The Abundant Society

The labor market has made a historic recovery.

This current inflationary episode has brought the supply side of the economy into the spotlight and shows the negative effects of weak aggregate supply much of which is a direct consequence of years of weak aggregate demand. Even before this current bout of inflation relative price increases in key sectors have been spiraling out of control - squeezing American families for the last two decades, reducing American competitiveness, and making our economy fragile.

Inflation is elevated at levels not seen in decades.

As the labor market and demand finally recover, we must turn our attention to the long-run productive capacity of our economy–making our supply chains more robust, building better and cheaper infrastructure, and lowering the ever-rising costs of childcare, healthcare, higher education, and housing. 

Our supply chains are overwhelmed and we must turn our attention to the long run productive capacity of our economy.

A large part of the inflation the US is experiencing is driven by unprecedented supply-demand imbalances driven by the pandemic. Necessary fiscal, monetary, and liquidity support from Congress and the Federal Reserve have led to robust demand conditions. Moreover, as people continue to substitute away from services like dining out due to fears of contracting the virus, demand for durable goods like consumer electronics is particularly high. This elevated demand overwhelms supply chains trying to ramp up again, particularly in key sectors such as semiconductors and lumber. In a world of just-in-time manufacturing where inventories are low, such shortages ripple through the entire supply chain rapidly.

A bevy of logistical issues has added fuel to the fire. Nearly 50% of air cargo is traditionally shipped in the belly of commercial airlines but since the pandemic essentially suspended a larger portion of commercial air travel, goods are being shipped via boats - putting an unbearable amount of stress on the shipping industry. US ports, particularly on the West Coast, are overwhelmed by the increase in demand, resulting in very high wait times to unload cargo and thousands of empty containers not being loaded back onto ships. 

To compound matters,  the shortage of truck drivers continues. Indeed, the trucking sector lost 5,000 jobs in March 2022, one of the few sectors which did so. 

Strong household balance sheets, a tight labor market, and a lack of spending on services have also contributed to a boom in renovation and new housing construction. Unfortunately, the Great Recession and abysmal response to it decimated the construction workforce. That, combined with input and raw material shortages, are further contributing to inflation. 

Infrastructure investments will help expand the capacity and resilience of supply chains but sadly infrastructure dollars in the United States don’t go nearly as far as they should.

We must address ballooning healthcare, education, and childcare costs.

Though inflation has been relatively subdued over the past three decades the cost of housing, healthcare, higher education, and childcare has ballooned - squeezing the American middle class. The result is a student debt crisis, families choosing not to have children over concerns about the cost of raising a child, rationing or skipping medications, and housing insecurity. This crisis has thrust the challenges of our cost of living into the spotlight. Now is the time to address it. 

For the acute inflation, President Biden must suspend the Jones Act and all non-Russia-related tariffs - a recent report from Hufbauer, Hogan, and Wang at the Peterson Institute for International Economics found that suspending tariffs would result in a one-time reduction of 1.3 percentage points on the CPI. That nearly halves the gap between inflation and wages. Congress must also send the COMPETES Act, which provides money for domestic manufacturing of semiconductors, equips the Commerce Department with an assistant secretary to oversee supply chains, and more, to President Biden’s desk. 

President Biden has taken some laudable acts such as using the defense production act and signing the historic infrastructure bill into law which will expand the long-term capacity of our economy but now we must work to get infrastructure costs down so we can reap the full benefits of the investment. 

In order to drive down the costs of childcare, healthcare, housing, and higher education down we must eliminate self-imposed supply constraints, get rid of burdensome red tape, reinvigorate robust antitrust enforcement, and simply build more. More public colleges and universities, more housing, more hospitals + healthcare providers, and establish a federal grant program to create a public option for childcare.