will fix that.
Well, the same thing is true in other areas. The notion that it's always "investment" when the federal government throws money at things (or lowers corporate taxes) is wrong unless you consider the whole picture, including the structure of the industry and the existing incentives. The reason these policies often fail is not because there is something inherently wrong with low corporate taxes or government "investment" - it's due to other factors.
Child care is a good example of this huge blind spot where we are only supposed to consider a binary-choice. Either a parent stays home and sacrifices earning and career growth to support a family, or the federal government subsidizes child care so the parent can work full time and off-load most of the child rearing to subsidized third parties.
But this misses what a lot of parents actually want, which is more work flexibility to allow people to work and maintain and grow careers while still being highly active in their child's growth and development. The biggest obstacle to that isn't the lack of federal dollars, it's federal labor regulation and a work culture the promotes standard "full time" employment as the the only viable option. The system is designed to consider anything but "full time" work as substandard.
If you want to give Mom's and Dads what they really want, then give them workplace flexibility, and the potential for meaningful part-time and flex-time work in their chosen career so they aren't faced with a binary choice of family vs career. A parent that can switch to flex or part-time work during a child's critical development, would be much more useful to most parents than the alternatives. That also happens to be very pro-natalist policy!
What was missing in the critique of corporate tax reduction was that those requestions were not made up (and more than made up) with increases in personal taxes. They increased the structural deficit which reduces national savings and investment. The corporate tax is so riddled with special incentives for this and that any shift in revenue collection from corporate to personal taxation will make investment more efficient and increase growth. It was absolutely infuriating that the "Tax Cuts for the Rich and Deficits Act of 2017" were not criticized more vigorously as being anti growth as well as regressive!
Yellen's leadership and sound decision-making has consistently made me more confident in the Biden's entire admin. Dumb signaling tweets from the Dems are very annoying to me and make me wonder what their priorities are for the nation... Yellen makes me forget about it all.
US economic performance vis a vis other high income countries: I have not seen any analysis of aggregate economic effects of COVID + COVID response across countries.
Would love to read the full Q&A!
Wonder if the mined or extracted in USA and is therefore comparatively environmentally "friendly" or lower impact will catch on.
Great article explaining in very simple economics that US is moving from a market centered economy to a welfare state to the extent it is not only focusing on entrepreneurs and especially capital markets or financial sector, but Bidenomics is talking about a comprehensive approach towards not only the ownership for capital but the workers in general who should benefit from Biden's tax plan. But it's not that private enterprise won't benefit. Bidenomics is trying to shift the focus from financial sector to industrial sector whereby US is all set to create an industrial base with help of government support through acts like the Chip Act, whereas corporations would create real economic output and not only a financial accounting service through white color jobs. US is already a pioneer in renewables and thanks to entreprenuers like Elon Musk and the rapid need to address the challenges of climate change. Even financial sector is all geared up to invest in renewable technologies starting with the hardware like electronic chips, batteries and semi conductors. With investments in production of mineral, as Elon Musk has put it it would be ready cash for all the related industries as demand for EV has not reached its maximum potential and the threshold is going to be met when Ford is going to manufacture its EV trucks to compete with Cyber Truck with its usual design ingenuity. Most of the auto manufacturers in 2022 have introduced trucks and SUVs with a face lift that is the standard design of a Ford Truck. AMerican universities are already doing research on the physical and chemical properties of exotic crystals like graphite and in coming years with appropriate nano technologies, lithium batteries and semi-conductors are bound to get far more efficient. And I agree with Madam Yellen that the generous American Rescue Plan has avoided major economic depression as an out of COVID Pandemic and the country is stabilized within less than a year to mark highest GNI.