One and a Half Cheers for Supply-Side Progressivism

Hooray for removing barriers to growth, if that's the intention

Greetings, The War on Prices subscribers,

I never thought I’d see the day, but a number of high-profile U.S. progressives are now voluntarily and proudly self-identifying as “supply-siders.”

Yes, seriously. Having for years lamented (and misrepresented) the very concept of supply-side economics as a simplified right-wing faith in tax cuts, they now seek ownership of the moniker for themselves. Ezra Klein has elucidated his idea of “supply-side progressivism.” Matt Yglesias this week made the case for extensive “supply-side reform.” And last week, not for the first time, Treasury Secretary Janet Yellen said that the Biden agenda itself represented a “modern supply-side economics.”

This is quite the rhetorical economic u-turn.

The term “supply-side economics” was originally a macroeconomic theory championed by Bob Mundell and then propagated by President Reagan’s economists. It essentially said: 1) that monetary policy was the correct macroeconomic tool for dealing with inflation, and 2) that tax policy should not be focused on managing the business cycle or closing deficits, but about setting the right long-term incentives for work, investment, and, ultimately, economic growth.

This idea, that fiscal policy should concern itself with the “supply-side,” rather than demand management (a la Keynesians) or public accounting (a la deficit hawks), was over time broadened to incorporate regulatory reforms that might help grow market output too.

So, the supply-siders’ message was to leave monetary policy to control the path of nominal GDP, while using tax, regulatory policy, and more to improve the productive potential of the economy. Supply-siders 1.0 therefore thought that should mean liberalizing markets through deregulation of price and entry controls, lower income and corporate tax rates, and, then, restraining government spending to ensure these tax rates remained low.

Over the past three decades, progressives have trivialized and caricatured the concept of “supply-side economics” as a belief that continual tax cuts are all that’s needed to boost growth. And, to be fair, some well-known, politically active Republican economists and politicians made this job easier for them by overpromising the growth and revenue benefits of tax cuts and by reneging on the longer-term spending constraint.

Progressives’ attempt to hijack the supply-side label is all the more striking in the context of the past decade. The argument that the recent Inflation Reduction Act would reduce inflation by raising taxes shows that progressives still reject the original supply-siders’ arguments about the desirable aims of tax policy. After the financial crisis, though, it wasn’t just the specifics of right-wing supply-sideism that progressives seemed skeptical of. They seemed to doubt the importance of supply-side policies for growth at all.

As Tyler Cowen pointed out yesterday, it was conventional progressive wisdom for much of the past decade to believe that “demand is usually deficient and supply can respond to any surge in spending, thereby offsetting inflationary pressures.”

Between 2000 and 2021, U.S. real growth in GDP per capita averaged just 1.1 percent—less than half the rate seen in the 20th-century postwar period. The Congressional Budget Office believes that the annual sustainable real per capita GDP growth rate will again be just 1.1 percent per year from the late 2020s through most of the next three decades. While some of this is due to population aging and not being able to repeat the one-time impacts of more women entering the labor force or expanded education, supply-siders have long argued that lower worker mobility and the overregulation of important markets after 2008 were all contributing to the slowdown and that better policy could improve the growth outlook.

Progressives largely dismissed such ideas as secondary issues compared to their priority of “boosting demand” through monetary and fiscal policy. In fact, some even suggested that “running the economy hot” on the demand-side would itself induce the investment and build-up of skills to propel growth. Demand, in other words, would create its own supply.

It therefore represents a dramatic and notable shift that many prominent progressives are now pivoting to ride under a supply-side banner today.

Why Now?

To a certain extent, the change of focus is easily explainable.

Congress and the Fed did run the economy hot and, well, we got a good dose of inflation for our troubles. Whether you think this proves the supply-side constraints were always there and significant or, as Matt Yglesias claims, that we’ve merely hit the limits of benefiting from a strong demand side, is irrelevant. The supply-side of the economy - its ability to produce goods and services - is self-evidently the constraint on stronger real GDP growth today.

What’s more, both the COVID-19 pandemic and now the energy-price squeeze disruptions remind us that having an elastic supply-side matters for riding out economic shocks too. “Resilience” - that buzzword of the moment - is bound up with the ability for the economy to quickly adjust to new circumstances. We can see the importance of supply capacity issues and the need for speed with our own eyes.

