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.