Running On Empty

It’s pretty easy to summarize Megan McArdle’s most recent Washington Post column—the go-to economic policies of both political parties are obsolete:

If the president wants to spare himself further such embarrassments, and his constituents further price hikes, he needs to stop fire hosing money into the economy. That won’t be easy, because both Democrats and Republicans think of deficit spending as free money with which to pursue their goals and reward their voters.

Politically, deficit spending is a hard habit to kick. Democrats, in particular, have devoted the past 15 years to arguing that deficit spending isn’t just politically expedient (all politicians love spending borrowed money) but is a positive boon to the economy.
Some of those arguments were sound. I supported deficit-financed relief during both the Great Recession and the covid-19 pandemic, and not just because I wanted to mitigate the misery of people who lost jobs and businesses. Rapid economic contractions can feed on themselves, as panicked consumers hoard money against possible financial hardship and thereby trigger further waves of layoffs and business failures. Strategic injections of government deficit spending can theoretically slow, or even reverse, that downward spiral.

But those injections only cure the patient if there’s spare economic capacity waiting to be put back into service as soon as demand recovers. That’s no good to us now, because unemployment is below 4 percent, core inflation is above 6 percent and demand has already recovered. So, when the government (as it has under Biden) comes in with even more borrowed money, all that money can do is bid up the price of existing goods and services further.
Unfortunately, a lot of Democrats, including our president, are stuck in the economic mind-set of days past, when there was always economic slack that could theoretically be stimulated away, so that deficit spending of any amount seemed to be all upside. They have yet to adjust to the new reality of an economy where the problems are all on the supply side.

The Republicans’ problem is easier to summarize: they believe in tax cuts. Full stop. Even Reagan didn’t reduce the size or scope of government. The key problem with relying solely on tax cuts is that we were on a different part of the Laffer Curve 40 years ago than we are now.

As I have been saying some time we need to produce more. More energy. More food. More houses. More stuff that people want to buy.

The alternatives are have fewer people and want less. For the last couple of years the U. S. population (births – deaths + immigration) has been about 3 million people. It should be obvious that increases aggregate demand. Regulating immigration is a lot more humane and politically possible than reducing births or increasing deaths.