opinion | Supply-side economics is no longer just for Republicans

Today’s unbearably high inflation is the result of too much money chasing too few goods. The drastic way to reduce inflation is to tackle the “too much money” side of the equation by raising interest rates or taxes, which stifles the public’s spending power. Whenever possible, the infinitely better way to combat inflation is to increase the supply of things to tackle the “very few goods” side.

Supply-side economics has long been the province of Republicans, who have claimed that government is the only way to help increase the supply of goods and services – primarily by cutting taxes so that companies will have a stronger profit motive than production. increase in

But Democrats have begun to shape their own version of supply-side economics, which gives government a more active role. my colleague Ezra Klein Identified This approach was in the form of “supply side progressivism” last year. In January, Treasury Secretary Janet Yellen described The Biden Administration’s Build Back Better Agenda As “Modern Supply-Side Economics.”

There will be stumbles along the way, but the possibilities are huge. In this newsletter I will look at several recent examples of this approach at the federal, state, and county levels, and then look at the pros and cons of an extremely ambitious supply-side idea: a new federal agency called the National Investment Authority.

An obvious place to start is with the Inflation Reduction Act, which Senator Joe Manchin, Democrat of West Virginia, Agreed To support the Wednesday after blessed Assurance by independent experts that it will curb inflation. Some of the effects of fighting inflation will come from the traditional demand-side approach of raising taxes, but some are intended to come from the supply-side of increasing the production of green technologies through tax incentives and spending programs, which are cheaper. Will happen. long run.

I doubt President Biden’s claim that energy provisions will reduce households’ energy bills by “hundreds of dollars,” at least in the near future. When he was campaigning for the presidency, Biden focused on job creation potential of their green energy agenda, which is not much of a selling point now that a tight job market is contributing to wage growth. The Inflation Reduction Act sounds like old wine in new bottles. Yet it is true that investment, whether government-led or not, brings down prices for consumers. A great example is the government’s early support for electric cars, which started out more expensive than internal-combustion vehicles, but are on the way. getting cheaper,

Sticking to the federal level, another obvious Democratic entry into supply-side economics is the $280 billion Chips and Science Act, which passed Congress last week with 17 Republican votes in the Senate and 24 Republican votes in the House. This includes funding for research on artificial intelligence, quantum computing and other technologies, as well as subsidies and tax credits for semiconductor manufacturing in the United States. It is an entry into industrial policy that might not have happened if lawmakers on both sides had not been concerned with China’s rise as a commercial and military rival.

At the state level, California is taking a step beyond anything the federal government has done. On July 7, Governor Gavin Newsom, a Democrat, announced On Twitter that “California is going to make its own insulin.” The state government will spend $50 million working with a contract manufacturer to develop and market cheaper versions of insulin over the next two to three years. Eventually it plans to spend another $50 million for a factory in California to produce insulin. The money can go for grants, loans or partial ownership of the factory. The assumption is that by providing a cheaper “public option” even on a smaller scale, California could force major insulin suppliers to lower their prices to compete.

“Any way you slice it, there are going to be some really interesting effects,” Paul Williams, executive director of the Center for Public Enterprise, a new nonprofit that advocates such initiatives, told me. .

Even some local governments are becoming entrepreneurs. Williams pointed me to Montgomery County, MD, where the County Housing Authority is building mixed-income housing using a new public investment fund since 2020. It hires developers and contractors and takes full ownership of properties after the completion of construction and lease-up.

In an age of political polarization, government-led investment to build the country’s productive capacity is one of the few ideas that garners at least some bipartisan support. “It’s definitely up in the air on both sides of the aisle,” said Samuel Hammond, director of social policy for the Niscan Center, a think tank that leans center-right.

The new supply-side economics is not a strictly liberal crusade. Democrats are coming around to the Republican idea that excessive regulation could disrupt production. Hammond said one of the most important features in the Inflation Reduction Act is reform of permitting procedures to expedite regulatory decision-making on the construction of power transmission lines and other infrastructure.

Hammond said he served for the Senate Small Business and Entrepreneurship Committee in 2019, when Republican Senator Marco Rubio of Florida was its top Republican member and he not only helped the Small Business Administration for funding high-impact, research-intensive enterprises Requested to be redone. Hammond called it a “nail salon and gas station.” When the pandemic hit and Rubio was replaced as the top Republican on the committee by Republican Senator Rand Paul of Kentucky, the effort ended.

Still, some Republicans are likely to go so far as to support the National Investment Authority, a new federal entity proposed in 2018. white paper by Cornell law professors Robert Hockett and Soule Omarova. (Omarova withdrew from consideration as controller of the currency in December, when some critics portrayed her, incorrectly, as a communist.) In the view of the professors, the authority aimed to “mobilize” private investors. Lend and take ownership stake in companies. To invest money in long-term efforts that are currently underfunded, such as infrastructure projects.

The National Investment Authority’s goal will eventually become self-financing — earning enough from its investments that it doesn’t have to demand more money — but in a pinch it will be allowed to borrow from the Federal Reserve and the Treasury Department. The agency, Hockett and Omarova wrote, “represented in its modern form Hamilton’s National Development Program of the late 18th century and the Hoover/Roosevelt-era Reconstruction Finance Corporation of the mid-20th century.”

I interviewed Omarova last week about her brainchild and how it fits in with the Biden agenda. To pursue the idea, he has team up With the Berggruen Institute, a research organization in Los Angeles dedicated to improving governance. He said the National Investment Authority’s ability to profit from successful ventures owned by companies distinguishes it from typical public-private partnerships in which the public takes the risk and private investors all reap the rewards. In addition, she said, the National Investment Authority will identify and correct strategic weaknesses in the US economy rather than leaving capital-allocation decisions entirely to the private sector.

Omarova told me that she believes the National Investment Authority can be made accountable to the public without being vulnerable to manipulation by members of Congress. I asked him about the possibility that the authority would practice “lemon socialism” – that is, the private sector wasted money on freebies for good reasons.

“Lemon socialism is an easy target to attack,” she said. “No one talks about lemon capitalism, which is at the core of every venture capital fund. Seventy-five out of every 100 venture capital investments fail, but as long as five of them generate a profit, they are satisfied. Government is held to a different standard; it can never fail.” Omarova said critics of government intervention like to point to the loss of debt to solar panel maker Solindra, but rarely mention that Tesla was funded in 2010 by the same program. (A New York Times title 2009 read, “An all-electric sedan, awaiting federal aid.”)

It’s a fair point, and it’s one that more and more MPs are understanding. There seems to be growing openness to some form of industrial policy on both sides of the aisle — see the substantial number of GOP votes for the Chips and Science Act, among other measures.

Supply-side economics was synonymous with an ever shrinking government. There is now a can version that is promising, although risky. More people are walking on the sunny supply side of the road.


Growth in non-farm payrolls in the United States in July, according to an average estimate of economists surveyed by FactSet. Federal Reserve officials have said job growth is proof that the economy is strong enough to withstand a hike in interest rates aimed at fighting inflation. The Bureau of Labor Statistics is set to report official jobs numbers on Friday.

“The bees steal from this flower and from it, but later with their theft they make honey, which is their own; It’s not thyme and marjoram anymore.”

– Michel de Montaigne in “Essays” (1580), “On the education of children”; Translated from French and with an Introduction by JM Cohen (1958)

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