Biden administration rhetoric might lead one to believe that free-market economists have triumphed. Treasury Secretary Janet Yellen trumpets what she calls a “modern supply-side economics,” while departing National Economic Council director Brian Deese seconds the idea of “modern supply-side” policy. But the Biden administration’s supply-side economics is a bizarro version of the original, in which marginal tax rates and regulatory burdens are irrelevant, while economic growth comes from social services and targeted subsidies. Neither modern nor focused on the supply side, this policy approach is fueling the inflation that the original version of supply-side economics was designed to prevent.
Modern supply-side economics arose in the 1970s as an alternative to the then-reigning Keynesian orthodoxy. While Keynesians believed that more government spending could elicit ever-greater growth, supply-siders saw that without more production, such spending would only fuel inflation. Robert Mundell, remembered as the father of supply-side economics, and who later won the Nobel Prize in economics, realized that high marginal tax rates and government regulation were reducing supply and increasing inflation at the same time.
The Biden administration and its political allies in Congress have embraced none of the core supply-side insights. Instead, they have supported social services, such as subsidized childcare, to get more women into the workforce and thus boost labor supply. But since any working woman pays substantial taxes, the true supply-side remedy would be to take less of her money and let her work and spend as she pleased. Economic research shows that high tax rates discourage married women, in particular, from working: a married woman returning to work has to pay taxes at the same high rate that her husband, who usually stayed in the labor force, pays, and she risks pushing both of them into a higher tax bracket. Yet the Biden administration has proposed ever more social programs funded by ever-higher tax rates.
In Yellen’s speech introducing the phrase “modern supply-side economics,” she attacked tax-cutting efforts and said that “deregulation has a similarly poor track record.” But one would be hard-pressed to find an economist who thinks that the deregulation of trucking, airlines, shipping, and railroads in the late 1970s and 1980s did not boost growth. And today, existing regulations are inhibiting the very programs that the administration claims to support.
Consider childcare. Economists Diana Thomas and Devon Gorry have found that regulations on child–staff ratios and degree requirements add thousands of dollars to its costs. That hasn’t stopped Washington, D.C. from this year requiring many childcare workers to get associate’s degrees. The federal government is likewise leaving in place its regulations for federally funded childcare programs.
Meantime, Deese, who recently announced his retirement, celebrates a “modern industrial strategy” and a “more explicit government role in America’s industrial development” as the core of the Biden administration’s supply-side program. Yet few organizations have a worse track record than the federal government when it comes to industrial investments. From backing the failed syngas plant pushed by President Jimmy Carter to subsidizing Amtrak, the decades-running money sink that is Biden’s favorite government corporation, government investments tend to prop up stodgy existing industries. There’s no political constituency for birthing new and disruptive industries; there’s always one for subsidizing large and failing ones.
The administration has even tried to fit its obsession with racial equity into a supply-side framework. It claims that investment in poor and minority neighborhoods will fight discrimination against such neighborhoods and boost labor supply. This, too, resurrects old and unproductive efforts. During the debate on airline policy in the 1970s, many claimed that deregulation would allow discrimination against certain places. But, as Alfred Kahn, the economist dubbed the father of airline deregulation, said of such arguments, “The word ‘discrimination’ was being used sloppily”—not to refer to treating people or places differently, but as grounds for demanding equivalent outcomes, even when the costs or efforts were unequal. This is the same sloppy sense in which the administration is using the word today.
Many policy wonks hope that a true supply-side economics could become more common across the political spectrum. Even some self-identified members of the Left have embraced an “abundance agenda,” advocating deregulation of the Food and Drug Administration and the Nuclear Regulatory Commission and relaxation of antiquated laws like the National Environmental Policy Act to accomplish the ends of greener, non-discriminatory growth.
But such an agenda has not penetrated the Democratic Party establishment. While Democrats, enabled by Senator Joe Manchin’s vote for the Inflation Reduction Act, could support a splurge on scores of green industrial projects, they couldn’t secure the rest of the party’s backing to allow permitting on many of those projects to move ahead. As is so often the case, the government is subsidizing demand and constraining supply, leading to inflation and diminished growth.
Free-market advocates should celebrate that they have won the rhetorical battle about supply—at least for now. Amid high inflation, the Left admits that the endless stimulus of demand cannot solve our economic problems or boost growth. If only they realized that true supply-side economics can.
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