The Revenge of Supply, at Project Syndicate
Surging inflation, skyrocketing energy prices, production bottlenecks, shortages, plumbers who won’t return your calls – economic orthodoxy has just run smack into a wall of reality called “supply.”
Demand matters too, of course. If people wanted to buy half as much as they do, today’s bottlenecks and shortages would not be happening. But the US Federal Reserve and Treasury have printed trillions of new dollars and sent checks to just about every American. Inflation should not have been terribly hard to foresee; and yet it has caught the Fed completely by surprise.
The Fed’s excuse is that the supply shocks are transient symptoms of pent-up demand. But the Fed’s job is – or at least should be – to calibrate how much supply the economy can offer, and then adjust demand to that level and no more. Being surprised by a supply issue is like the Army being surprised by an invasion.
The current crunch should change ideas. Renewed respect may come to the real-business-cycle school, which focuses precisely on supply constraints and warns against death by a thousand cuts from supply inefficiencies. Arthur Laffer, whose eponymous curve announced that lower marginal tax rates stimulate growth, ought to be chuckling at the record-breaking revenues that corporate taxes are bringing in this year.
Equally, one hopes that we will hear no more from Modern Monetary Theory, whose proponents advocate that the government print money and send it to people. They proclaimed that inflation would not follow, because, as Stephanie Kelton puts it in The Deficit Myth, “there is always slack” in our economy. It is hard to ask for a clearer test.
But the US shouldn’t be in a supply crunch. Real (inflation-adjusted) per capita US GDP just barely passed its pre-pandemic level this last quarter, and overall employment is still five million below its previous peak. Why is the supply capacity of the US economy so low? Evidently, there is a lot of sand in the gears. Consequently, the economic-policy task has been upended – or, rather, reoriented to where it should have been all along: focused on reducing supply-side inefficiencies.
One underlying problem today is the intersection of labor shortages and Americans who are not even looking for jobs. Although there are more than ten million listed job openings – three million more than the pre-pandemic peak – only six million people are looking for work. All told, the number of people working or looking for work has fallen by three million, from a steady 63% of the working-age population to just 61.6%.
We know two things about human behavior: First, if people have more money, they work less. Lottery winners tend to quit their jobs. Second, if the rewards of working are greater, people work more. Our current policies offer a double whammy: more money, but much of it will be taken away if one works. Last summer, it became clear to everyone that people receiving more benefits while unemployed than they would earn from working would not return to the labor market. That problem remains with us and is getting worse.
Remember when commentators warned a few years ago that we would need to send basic-income checks to truck drivers whose jobs would soon be eliminated by artificial intelligence? Well, we started sending people checks, and now we are surprised to find that there is a truck driver shortage.
Practically every policy on the current agenda compounds this disincentive, adding to the supply constraints. Consider childcare as one tiny example among thousands. Childcare costs have been proclaimed the latest “crisis,” and the “Build Back Better” bill proposes a new open-ended entitlement. Yes, entitlement: “every family who applies for assistance … shall be offered child care assistance” no matter the cost.
The bill explodes costs and disincentives. It stipulates that childcare workers must be paid at least as much as elementary school teachers ($63,930), rather than the current average ($25,510). Providers must be licensed. Families pay a fixed and rising fraction of family income. If families earn more money, benefits are reduced. If a couple marries, they pay a higher rate, based on combined income. With payments proclaimed as a fraction of income and the government picking up the rest, either prices will explode or price controls must swiftly follow. Adding to the absurdity, the proposed legislation requires states to implement a “tiered system” of “quality,” but grants everyone the right to a top-tier placement. And this is just one tiny element of a huge bill.
Or consider climate policy, which is heading for a rude awakening this winter. This, too, was foreseeable. The current policy focus is on killing off fossil-fuel supply before reliable alternatives are ready at scale. Quiz: If you reduce supply, do prices go up or go down? Europeans facing surging energy prices this fall have just found out.
In the United States, policymakers have devised a “whole-of-government” approach to strangle fossil fuels, while repeating the mantra that “climate risk” is threatening fossil-fuel companies with bankruptcy due to low prices. We shall see if the facts shame anyone here. Pleading for OPEC and Russia to open the spigots that we have closed will only go so far.