With inflation high, and the Democrats’ American Rescue Plan widely considered to have worsened it, in fact, a cynic might argue that it makes political sense for progressives to point to supply-side constraints as the major economic problem we face too, if only to take the heat off of policies that added to excessive demand in the first place.

Undoubtedly, then, today’s economic context helps explain the latter-day progressive conversion to supply-sideism.

But I also wonder whether there are cruder political considerations here too. The U.S. has suffered two major crises in the past 14 years - the Great Recession and the COVID-19 pandemic. On both occasions the Democratic party has won the Presidency, Senate, and House of Representatives as a springboard to facilitate major policy change. And yet, most progressives would deem they have, in fact, wasted these opportunities. With the notable exception of Obamacare and bits of the Inflation Reduction Act, they have failed to deliver on their biggest ideas.

The collapse of President Biden’s “Build Back Better” legislation - arguably the single biggest attempted expansion of the welfare state since the Great Society - is but one example of this inability to convert raw political power into lasting policy change. Faced with those bruises, it makes sense to be a bit introspective and wonder whether your policy agenda itself is correct.

And in that regard, a pivot to a “supply-side” focus might again make sense. There’s the possibility that you can peel off some support from the Republicans and centrist Democrats who genuinely want to deregulate certain markets and lower costs, as a means of greasing the wheels for major bills (as we saw with the Inflation Reduction Act). But more than that, some Democrats have begun to recognize that the ability to physically deliver on their broader ambitions - whether on climate change, healthcare, or economic infrastructure - is itself inherently bound up with removing economic constraints to more capacity or cheaper building.

What is supply-side progressivism?

The progressive who has thought about this most is Ezra Klein. Progressivism’s “great dreams linger on the demand side,” Klein wrote in a September 2021 column. That is, their desire has been to push more assistance to families through universal health care, food stamps, Pell Grants, Social Security, tax credits, and cold hard cash. And Klein, to be clear, still sees these ambitions as essential to a fairer, more prosperous U.S. But in focusing so much on the demand side of the economy and neglecting the supply-side, he thinks that progressives have made two massive economic errors.

The first is that merely pumping subsidies into sectors with heavy supply barriers causes either rising prices or rationing - as we see in housing, where tight land-use laws and zoning requirements can make supply unresponsive to rising demand. As such, even progressives’ favored redistribution becomes less effective in helping families, because the cash just flows straight through into higher prices.

But there’s a bigger problem. In downplaying the importance of the supply potential of the economy, progressives have ignored that with faster growth all the other problems afflicting the country would be more manageable. Redistribution is, at best, zero-sum. If progressives want to achieve their broader ambitions on climate change, or poverty reduction, or access to healthcare, they’ve got to recognize that more efficient production in a whole raft of areas is important. That means creating the conditions for supply and innovation more broadly. 

In short, Klein wants to shift the progressive mindset towards the politics of more, rather than the politics of redistribution. His agenda chimes with the vibes of The Atlantic’s Derek Thompson and Yglesias’s recent writings. The basic idea is that progressives will only achieve their social and economic goals in a world of abundance. To the extent that the government can remove barriers to abundance or actively enhance its prospects, progressives should favor policies that grow the supply-side of the economy.

What should free-marketeers make of this?

On the face of it, the fact that progressives are pivoting to worrying about the supply-side of the economy is great news for free-marketeers. Economic growth is more important to living standards than anything else, and an honest appraisal of the issues will find that output is restrained by a number of significant regulations that free-marketeers would support reforming.

It’s welcome then that many progressives are no longer just talking about making housing more affordable, but actually calling for zoning and land-use regulatory reform to increase the housing supply. It’s heartening that Janet Yellen is talking about a whole-of-government effort to reform the environmental permitting process for major projects to make physical infrastructure cheaper and easier to build. It’s music to free-marketeer ears that commentators such as Matt Yglesias are pushing so hard for President Joe Biden to reduce tariffs, for Congress to repeal the Jones Act, and for smart transit and FDA reforms that would lower costs for, and broaden access to, goods and services.

What’s more, an inflationary period is an opportune time to deliver such supply-side reforms. The inflation of the 1970s, let’s not forget, was the precursor for many of Jimmy Carter’s meaningful deregulations, including of airlines. So, this sort of agenda will help push in some of the right areas just at the politically ideal time.

So why only one and a half cheers for this “supply-side progressivism” development, rather than the full three? There are a couple of obvious concerns for free-marketeers.

