The case for stimulating demand and restricting supply

J. W. Mason writes,

The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates.

It really does seem that on the big macroeconomic questions, our side is winning.

Pointer from Tyler Cowen. He lists a number of propositions, which tend to favor macroeconomic policies that stimulate demand and restrict supply.

For example although he argues (correctly) that there is no bright line between being unemployed and being out of the labor force, he claims that

Work incentives don’t matter.

Suppose you have very high marginal tax rates on work. The “new” theory is that with enough aggregate demand, everyone will work, anyway. As Mason puts it,

Weak demand is an ongoing problem, not just a short-term one. The most serious criticism of the ARPA is, I think, that so many of its provisions are set to phase out at specific dates when they could be permanent (the child tax credit) or linked to economic conditions (the unemployment insurance provisions). This suggests an implicit view that the problems of weak demand and income insecurity are specific to the coronavirus, rather than acute forms of a chronic condition.

I think that if you subsidize demand and restrict supply, then the whole economy will look like education, health care, and real estate, where prices go up and resources are wasted.

John Cochrane has a more detailed critique of this “new” economic theory. One way in which it differs from the conventional wisdom of the 1960s: back then, economists were confident that if inflation broke out, the government could direct businesses to slow the rate at which they increased wages and prices. That theory has not made a comeback, at least so far.