Supply And Demand

Understanding supply and demand is at the very basis of Economics 101, and thanks to the pandemic, we are seeing a “real world” example of what happens when demand surges, outstripping supply–or at least, outstripping the ability to satisfy demand promptly. For example, the supply-chain problems that have raised prices and fears of inflation have been exacerbated by the gusher of spending that is attributed to demand that was pent-up due to COVID restrictions.

Ezra Klein recently revisited the consequences of imbalances between supply and demand in a column for the New York Times. He focused on the dilemma posed by subsidies–not the pernicious subsidies of corporate farmers or fossil-fuel companies, but well-meaning efforts to help needy American families.

Many of progressivism’s great dreams linger on the demand side of the ledger. Universal health care promises insurance that people can use to buy health care. Food stamps give people money for food. Housing vouchers give them money for rent. Pell Grants give them money for college. Social Security gives them money for retirement. The child tax credit gives them money to care for their children. The minimum wage and the earned-income tax credit give workers more money. A universal basic income would give everyone more money.

Great. Or maybe not…

The problem is that if you subsidize the cost of something that there isn’t enough of, you’ll raise prices or force rationing. You can see the poisoned fruit of those mistakes in higher education and housing…

Klein quotes from a recent paper issued by the Niskanen Center–a think tank I have previously cited, and one  that consistently turns out clear-eyed, impressive research.

We are in an era of spiraling costs for core social goods — health care, housing, education, child care — which has made proposals to socialize those costs enormously compelling for many on the progressive left,” Steven Teles, Samuel Hammond and Daniel Takash write.

There are sharp limits on supply in all of these sectors because regulators make it hard to increase supply (zoning laws make it difficult to build housing), training and hiring workers is expensive (adding classrooms means adding teachers and teacher aides, and expanding health insurance requires more doctors and nurses) or both. “This can result in a vicious cycle in which subsidies for supply-constrained goods or services merely push up prices, necessitating greater subsidies, which then push up prices, ad infinitum,” they write.

The Niskanen paper advises Republicans to stop focusing on “backward-looking deficit reduction strategies based on budgetary gimmicks or dead-on-arrival cuts to existing entitlements.” Instead, it urges conservatives to tackle costs, pointing out that, far too often, Republican proposals to cut government spending “are just shell games that shift costs onto individuals.”

The conservative enthusiasm for moving Medicare beneficiaries onto (often more expensive!) private plans “risks being little more than an accounting trick — a purely nominal change in ‘who pays’ that would do little to address the underlying sources of cost growth.

What is needed, according to Klein, the Niskanen authors and others quoted in the article, is a new focus on innovation, and public policies that encourage it.

Klein says progressives are finally figuring this out, most  clearly when it comes to climate.  Biden’s agenda would increase the supply of renewable energy and advanced batteries and build the supply of carbon-neutral transportation options. Environmentalists understand that markets alone cannot solve the climate crisis, and Democrats are coming to recognize that the same is true for much else on the progressive docket.

Klein shares a quote from a member of Biden’s Council of Economic Advisors.

The transportation, rail, public transit and port investments will reduce efficiency-killing frictions that keep people and goods from getting to markets as quickly as they should,” they wrote. “The child and elder care investments will boost the labor supply of caretakers. The educational investments in pre-K and community college will eventually show up as higher productivity as a result of a better-educated work force.”

As he concludes:

A list like this could go on. It’s not clear whether it’ll be in the reconciliation bill, for instance, but Biden has proposed an expansive plan to increase housing supply in part by pushing local governments to end exclusionary zoning laws. And in California, that’s exactly what’s happening, as I wrote a few weeks back. A decade ago, progressives talked often of making housing affordable, but they didn’t talk much about increasing housing supply. Now they do. That’s progress.

Yes. As Aaron Bastani, another author Klein quotes, puts it, “the world we should want requires more than redistribution. It requires inventions and advances that render old problems obsolete and new possibilities manifold.”

Getting to that world will require overcoming the fear of change that is roiling the world we currently inhabit.

16 Comments

  1. In my youth, it was normal to see mixed use buildings in cities large and small. The hardware store was on street level and people lived above in apartments. I think it was after WWII when the racially divided suburbs were coming on line that government agencies banned new buildings with that Residential / commercial mix. That is too bad. Now people HAD to have cars for everything. More and bigger roads were required. People could no longer walk to work or the grocery or the barber. That was bad for society at large and the environment.

  2. I have absolutely no idea what Klein is advocating for and the Times article is behind a paywall. When they stop being State Dept propaganda, I’ll subscribe.

