The Need for Supply-Side Economics

The Economist
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One of the memorable presidential political quips for me was candidate George H. W. Bush labeling Ronald Reagan’s supply side economic campaign as “Voodoo Economics” trying to develop economic policy based on magic. This was in 1980 as the U.S. and European economies were trying to break free of stagnation and high inflation that dominated the late 1970s.

Reagan won the election and spent the next eight years attempting to implement Reaganomics as a major departure from previous economic policy. Reagan’s tax cuts were deemed marginally successful, if at all, but his liberalizing trade policies and emphasis on industry deregulation freed economies from many barriers to trade, innovation and industry disruption, laying a framework for heightened globalism, increased competition along with slow, but steady, economic growth and prices. By the mid-1980s the economy returned to normalcy.

We have seen how fragile supply chains are on a global basis. We are also experiencing severe labor shortages. These developments have sent inflation to 40-year highs and are potentially precursors of the future as we transition from the baby boomer generation to millennials and as the U.S. looks to ensure production of some strategic or critical products, like microchips and drugs much closer to home. The outlook for continued inflation is significant enough for the Federal Reserve Bank to begin raising interest rates to cool off demand and keep inflation lower in the short-term. This is a reasonable policy move, but the long-term solution requires a return to supply side economics where the supply and productivity of land, labor and capital increases.

In her book “Redefining Capitalism in Global Economic Development” (2017) Kui-Wai Li describes supply side economic focus as “the desire to build up a long-lasting capacity enlargement that can lead to economic revival and expansion in the long run.”  In other words, growth and development rely heavily on increasing the factors of production – land, labor and capital. Rather than policies focused on increasing demand by households for more goods and services, government policies must focus on the supply side.

We are seeing this more so than in the past with an infrastructure bill that took over a decade to pass. It is the one larger federal government expenditure I wholeheartedly support because it will generate long-term returns. Separate from the infrastructure bill, Biden’s Build Back Better initiative has some elements that support the supply side and some focused more on redistribution of incomes. Aspects supporting the supply side include the child tax credit and universal pre-school, affordable transportation access, entrepreneurship development programs, affordable broadband for low-to-middle income communities, workforce development, youth development and job corps. Overall, its focus is on trying to engage those most constrained from participating in productive economic activities with new sources of taxes to pay for the effort.

In general, capital needs new investment opportunities rather than simply pushing asset prices up. Investment tax credits to nudge capital to more productive sectors are desirable. Labor needs to be incentivized, reskilled in many cases, and we need more of it through rational immigration policies. Land needs us to improve transportation and communication systems, adapt to climate change while rapidly mitigating the potential degree of damage, and increase extraction of rare earth metals needed for things like batteries to power the future. As I’ve stated numerous times in the past, Colorado is really fortunate in that the state’s appeal attracts many of the supply side factors.  What the Front Range needs is more water storage capacity as an insurance policy for the uncertain times ahead.

Relatively speaking, the last 40 years have seen steady economic expansion with steady prices. However, our universe is changing, and like the late 1970s, we find ourselves humbled as we search for a way forward. In times like these we need a beacon to steer toward, regardless of the loud noise from social and political disruption. I submit the correct beacon is sustainable supply-side economics.

 

Tom BinningsTom Binnings is a senior partner at Summit Economics in Colorado Springs. He has more than 30 years of experience in economic and market research for public policy, strategic planning, business analytics and project finance. He can be reached at: tbinnings@live.com

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