Economy · July 7, 2022

The Grumpy Economist: Time for the Offer

To the Project Syndicate essay, with Jon Hartley. It is not the first and it will not be the last on the matter!

Now that rising inflation has refocused everyone’s attention on the long-ignored supply side of the economy, the question is how to best support large-scale growth, efficiency and innovation. The answer is not necessarily deregulation, but the need for smarter regulation is increasingly evident, even to progressives.

STANFORD – The return of inflation is an economic cold shower. Governments can no longer hope to solve problems by throwing money at them. Economic policy must now turn its attention to supply and its cousin, economic efficiency.

The problem is deeper than the delay in deliveries of goods and a year of sharp price increases. From the end of World War II to 2000, US real GDP per capita (adjusted for inflation) grew 2.3% annually, from $ 14,171 to $ 44,177 (in 2012 dollars). Americans have gotten healthier, lived longer, reduced poverty, and paid for a much cleaner environment and a broad range of social programs. But since 2000, the postwar growth rate has dropped nearly half, to 1.4% per year. And it’s worse in Canada and Europe, where many countries haven’t grown at all since 2010 on a per capita basis.

Nothing matters more to human prosperity than long-term economic growth. No economic trend, therefore, is more worrying than growth which is halved, especially for the well-being of the less fortunate.

The eruption of inflation resolves a long debate. Sclerotic growth is not the result of a “secular stagnation” on the demand side, which can only be solved with massive fiscal and monetary stimuli. Sclerotic growth is a supply problem. We need policies to increase the productive capacity of the economy, either directly or by reducing costs.

How? The simplest and most important thing governments can do is get out of the way. Byzantine regulations and capricious regulators stand in the way of business. We don’t need reckless deregulation, but rather smarter regulation that is simple, effective, avoids disincentives and unwanted consequences, and is not biased to protect current assets and support regulatory empires. This means adding lapse clauses to the regulations, regularly reassessing existing measures and establishing a right of external appeal.

The United States needs infrastructure. The problem isn’t money. The problem is that building anything in America has become nearly impossible, due to the bush of regulations and lawsuits that will stop or increase the costs of any project.

It begins by repeating the Jones Act, a 1920 law that requires all intra-state shipping to use expensive US merchant ships (basically, it’s the “Send It by Truck Act”). Repeal the Davis-Bacon and related acts, which deliberately add to the construction costs of the highways. Reform the National Environmental Policy Act, which allows people to sue to stop and delay projects for specious environmental reasons. Review the Nuclear Regulatory Commission. Not a new nuclear power plant has been built since the NRC was founded in 1975.

Protectionism reduces supply. Tariffs and trade restrictions make products more expensive and deprive other countries of the dollars they need to buy from America. Yet the Biden administration has kept the Trump administration’s longstanding restrictions and even tariffs in place. It also doubled the tariff on imported lumber last November, just as construction costs were skyrocketing.

The high costs of housing in parts of America with good jobs create barriers to opportunity and force people to make long trips which contribute to congestion and emissions. The cause is clear: restrictions on land use, zoning and building codes that make it impossible or expensive to build and build densely. Rental controls help today’s tenants at the expense of today’s landlords, but they also deny opportunities for newcomers, especially the poor, and ruin rented housing stock.

The failure of American public schools is another obstacle to opportunities and productive capacity. Again, the problem isn’t money: nationally, primary and secondary schools spend an average of $ 13,000 per student. Sad New York Public Schools Donate $ 28,000. The problem is the teacher unions and the politicized education bureaucracies, which are now committed to undermining curricula. A solution that puts students first is more educational choice and competition.

Many Americans are neither working nor looking for work. It is not for lack of work. Employers are starting to work. One problem is that many people lose a dollar or more in perks for every extra dollar they earn. Disincentives add up to programs like meal vouchers, housing benefits, health insurance benefits, education benefits, disability payments, and more. It would be useful to reform the licensing programs to limit the general disincentive to perhaps 50 cents on the dollar.

Labor laws and regulations are full of cost increases and disincentives. Detailed regulations cover working hours, scheduling, mandatory benefits, and more. Requirements for professional licensing, trade unions, regulatory compliance charges, and payroll and income taxes increase the cost of labor.

The United States needs workers. The country needs truck drivers, childcare providers, teachers, nurses and construction workers. It needs entrepreneurs. It needs taxpayers to finance a bankrupt welfare state. All these workers are on the borders. Immigration reform that increases economic migrants is a main supply policy. “Creating jobs” with policies like the Green New Deal is now a cost, not a benefit, as those workers have to stop doing something else.

To increase revenue with minimal economic distortion, taxes should have low marginal rates, a broad base, simplicity and predictability. The US system is the antithesis of this description.

US health care and insurance is a bloated oligopoly created by the government. Market-oriented reforms can reduce costs and improve performance. The United States can no longer simply devote more money to the problem.

Alas, getting out of the way is a terrible policy. Economic regulation largely serves to protect constituency A to the detriment of constituency B and to the detriment of economic efficiency. Procurement policies are not accompanied by simple and emotionally attractive slogans such as “stimulus”. They call for painful reforms for thousands of different markets and regulations – a great spring cleanup of economic life. And politicians thrive on offering new ideas and new programs, not promising difficult reforms or using unfashionable terms like “supply side”, “free market” or, God forbid, “neoliberal”.

But there is hope. Progressives, in particular, are noticing the problem. Driven by a “YIMBY” (“yes in my backyard”) movement, California is also beginning to crack down on zoning restrictions that ban housing construction and discount poor people from areas of economic opportunity. The Obama administration has begun to criticize professional licensing and zoning. Progressive writers like Ezra Klein, Derek Thompson and Matthew Yglesias denounce supply-side growth restrictions. If they want to call it “supply-side progressivism,” a “progress program” or an “abundance program,” that’s fine.

For now, the Biden administration’s “global strategy” to focus on the “modern supply-side economy” is simply a re-branding of its buzz-filled “infrastructure” bill and the expansion of the welfare state Build Back. Better poorly conceived. However, in doing so, they recognize the problem. They, or their successors, can follow through with effective strategies.