It’s The Supply-Side, Stupid!

Part 2

Jerome Powell is a gutless wonder and a D+ thinker, to boot. If that.

What else can you say about this gem he delivered up to the liberal swells at NPR this week. If the booming 3.5% unemployment economy of 14 months ago wasn’t the time to fix the nation’s horrific fiscal deficit, pray tell, what would be?

Yet did Powell call Donald Trump and his GOP spendthrifts to the carpet in January 2020—long before the Covid-Lockdowns were a thing?

No, he didn’t utter a peep, save for some rhetorical blather about the long-term unsustainability of Washington’s penchant for massive deficits year-after-year. So now, once again, it is not the time to act.

“Given the low level of interest rates, there’s no issue about the United States being able to service its  debt at this time or in the foreseeable future,” Mr. Powell said Thursday in an interview with National Public Radio. “Nonetheless, there will come a time—and that time will be when the economy is back to full employment, and taxes are rolling in, and we’re in a strong economy again—when it will be appropriate to return to the issue of getting back on a sustainable fiscal path.”

The bolded phrase gets us to the meat of the matter. Namely, the Keynesians who dominate both Wall Street and Washington hold that a mythical condition called “full employment” is the holy grail of economic policy and so long as there is a purported shortfall, anything goes on the “stimulus” front.

In effect, the concept of Full-Employment and Potential GDP have obliterated the old-fashioned, all-seasons verities about fiscal rectitude and sound money. Massive deficits and egregious money printing have thus become permanent policy because there is always something—-wars, plagues, oil shortages, housing busts, stock market crashes—that keep the economic nirvana of Full-Employment at bay.

But here’s the thing. The very idea of Full-employment is a crock, and, ironically, we had live-fire proof during last year’s Lockdown mayhem.

In one fell swoop, 22 million jobs or nearly 15% of the February 2020 pre-Covid total (152.5 million) disappeared in a heartbeat during April. But when the accompanying unemployment rate went from 3.5% to 14.8% in two months, that did not indicate that there was a huge Full-Employment gap warranting another round of stimulus.

To the contrary, the Covid-marshals had ordered a 15% reduction in labor capacity overall, and a 90% reduction in effective airline capacity, to pick one example. No amount of “stimulus” could have closed the gap because as a matter of law and practice, these resources had been deleted from the economy for the duration. At that moment in time, Potential GDP was sharply lower.

The fact that the worst of the Lockdown shrinkage of economic capacity lasted for only a few months is irrelevant to the point at hand. To wit, multitudinous forces—public policies, demographics, cultural preferences, global economics—continuously cause domestic labor and capital resources to be added to and subtracted from the US economy.

Moreover, the capacity to produce economic output at any given time is not merely a function of the quantity of resources, but also their price and efficiency. When US factory labor, for instance, got way out of line with competitors in Mexico, China and elsewhere, the impacted workers and factories didn’t go away, yet they became permanently idled because they were no longer competitive.

To take another example, the relative price of welfare versus work keeps changing as policy evolves. In the case of social security disability (DI), more liberal benefits and eligibility standards over the decades have caused a huge increase in the relative share of the population deleted from the available work force owing to DI.



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