    Our oligarchy chose just-in-time inventory models which failed during a global pandemic where certain chokepoints were disrupted. Every time I hear a politician like Todd Young advocate for “investment in innovation,” I put my hand on my wallet. When I hear bipartisan approval for some nationalistic sounding program, I know the propagandists will be writing OpEds.

    Let’s just cut through all the BS and ask what the Oligarchy is wanting now? I have a good idea since the Military-Industrial Complex needs a war, they know their investments in China and the Far East might be disrupted so they need their supply chains subsidized back in the USA.

    Is that what all the propaganda is about?

  3. Sheila, you hit the issues squarely at the helm of what matters most to the future of a civil society when you the concluding one sentence paragraph:

    “Getting to that world will require overcoming the fear of change that is roiling the world we currently inhabit.”

    During recovery from global pandemic, we have a choice whether to feed fear of change or invest in new evidence-based possibilities for an improved future. Otherwise we are canoeing the mountains and wonder why we are frustrated and stuck in our anger toward one another.

  4. We are, in so many cases, our own worst enemy. When we suspect there might be a shortage, we rush out to buy as much of the thing we think we’re running out of as we possibly can. We create shortages often where there aren’t any. It happened in Great Britain with their fuel shortage this past summer and it happened here with toilet paper a year ago.

  5. There is no question that our society would benefit far more from structural changes to our economic and political systems than redistributive solutions. But proposals to change one little detail in how our tax code works is met with an impenetrable WALL of opposition, even among Democrats in Congress.

    Of course I’m talking about the provision called “carried interest” in the field of private equity investing, including hedge funds. A typical PE or HF manager’s contract with his/her clients includes a basic asset charge of 1-2% of the clients assets each year PLUS 15-20% of the investment gains in the clients funds each year, usually limited to gains above a certain floor. This does not require the manager to invest any of their own funds or those of their investment firm.

    But somehow, some way, Congress determined long ago that a service fee that is basically a share of the clients financial gains should be taxed the same way their clients are and not like “fee-income” or like normal wage earners, so they pay no MORE than 20% federal taxes on their earnings when a a top wage-earner is paying 39% on income above a certain breakpoint. At very high incomes there is little difference between the marginal tax rate and the effective rate as most of the income is taxed at the rate of the highest bracket.

    My point is that if our democratic republic can’t even fix something this simple and egregiously unfair in our tax code, how in the HELL can it fix anything?? The structural issues that need to be fixed do not lie in our markets and supply-chains. The structural issues that need to be addressed are how our federal, state and local governments are organized.

    Federalizing election law and voting rights once and for all is a good place to start but here we are, wrangling over an ever-diminishing set of benefits soft-infrastructure bill as well as how to pay for it for much of the year, as we march towards our version of an “illiberal democracy”.

    If it were up to me we’d affirm voting rights and election law but we’d also eliminate these hallowed institutions: The Senate, the Electoral College, life-time Court judge appointments and the consolidation of 50 states into no more than a dozen (softening the impact of eliminating the Senate).

    Hey, I can DREAM can’t I?

  6. Many who are liberal in many ways see themselves as fiscal conservatives overall. The greater supply of money from the government the more inflation we have. So look at the Biden plan, there isn’t fear, its a reality that people have moved to real estate and more steady stocks that rise with inflation. Yes your 401k may be doing poorly if you didn’t rotate out of growth stocks. Big government out of control is always a problem.

  7. $14.99/month for a wealth of information at NYT including what to watch on streaming services, weeknight dinner recipes, tech, in her words, I mean I could go on. Complaining about a paywall in comments is so telling.

  8. Supply and demand economics is something I learned about in high school. Recently, I have heard that getting a car is difficult due to problems in the supply chain with auto parts. I lucked out. I found a 4 year old Prius Prime at a dealership with all the tech bells and whistles. The salesman told me that the price of used cars is inflating and that it would take 6-9 months to get a new vehicle.

    I got the car. I then found out that charging the battery doubled my electric bill. That raises a question about supply and demand as we move toward electric vehicles. How high is the carbon footprint of electric cars? What will the charging ports cost consumers when they recharge the car battery? How many charging ports will be needed to ensure there is an adequate supply for the consumers of electric cars?

    I just heard about up charging on NPR. This is something hospitals have been doing for years which in turn markedly increases the health care bill on consumers. That is, in my opinion, greedy behavior and again makes me very glad I no longer work as a registered nurse in a hospital system. As I have said before, a much stronger and readily available public health infrastructure could markedly reduce health care costs. If preventative health care was readily available, health care costs could be markedly reduced. ” An ounce of prevention is worth a pound of cure.”