Last week, the International Energy Agency declared that current climate pledges will “create” 13 million new jobs, and that this figure would double in a “Net-Zero Scenario.” But we’re in a labor shortage. If you can’t hire truckers to unload ships, where are these 13 million new workers going to come from, and who is going to do the jobs that they were previously doing? Sooner or later, we have to realize it’s not 1933 anymore, and using more workers to provide the same energy is a cost, not a benefit.
It is time to unlock the supply shackles that our governments have created. Government policy prevents people from building more housing. Occupational licenses reduce supply. Labor legislation reduces supply and opportunity, for example, laws requiring that Uber drivers be categorized as employees rather than independent contractors. The infrastructure problem is not money, it is that law and regulation have made infrastructure absurdly expensive, if it can be built at all. Subways now cost more than a billion dollars per mile. Contracting rules, mandates to pay union wages, “buy American” provisions, and suits filed under environmental pretexts gum up the works and reduce supply. We bemoan a labor shortage, yet thousands of would-be immigrants are desperate to come to our shores to work, pay taxes, and get our economy going.
A supply crunch with inflation is a great wake-up call. Supply, and efficiency, must now top our economic-policy priorities.
Update: I am vaguely aware of many regulations causing port bottlenecks, including union work rules, rules against trucks parking and idling, overtime rules, and so on. But it turns out a crucial bottleneck in the port of LA is… Zoning laws! By zoning law you’re not allowed to stack empty containers more than two high, so there is nowhere to leave them but on the truck, which then can’t take a full container. The tweet thread is really interesting for suggesting the ports are at a standstill, bottled up FUBARed and SNAFUed, not running full steam but just can’t handle the goods.
Disclaimer: To my economist friends, yes, using the word “supply” here is not really accurate. “Aggregate supply” is different from the supply of an individual good. Supply of one good increases when its price rises relative to other prices. “Aggregate supply” is the supply of all goods when prices and wages rise together, a much trickier and different concept. What I mean, of course, is something like “the amount produced by the general equilibrium functioning of the economy, supply and demand, in the absence of whatever frictions we call low ‘aggregate demand’, but as reduced by taxes, regulations, and other market distortions.” That being too much of a mouthful, and popular writing using the word “supply” and “supply-side” for this concept, I did not try to bend language towards something more accurate.
Are taxes the price we pay for civilization?
Autumn is usually the time when countries’ parliaments try to reach an agreement on the amount of taxes to be paid during the twelve months of the coming…
Autumn is usually the time when countries’ parliaments try to reach an agreement on the amount of taxes to be paid during the twelve months of the coming year. If, as many people seem to believe, “taxes are the price of civilization,” this seems to imply not only that we live under the implicit threat of barbaric chaos, but also that there is some mischievous organization out there which, in order not to unleash that chaos on our doorstep, demands that we pay an expensive ransom.
In other words, if taxes are the price of civilization, that is a sign that someone has effectively and successfully claimed for themselves “the monopoly of the legitimate use of physical force” in our common territory. This person, or group, is called the State (it is Max Weber – surely not an anarchist – who states this at the very beginning of his famous essay “Politics as a Vocation”).
Curiously enough (or perhaps not), the way that this modern State of ours legitimizes its “monopoly of physical force” is precisely by telling us that such “kidnapping” is done in our name (“we are the state.”) and for our own good (“it was the National Health Service that saved us.”). Nonetheless, the kidnapping remains – and in this, libertarians, beyond looking up to Frederic Bastiat (“The state is the great fiction by which everyone endeavors to live at the expense of everyone else.“), also end up agreeing with Engels: “the state is nothing but a machine for the oppression of one class by another, and indeed in the democratic republic no less than in the monarchy.”
What they do not agree on is what constitutes the relevant social classes. The libertarian class struggle is not the one that Karl Marx brought into the world (despite the 3rd volume of his Capital ending precisely when he was at last going to explain us “what constitutes a class“…). To libertarians, as long as this “kidnapping argument” serves as the foundation of government, the class struggle will always be between the governing and the governed (see Dunoyer, Comte and Thierry, or Calhoun), that is, between those who live off the ransom and those who pay for it.
