Government policies are stoking demand and strangling supply. So why is the Fed surprised by the inevitable inflation?

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OPINION: Policy makers should not have been caught off guard by surging prices and shortages of goods and labor. Here’s why.

STANFORD, Calif. —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.”

Economic beliefs must change 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.

One underlying problem today is the intersection of labor shortages and Americans who are not even looking for jobs. Although there are more than 10 million listed job openings—3 million more than the pre-pandemic peak—only 6 million people are looking for work. All told, the number of people working or looking for work has fallen by 3 million, from a steady 63% of the working-age population to just 61.6%.

Practically every policy on the current agenda compounds this disincentive, adding to the supply constraints. Consider child care as one tiny example among thousands. Child-care 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.

In the United States, policy makers 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.

 

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Caught off guard? Every Republican candidate running against Trump in 2016 warned us that his America Alone economic policies were a recipe for inflation. Throw in a failed response to a Global Pandemic that destroyed our supply logistics… and here we are.

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