  9. ” It’s not clear whether it’ll be in the reconciliation bill, for instance, but Biden has proposed an expansive plan to increase housing supply in part by pushing local governments to end exclusionary zoning laws. And in California, that’s exactly what’s happening, as I wrote a few weeks back. A decade ago, progressives talked often of making housing affordable, but they didn’t talk much about increasing housing supply. Now they do. That’s progress.”

    I take issue with this solution. Just last night I went to a county council meeting to show opposition to a zoning -change proposal that would have increased housing density on a tract of land in our county. Our county includes a stretch of land bounded on one side by the Atlantic Ocean and on the other by the Waccamaw River, which is a very wide river (part of which is the Intercoastal Waterway). The density of this area as it is currently, presents safety issues to traffic, already experiencing an increase in accidents near this tract and evacuation plans in a hurricane-prone area. Not to mention, the environmental impacts on land containing vital wetlands and marine forest. Sometimes , restrictive zoning IS progressive. It depends on the area. The proposal to rezone was brought by the developers looking to make big profits.

    BTW – I continue to wonder why there is so little talk about over-population as a problem-creating situation for the planet at large.

  10. Patrick > I have been writing for years in re the carried interest abomination (one of many in the code) which allows hedge and equity funds to treat their income as capital gains rather than as ordinary income when such compensation is clearly ordinary income by any rational measure. Politicians of both parties (including Hillary when she ran) have promised to end this immense drain on our treasury but when in office they suffer a lapse in memory.

    The “carried interest” definition in the code, like many other exemptions from political redefinitions via such code, needs further redefinition – from capital gains to ordinary income status. There are also needed changes in the bankruptcy code, especially Chapter 11 thereof, and I have been agitating to no avail for years for such changes in both codes.

    The superrich have been successfully framing any changes in the internal revenue code that they don’t like as “soaking the rich,” etc., when in truth and fact you have huge corporations with billions in profits who are “soaking us taxpayers” by not only paying no taxes but are even getting money back due to the patchwork of credits and exemptions and other goodies such as income averaging etc. A few years ago I paid more taxes than Boeing did, and I certainly did not make 11 billion in profits, as Boeing did.

    John F. Kennedy, after he was elected, was asked how it felt to be the most powerful person in the government. His reply was accurate. He said: “I don’t know. You’ll have to ask the Chairman of the House Ways and Means Committee,” (an Arkansas congressman at the time). I think he was on to something.

  11. A standard meme for environmentalists is that “everything is connected”. Human civilized population numbers and technology make that infinitely more true.

    Another expression of the same thing is from Wikipedia’s entry for the butterfly effect:

    “In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.

    The term is closely associated with the work of mathematician and meteorologist
    Edward Lorenz.”

    A possible conclusion from this is that we have built a connected system so complex it is beyond our ability to manage.

    Another is that we have built a connected system so complex it requires an unattainable degree of collaboration to manage.

  12. Yeah,gotta keep blaming the ills of the country on Bubba. Meanwhile,Steve Danziger is going to jail. The suits won decades ago. They’re going to always win.

  13. Todd Smekens. Being behind a paywall does make it harder to access, but it does not make it state sponsored propaganda. I have found that paying for good journalism is worth the cost. It is too bad there is not a model that will let you purchase one day’s access for say, a $1, just like you used to when you did not want the full subscription, but just wanted to pick up that day’s paper.

  14. A few thoughts –
    We should remember that CEOs got the big bonus for switching to “just in time” sourcing, meaning that if there was any disruption or delay in the supply chain, instant scarcity was the result, but that wasn’t their concern.

    We should also remember that real liberals were never the “straw men” that conservatives, and smart, young upstarts like Ezra Klein paint. We always were concerned with the supply-side of things. “Just throw money at it” was the anti-liberal meme. The problem often was —

    False dichotomies – we were often presented with these false dichotomies, like either having a housing shortage, or allowing sub-standard housing with no insulation, built on a toxic waste dump.

    Also, the “push back” that led to things like “means testing”, which separated the really poor from the marginal working class, leading to the lumping of the “undeserving poor” together so that we could increasingly ignore them.

    One last thought – there is a tendency to only look as a small subset of the world and redefine it as a closed system. The Manchins of the world grow rich from fossil fuels, but by ignoring the complete system of an interconnected world, they don’t have to pay for the loss of habitat, the polluted rivers, the toxic waste, or the lives harmed by all of this.

  15. So, Patrick, how is “federalizing election law and voting rights” going to work out when Trump is President, again, and Republicans control Congress? I am constantly mystified why many people on the left think our national government is always wise and our states are always wrong. Didn’t the Trump era already prove the dangers of power concentrated in Washington, D.C. ? Federalism protected us from much of the excesses of Donald Trump.

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