As has been noted for several centuries (see La Boétie or David Hume), the rulers, being a minority, would easily be put at a disadvantage in a direct clash. Rulers need to make the citizen believe that they are the only bulwark that prevents the Hobbesian “state of nature” from swallowing up the routine of everyday life. To achieve this, the most effective way is for the State to create an ever-larger layer of the population whose livelihood depends, at least in the short term, on maintaining this civilizational kidnapping – be it by belonging to the literal or figurative (administrative, functional, academic, retired) armies of the State, be it by having close relatives who belong to them, or be it by, say, benefiting from Minotaur-subsidized goods and services. This layer of the population will constitute the class whose interests and “guarantees” ensure the maintenance of the ruling minority. If, in the meantime, one is able to centralize power and undermine the autonomy of all the independent fortifications that could oppose the expansion of the Bismarckian Minotaur, so much the better (on this point, de Jouvenel is required reading).
Still, it is interesting – and important! – to note that most liberals in the classical tradition do not support this pessimistic and cynical view of the nature of the state. Ludwig von Mises, who confided with Weber in Vienna for a few months in 1919, goes so far as to claim in his last work that government is “the most necessary and beneficial institution” of life in society. To classical liberals like Mises, “if all men were able to realize that the alternative to peaceful social cooperation is the renunciation of all that distinguishes Homo sapiens from the beasts of prey, and if all had the moral strength always to act accordingly, there would not be any need for the establishment of a social apparatus of coercion and oppression.” To these authors, it is not even correct to say that the State constitutes a “necessary evil,” because in their view the evil is not in the State but in the imperfection of human beings (John Locke, three hundred years earlier, was saying essentially the same thing).
Thus, taking both arguments into consideration, perhaps the most sensible thing to do would be to follow Mark Skousen and settle that taxes are, in fact, “the price we pay for failing to build a civilized society”, a definition that is also in line with the Spencerian libertarian ideal, since from it we can derive that “a centrally planned totalitarian state represents a complete defeat for the civilized world, while a totally voluntary society represents its ultimate success.”
Now, note the dichotomy that emerges from these two alternative “prices”. If taxes constitute “the price of civilization”, this suggests not only such “civilizational kidnapping” as libertarians see it, but also such social engineering as envisioned by social-progressives, who consider it on the State to foster the advance of civilization. If, on the other hand, taxes are “the price of uncivilization”, such definition makes it clear that the burden is on the individual to promote (and implement) a set of institutions and moral rules that, little by little, fulfill the civilizational fate of mankind and leave behind the “uncivilizational” vestiges of the State – of the “machine for the oppression of one class by another” (something that the communists from Marx’s time would supposedly also like to achieve, but through completely counterproductive means…).
Moreover, the economist in me also can’t help noting that, if taxes are “the price of civilization”, then it means that this “good” – i.e. civilization, social peace – is probably the only one whose price has continued to escalate since the dawn of modern civilization, regardless of the monetary policy pursued by the central bank (a development which, in accordance with the libertarian view, does not speak well for government management of this “public good”…). On the other hand, if taxes are seen as “the price of our failing to build a civilized society”, then the reason for our current tax burden becomes clear…
So, whatever the reader’s preferred definition of what the State is and should do, I believe that the Fall period could well serve as a sort of “Budget Lent”, in which we honestly reflect on the essence of taxes and the State.
Pedro Almeida Jorge is an Economist and Library & Translations Coordinator at Instituto +Liberdade, in Portugal.
Michael Saylor: “Bitcoin Is The Oxygen Mask”
Michael Saylor: "Bitcoin Is The Oxygen Mask"
"So what is bitcoin, exactly?" Tucker Carlson asks.
To explain it, Tucker notes that they scoured…
Michael Saylor: “Bitcoin Is The Oxygen Mask”
“So what is bitcoin, exactly?” Tucker Carlson asks.
To explain it, Tucker notes that they scoured the world for someone to explain it that had “skin in the game” and Michael Saylor fits that bill perfectly with billions of his firm MicroStrategy’s balance sheet invested in the cryptocurrency space.
Saylor begins: “Bitcoin is the first engineered monetary system in the history of the human race…full stop!”
And to explain it, “the first question is ‘whats money?’; the second question is ‘whats the problem?’; and the third question is ‘whats the solution?’.”
Very effective case for bitcoin here. The oxygen/blood metaphor is excellent. https://t.co/xpotFvXktp
— Eric Balchunas (@EricBalchunas) December 1, 2021
And so the Microstrategy CEO begins by explaining what is money…
“Money is social, economic energy… it is monetary energy.”
