The Problem Is Aggregate Product

If you dig through a considerable amount of word salad you’ll find a significant nugget of information in Ezra Klein’s most recent New York Times column. After spending several hundred words explaining that progressives have scoffed at the “supply side” of the economy through sheer ideological bias he observes:

But this is a lesson progressives are, increasingly, learning. This is clearest on climate. Much of the spending in the Biden agenda is dedicated to increasing the supply of renewable energy and advanced batteries while building the supply of carbon-neutral transportation options. Democrats have realized that markets alone will not solve the climate crisis. And the same is true for much else on the progressive docket.

In a blog post, Jared Bernstein, a member of President Biden’s Council of Economic Advisers, and Ernie Tedeschi, a senior policy economist for the council, framed the Biden agenda as “an antidote for inflationary pressure” because much of it expands the long-term supply of the economy.

“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.”

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.

I’m not as convinced as he that the Biden Administration has any particular interest in the “supply side” of the economy. Everything he mentions could also be interpreted as constituent service. Additionally, I don’t agree that spending more money on, say, education will ipso facto increase productivity and that is true for two reasons. The first reason is that if you cap the supply of something and make money available to buy more of it in the near term the only measurable effect will be to increase prices. That’s axiomatic, tautological. The second reason is that exactly what the money is used for makes a difference. I challenge Mr. Klein to demonstrate that spending more money on teaching interest studies, psychology, or Hungarian literature has any measurable impact on productivity one way or another. If the objective is increasing productivity they’d get a lot more bang for the buck subsidizing trade schools than community colleges. And the literature on pre-K is pretty mixed. Gains made do not necessarily persist long enough to last the recipients through high school let alone into the workforce.

Nonetheless it’s gratifying to see what I would phrase as increasing aggregate product getting more attention. Subsidizing consumption doesn’t do a lot to improve the state of the economy unless aggregate product increases. At least it doesn’t do much for the U. S. economy.