Virus policy and inflation

Subsidize demand, restrict supply.

In Specialization and Trade, I make the claim that most government intervention does not conform to the textbook model of dealing with market failure. In that model, when the market produces too little of something (use of masks in a pandemic), the government is supposed to subsidize either supply or demand. When the market produces too much of something (air pollution from automobiles), the government should penalize either supply or demand.

In practice, politicians don’t follow the textbooks. They obey interest groups. Every interest group once to see its supply restricted and its demand subsidized. So the national government subsidizes home purchases, but then at a local level it restricts housing construction. The government subsidizes the demand for health care and higher education, but it uses licensing and accreditation rules to restrict supply.

It occurs to me that virus policy is “subsidize demand, restrict supply” writ large. Lockdown-type rules restrict supply. And “stimulus” subsidizes demand.

What do you get when you subsidize demand and restrict supply? Higher prices. Eventually.