Wending his way from African’s glass beads to gold and on to the present day, the bitcoin advocate notes that “money is that shared ledger of who owes what to whom,” explaining the difference between “weak money and strong money” in terms of being able to manufacture glass beads and dump them on Africa-past (glass beads are weak money) analogizing to the dollar (being able to ‘manufacture’ dollars and dump them on the world).
Because of the inflationary impact on goods of this ‘manufacturing’ of dollars, you’re never going to catch up because you are being paid the currency: “the only way you can actually stay ahead is to grow your cashflows faster than the rate of monetary inflation… and that’s why the rate of expansion of the money supply is so critical.”
Saylor makes the prescient point that while CPI dominates inflation discussions, “the government gets to pick what’s in that basket of goods and how it is weighted.”
The last decade has seen monetary inflation rise at around 14% per year… and the S&P has risen around 14% per year.
The best inflation rate for an investor, Saylor explains, or for anyone who wants to stay wealthy or be wealthy – if you’re concerned about maintaining your economic purchasing power – “it’s the monetary inflation rate – the rate at which the supply of money is expanding.”
Then Saylor takes us on a journey:
“…the currency is to the economy what your blood is to your body… and economic energy or money is to the currency what oxygen is to your blood.”
“So, common sense says that, if I keep sucking the oxygen out of the room, you’re going either suffocate or freeze to death…”
“…and if I keep sucking the economic energy out of the currency, the economy collapses… and in the extreme you get ripped back to stone-age barter.“
“…when the money doesn’t work anymore, I have trade you cigarettes for bullets… and the problem with that is the economy becomes a million times less efficient.”
“…how many countries in the world have a collapsed currency…66 of the dollarized [ZH: have an inflation problem]… there’s about 130 floating currencies and all of them are weaker than the dollar.”
“The US dollar is the world’s reserve currency and the US dollar is expanding… it was expanding 10% a year for a decade… it’s now expanding at 14% a year and expanded 34% over the past 12 months…”
Saylor is discussing the expansion of the US money supply (in a TMS – True Money Supply or Rothbard-Salerno Measure)…
Saylor continues, “…thus the dollar is weakening… it’s like the oxygen is getting sucked out of the room…”
Saylor turns to Tucker and asks “..if I told you the oxygen is getting sucked out of the room… but there’s an oxygen mask dropped out of the ceiling over there, what would you do?”
Tucker exclaims “I’d run for it!”
Saylor replies “yeah, put the oxygen mask on…” concluding his analogy by explaining that “Bitcoin is the oxygen mask.”
As Tucker adds, Saylor has made the most compelling case I’ve ever heard for the need something like bitcoin:
“the whole point of bitcoin is to escape the inflation vortex that has consumed all these previous empires.”
Saylor clarifies further:
“…the point of bitcoin is to fix the money… and money is energy… and energy is life… and if I keep sucking the energy out of the economy, I’m sucking the oxygen out of your system…”
“…under the best case, you perform poorly. Under the worst case, I suffocate you to death, or freeze you to death.”
“That’s the problem. That’s why economies collapse… and that’s why empire’s collapse.”
Watch the full-length interview below:
Goldman: Are We Starting To See What The “New Normal” Looks Like?
Goldman: Are We Starting To See What The "New Normal" Looks Like?
By Goldman strategist Chris Hussey
US stocks traded sharply…
Goldman: Are We Starting To See What The “New Normal” Looks Like?
By Goldman strategist Chris Hussey
US stocks traded sharply lower Friday, and on pace for another decline this week, as investors reacted to a new virus variant, strong business sentiment surveys, and Friday’s decidedly mixed labor report — and contemplated how to position into a now-volatile year-end.
…is this what it looks like?
As we leg further into the last month of 2021 and the post-pandemic era, this week may be raising the question: are we starting to see what the ‘new normal’ looks like?
It’s not unreasonable to look at the Omicron variant as an anomaly that ‘surprises’ markets and represents a left tail risk. But after enduring the original COVID-19 outbreak followed by waves from the Beta and Delta variants, investors may be determining that COVID waves are becoming a regular thing — seasonal like the flu the perhaps.
