On both sides of the Pacific, in China and the US, the destructive combination of recession and inflation is evolving in a classic way, to include bank failures and the popping sound of property, asset and financial instrument bubbles as they disappear in a foam of bankruptcy, negative equity and failure.
If there is a theory whose implications just might guide policymakers as they seek understanding and a way out of the mess, it is supply-side economics (SSE). It is a common-sense idea with a long history.
Contrary to popular opinion, today’s left/right policy debate over how to “fix” a combination of recession and inflation did not begin in the 1930s with John Maynard Keynes versus classical liberals (that is to say conservatives) like Fredrick Hayek (during those years, an old tradition was kept available).
There was also a third option, offered by advocates of the most ancient, simple non-philosophical strategy of them all: violent pillage, rebellion and theft. Just grab it, whether it (that is, the policy instrument/theory) be Lebensraum, puppet kings in Africa or co-prosperity zones on the Chinese mainland.
As far back into human history as our data sources (such as the Old Testament and the Analects of Confucius) allow us to know about, mankind has employed three techniques in order to “put food on the table.”
One, take it, steal it, or cheat it away from somebody else.
Two, howl at the gods, or at least take it from nature during good times (for example, let us pump out all the oil we can find, and let’s allow our grandchildren to worry about it tomorrow).
Three, learn how to produce it, during both good times and bad times (all the while knowing we are morally required by awe for the sacrifices of our ancestors, by current respect for ourselves and by our duty to our children) to proceed by way of innovative means of true progress in theory and engineering taking the form of innovative production, bringing about an economic culture (I here name SSE) more and better attuned to permanent prosperity than ever could be expected from violence, magical, utopian- revolutionary redistributive shortsighted alternative strategies.
I call these three techniques militarism, aggregate demand, and finally aggregate supply (SSE) measures.
Only the third works into the long run. We all know this in our hearts, but we (mankind) allow ourselves, too many times to count as we look back across the ages, to believe that the first two modes of operation offer low-cost shortcuts to a better world.
Aggregate demand models (take it from a neighbor or a rich “maker,” or just by chopping wood and drawing water/oil from nature, hoping to sell same to a player whose model is SSE) don’t work.
Current events and recent history support my contention.
Frustrating the makers with regulations, taxes and scapegoat politics, whether with a long-run train of abuses or short-run lockdowns, school closings, tariff walls, humiliation and shame will create artificial shortages wherein today’s empty shelves are claimed to be the necessary cost of a pie-in-the-sky future, colored green or with war-paint camouflage.
Losses are, for a time, invisible. President Xi Jinping knows that agricultural products consumed in China are a necessity if progress is to continue. But because of the (natural) laws of specialization and gains from trade, the grain fields and pig farms of the American Midwest are the place where China gets more consumable food than can be produced “at home.”
American policymakers should know (not much evidence these days they do) that their side of the deal (trade laws are SSE natural, universal laws) allow American farmers to get better SSE payoffs than if they are forced to trade only with domestic buyers.
China has significantly run down its investment position in US Treasury bonds: American banks that held reserve positions in Treasury obligations have taken ruinous losses as crude, demand-side inflation “curative” interest-rate increases drove down not merely bond values, but the values of all other promises of future profits, from every source possible, including property investments and risky projects undertaken everywhere in the world because of the availability of yesterday’s absurdly cheap money (it’s another example of failed aggregate-demand management).
US Treasury head Janet Louise Yellen has assured depositors in the banks that have already failed that their funds are safe because of a (legally questionable) politically necessary bailout from “her” Treasury.
But such a plan is a familiar variant of aggregate-demand thinking: The losses are merely shifted (behind a temporarily persuasive veil of ignorance) to the generality of American taxpayers as well as foreigner players (she included them in her bailout message). Both groups of creditors hold a large quantity of those diminished-in-value US future general financial obligations.
Are things so hot that the most ancient of strategies – force – is considered?
Consider the Russian case. Between the date of the Bolshevik Revolution and the peak of “prosperity” in the 1970s, the Soviet Union/Russia achieved a gross domestic product of about one-third of the Americans’. Keeping up an empire based on force was expensive. Today, as he fights a war, Vladimir Putin’s GDP is estimated at between one-tenth and one-fifteenth of the US level. Enough said.
Deng Xiaoping’s reforms were an Asian version of SSE. They worked. But the reforms now are under ideological pressure.
American reforms brought about during the Reagan years are now challenged by green ideology and ethnic redistribution. Both demand-stimulus “ideas” require big current sacrifices said to produce distant “justice,” super-abundance or at least insurance against much-feared “punishments” for past “greed, bigotry and profiteering.” Is it likely to work?
Advocates of SSE say a rising tide of supply-side production doesn’t just lift economic boats, but it makes it possible to afford experimentation with new ideas, even when the new ways bring about “creative destruction” of ways that could not stand up against common sense.
Tom Velk is a libertarian-leaning American economist who writes and lives in Montreal, Canada. He has served as visiting professor at the Board of Governors of the US Federal Reserve system, at the US Congress and as the chairman of the North American Studies program at McGill University and a professor in that university’s Economics Department.