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Suppliers Supply ??

05/13/2022

Keynesian economists see recessions as a failure of demand.  Consumers don’t want to buy or cannot buy the goods that are produced.  Deficit spending by the government covers that shortfall in demand, thus avoiding recession.  Inflation only happens when demand increases more or faster than supply.  This is called fiscal policy and is governed by Congress and the President.

Monetarists see inflation as “always and everywhere, a monetary phenomenon.”  This is called monetary policy and is governed by the Federal Reserve System.  If there are too many dollars chasing too few goods, then prices will rise.  Inflation happens when the money supply grows faster than productivity growth.

Supply-side economists see recessions as a failure to reward or properly incent businesses to produce.  Businesses need lower taxes and fewer regulations to produce.  Just get out-of-their-way!

For the last two years, we have experienced huge budget deficits to fuel the declining demand during the pandemic, but those deficits are dropping rapidly.  The Fed rapidly expanded money supply, keeping the financial system safe and putting spending power in the hands of consumers.  Both Congress and the Fed kick-started inflation in the short-run, but both are already tapering now.  In retrospect, I would argue that they — Congress, the President, and the Fed — all did the right thing, just too much of the right thing.  Of course, in retrospect, it was better to do too much of the right thing than too little of the right thing.  I understand that.

However, I don’t understand the supply chain problems.  Cutting taxes or regulations will not open the ports of Shanghai or San Diego.  Neither cutting taxes and cutting regulations will cause the Saudis to produce more gasoline.  Neither will reduce the heavy uncertainty hanging over the European economy due to war.  Neither will stop China from strangling itself, reducing their imports of U.S. goods.  And, Covid doesn’t care about your taxes or silly regulations.  The list goes on . . . but honestly . . . no baby formula  ?!?!?!

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