For now, we don’t yet know how much of an impact the Omicron virus will have, but what we might be learning is that the virus is still having an impact, even if that impact is not as great as it first was back in early 2020.
And beyond the virus, this week may also have delivered a clearer view of what else may become ‘normal’ in the post-pandemic era: from inflation, to labor, shopping, sentiment and volatility. A few things to consider:
- high inflation. Leading into this week, our economists revised our forecast for Fed Fund rate hikes to 3 in 2022, from 2, as inflation is remaining remarkably sticky. Fed Chair Powell’s testimony before Congress earlier this week only reinforced our view that the FOMC is concerned about high inflation. And high commodity prices are unlikely to provide a relief valve for inflation pressures as Jeff Currie discusses in the latest Commodity Watch. We now see a 28%+ total return for commodities over the next 12 months.
- tight labor. Friday’s payrolls report revealed that fewer non-farm payroll jobs were added in November (210k vs 546k a month earlier) but also that fewer people are unemployed than expected (the unemployment rate fell to 4.2%). So while its tempting to look at the 210k new job adds as a disappointing indicator of US growth, the 4.2% unemployment rate may tell us more about the economy — everyone who wants a job, has one. Also interesting in Friday’s report, despite the ultra-low unemployment rate, wage growth moderated to +0.3% mom from +0.4% a month ago. But will wage pressures continue to ease in a world where so few are looking for a job but ‘Help Wanted’ signs seem to appear on every store you walk by? One other note on payrolls: from December 2011 through February 2020 (8 years+ of pre-pandemic data), monthly non-farm payroll additions averaged 200k (meet the new payrolls, the same as the old payrolls).
- Black Friday now takes place on Black Monday. The post-Thanksgiving holiday shopping stats have been somewhat uninspiring, another reason, perhaps, to doubt the growth pace of the US economy. But Eric Sheridan and Kate McShane point out that people are still shopping, they just are starting their holiday shopping a lot earlier than they used to. Perhaps people are starting to shop on October 19th rather than November 29th. And our weekly retailer activity tracker continues to show strong shopping activity throughout November.
- Business sentiment is very strong. On Friday, the ISM Services index was reported to have reached a new all-time high at 69.1. And the ISM Manufacturing Index rose to 61.1 in the latest survey — near its highest level in the last 10 years (only this past March’s spike to 64.7 exceeds November). Supply chain bottlenecks partly reflect the strong demand for industrial products and the inflationary impulse that such bottlenecks support. But the strong business sentiment may also reflect how Corporate America is adjusting to the ‘new normal’ of the post-pandemic era — and likes what it sees.
Stock market volatility is high. In the past week, the VIX has spiked back up to 32, highlighting the uncertainty that is permeating around stocks now.
As we wrote in Thursday’s Midday, “price discovery,” the spike in volatility appears to simply reflect the increased difficulty in determining the price of risk assets in a world of rising inflation, virus waves, and normalizing growth. And as we step into the ‘new normal’, perhaps such uncertainty is likely to persist such that volatility remains elevated for longer than we have seen in past cycles. One other note on the VIX: in the 3+ years prior to the pandemic from December 2016 through late-February 2020, the VIX had a median weekly level of 13. Since the VIX picked up on the pandemic risk in late-February 2020, the VIX has registered a median of 22.
One last item for the ‘new normal’ file: rates. While the stock market is going through another bout of elevated uncertainty and a spike in the VIX, yields on 10-year Treasuries have retreated back to 1.36%, well above the lows we saw at the heart of the pandemic in 2020, but at the very bottom of the range we experienced in the post-Great Financial Crisis era. Praveen Korapaty forecasts that yields will rise to 2.00% by year-end 2022 but it is interesting to see that as the economy ‘normalizes’, yields on 10-year Treasuries are not pushing higher — even as inflation does. Inflation markets this week began to price in less inflation in the future — contributing to the lower 10-year yield. But regardless of the technical factors that may be holding rates down, an ultra-low 10-year Treasury yield has provided a good backdrop for stock price appreciation in the past – especially the Tech-laden, ‘long duration’ US stock market.
Interesting fact: beyond the Tech-laden, ‘long-duration’ S&P 500, index returns this year have been quite a bit less impressive. The Russell 2000 Small Cap stock index, for example, is now up less than 10% for the year.
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