The first is that some proponents of progressive supply-sideism don’t just believe that a greater supply-side focus is today necessary to boost growth, but also deviate from the original supply-siders’ focus on boosting growth as the sole or main aim of their agenda. Janet Yellen, for example, admits that the Biden administration’s aim is to spread geographic opportunity as a goal too, rather than to simply raise productivity and GDP.

Embedded within much supply-side progressive advocacy are these sorts of egalitarian value judgments that sometimes will dovetail with pro-growth policies, but other times will not. Aside from whether having multiple aims would dilute the likelihood of achieving any, this deviates from the goals of the original supply-siders (raising output) or libertarians (liberating markets). The lack of any grounding of a singular aim for growth also allows progressives to claim that their supply-side agenda incorporates anything they wanted to do anyway.

A second more significant (although related) issue is the latitude supply-side progressives would give governments in determining the aims of production. Free-marketeers generally believe in a consumer-led market, where resources flow to where they are most productive as judged by customers in a world of constant experimentation. Governments should only seek to intervene when there are clear and obvious market failures, and even then in the most efficient way possible.

Supply-side progressives instead appear to think governments should consider setting “missions” for the private sector that governments determine are good for growth or welfare - whether developing new nuclear, building chip manufacturing or hitting net zero. Policy is then geared towards removing barriers to or incentivizing more production capacity for the supply of those goods to deliver on those government-defined goals.

As should be clear, there will be many times when such an approach delivers policies free-marketeers like. If the societal goal is “more housing” then zoning reform or relaxing urban growth boundaries is an obvious lever that we can all support. Yet governments setting specific missions like this also opens up the possibility of lots of damaging industrial policy, with the state betting on particular technologies that turn out to be duff. Governments wouldn’t own or control the means of production in a “supply-side progressive” world, but would be much more active in determining the ends of production. This is not desirable.

Third, and finally, I’m not convinced as yet that supply-side progressives have their heads around why so many anti-growth constraints have arisen in the economy. As a good post by John Myers on the UK outlined yesterday:

passing high impact reforms is politically difficult, even where such reforms offer large potential benefits. One reason is often that the losers notice the loss, but the winners notice much less benefit – even when the total benefits hugely outweigh the total costs. That makes it much easier for the losers to organize to reverse the reform – or block it in the first place. This type of ‘collective action problem’ was identified by Mancur Olson.

We’ve seen that on everything from COVID-19 tests to baby formula, sugar subsidies to the Jones Act. My worry is that at the first sign of political backlash, progressives will revert to showering more tax credits and other subsidies on sectors rather than finding ways to achieve deregulation.

Is this nit-picking? Perhaps. The first stage of dealing with a problem, after all, is acknowledging that you have one. In that regard, U.S. economic policy debates overall will be much better if more progressives focus seriously on supply constraints and how to remove them. And this would provide an opening to a lot of useful free-market reforms. I just worry that if the aims of such an agenda and the constraints on where government intervenes remain unclear, then it could end up the scenic route to new forms of cronyism, without grappling with the true barriers to growth.

OTHER THINGS

• My Times column this week was on Scottish rent controls and why they are a bad idea. I set out the basic economics, before looking at the recent experiences in St. Paul, Minnesota and Berlin, as well as referencing the UK’s own sorry experience between 1915 and 1989. The comments suggest that on this issue most ordinary people “get it.” Let’s hope that’s enough to stop contagion from Scotland to London, where Mayor Sadiq Khan has been agitating for their introduction.

• A few people have asked for my thoughts on the FT’s Chris Giles’ article analogizing the UK Conservatives’ forthcoming “fiscal event” with Anthony Barber’s tax-cutting budgets in the early 1970s which were followed by the infamous “Barber Boom” and much higher inflation. Chris thinks Liz Truss and Kwasi Kwarteng are taking a similar risk with their proposed £30 billion per annum of tax cuts. Two thoughts. First, if you believe that fiscal deficits determine inflation so obviously, it seems strange to emphasize the tax cut risk to inflation and interest rates but not the £150 billion being thrown at keeping energy prices down for two years. Second, broad money growth during 1972 and 1973 exceeded 25 percent per year. It seems unsurprising, then, that inflation accelerated between 1973 and 1975. We are in a period right now where monetary policy has been tightening. What is the mechanism by which this additional borrowing for tax cuts increases money supply growth significantly?

That’s about it for this week.

Have a good weekend

Ryan