Growing out of inflation: a new supply-side policy

[Celerity]

The obvious response to inflation is to rein in demand via monetary policy—except supply, not demand, is the problem.

PHILIPPA SIGL-GLÖCKNER and ENZO WEBER 30th June 2022

https://socialeurope.eu/growing-out-of-inflation-a-new-supply-side-policy



Inflation is back. The last time prices increased by 8 per cent per annum was in the early 1980s. A decisive catalyst has been Vladimir Putin’s war against Ukraine, causing energy prices to soar to unimagined heights. A phenomenon long of little relevance prevails—scarcity. And not only scarcity of energy but also of various raw materials and intermediate products, as well as skilled workers. The conventional response to inflation and shortages is well known: the central bank raises interest rates, companies and households borrow less and buy less, so demand matches supply again. This price mechanism does not however fit Europe today: elevated prices are not the result of excessive consumption but of uncertain energy and gas supplies, disrupted international supply chains and overdue investments in green technology. Shrinking demand to fit restricted supply would be painful—and unnecessary. With the right strategy, it is possible to grow out of the current situation.

Essential role

Key to this is the market. Yet only the state can get the market going. It plays an essential role—enabling investment by setting the rules of the game (such as a price for carbon), planning large-scale infrastructure (such as the energy system) and subsidising otherwise not-yet-profitable projects (such as the ecologically-driven). Accomplishing the green transition in the time required by climate goals—years, not decades—is a monumental task. Just consider the investments in electricity grids, infrastructure for hydrogen and transport, industrial plant and buildings which have to go hand in hand with the massive scale-up in renewable energy. Realising those will not be possible in the time left without a co-ordinating actor. Hence, fighting inflation effectively today requires more than a monetary-policy response. Equally, simply focusing on the demand side to counter the recession won’t do the trick. A new supply-side policy is required, under which the state pulls out all the stops to enable necessary investments, set positive incentives, expand potential and so slow price growth.

Skill shortage

One such ‘stop’ is shortage of skilled labour. Without workers, any effort to accelerate the transformation will only exacerbate bottlenecks. A well-developed care and nursing infrastructure is key: it enables women to pursue a full-time career and allows for improved career development. Abolishing incentives to remain in marginal or part-time jobs, for instance through the tax code, would work in the same direction. Migration is becoming increasingly important to expand workforces. Yet migrants suffered most from the Covid-19 crisis across Europe and integration must be improved to make the best use of their potential. Before the long-term unemployment caused by that crisis becomes permanent, wage subsidies and further training incentives could help those affected get back on their feet today. Finally, publicly-supported re- and upskilling would enable people mid-career to help shape the transformation, instead of being left in its wake. For such an educational policy to develop individuals’ strengths rather than just correct deficits, it must be proactive and continuous.

Self-defeating rules

An overly successful labour-market policy would however be self-defeating under the current fiscal rules set by the Stability and Growth Pact: if the economy exceeds potential, the government has to start saving money to cool it down. Today, the labour market is estimated to have reached its potential when people work roughly as much as in the past. That may yield counter-intuitive results: the Spanish economy, for instance, is estimated to exceed its potential when unemployment falls below 12 per cent. The method for estimating potential output under the pact should therefore be adjusted, so that public investment can be supportive of labour-market and climate policy. Public investment which effectively supports an expansion of potential requires long-term planning. If contractors have no idea what orders will look like in two years, they will be reluctant to invest in new machinery and expand their workforce. Thus, increases in government spending at short notice will only lead to higher prices. A new supply-side policy requires predictable investment, not stop-go.

snip

[3Hotdogs]

1. Supply side.... I went to the Hyundai dealer for my free oil change.

There was EXACTLY one car on the showroom floor. During winter, they had only used cars on the floor.

This is a dealer that has a highway strip with Honda, Ford and Nissan in his "group" of manufacturers.

[KPN]

2. OFFS! They never give up do they?

Maybe I’m reading this wrong (didn’t go to the article itself), but reading between the lines I see tax cuts for corporations and wealthy investors. Same old same old.

[Celerity]

3. No, that is the old US RW 'supply-side economics' theories based off the Laffler curve, and

postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade.

The American RW economists wanted and still want to shrink government to a skeletal level, and get it out of regulating business as much as possible. They see the state as the enemy.


This article is a complexly different beast. Social Europe is centre left to left academic discussion website.

They would never advocate for a RW economic policy. I myself would never post any RW economic theories here, as I hold them to be completely antithetical to my own economic constructs. (I am a firm believer in the Nordic model, with a vibrant, robust but very well regulated capitalist sector working synergistically with an expansive social welfare state. I am a member of the Swedish Social Democratic Party ie Socialdemokraterna. Social democrats are NOT, I repeat, not socialist at all btw, the conflation of the two (especially the misuse of the 'democratic socialist' label by some) in the US drives me bonkers.

This article sees the role of government as absolutely essential, and posits that social outcomes are also foundational.

look at the 2nd paragraph



also further down.