One of the biggest deficiencies within the macroeconomic policies of the Democratic Party has been its insistence that aggregate supply issues, whatever they may be, will simply take care of themselves. The most recent example of this came Thursday morning from Jason Furman, who was head of the Council of Economic Advisors during the Obama Administration. This was his reassuring (to him) reaction [1] to the news that the economy contracted 1.4% during the 1st quarter of 2022 (January-March).
At CEA the main number I focused on (and included in every blog post) was private final domestic demand. It was up 3.7% in Q1.
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The much bigger subtraction was net exports as exports fell and imports continued to soar. What this says is DEMAND is strong as consumers and businesses are buying a lot. But SUPPLY is behind so much coming from abroad (or being diverted from sales abroad).
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This is an economy with strong demand but supply can’t keep up.
Again, he meant this as reassurance: demand is still going strong, not much to worry about here. This is a standard Keynesian response. For over 80 years, Keynesian economic theory and practice have focused on aggregate demand, under the assumption that aggregate supply will fix itself. Yet for those of us who focus on supply-side issues, “supply can’t keep up” is the entire point.
One would have thought the 1970s would have disabused Keynesians of the notion that aggregate supply can be ignored. At the very least, one would have hoped the COVID-caused supply chain problems would accomplish that task. No such luck. In fact, the Democrats are letting their supply-side blind-spots spread to microeconomic matters.
In education, student debt forgiveness is back in vogue [2] in the White House, to the point where the moral hazard effect (that this would encourage greater enrollment in college on the assumption that future loans will also be forgiven) has become a feature of the policy rather than a bug. Yet greater demand for college in the absence of increasing supply will simply lead to ever higher tuition rates (and debts).
The 2020 campaign (on the Democratic side) was fixated on the wisdom of “Medicare for All.” Here. at least, there were occasional warnings about supply raised by John Delaney and others, but the overall medical care shortage exacerbated by Certificate of Public Need [3] regimes remains unaddressed.
… and don’t get me started on the progressive wing getting seduced by NIMBYism [4] in housing (thankfully, San Franciscans made my point for me with their votes).
Overall, myopia on supply-side issues will lead the Democrats to policy and political failure. In the macro realm, higher immigration levels and lower input tariffs are desperately needed. In the micro areas, they need to pay far more attention to services being available rather than “affordable” – as the latter is impossible without the former.
Supply-side problems will not take care of themselves.