Government Restrictions on Supply Increase the Cost of Living
The need for smarter regulation is increasingly apparent, across the political spectrum.
By John Cochrane and Jon Hartley
The return of inflation is an economic cold shower. Governments can no longer hope to solve problems by throwing money at them. Economic policy must now turn its attention to supply and its cousin, economic efficiency.
The issue is deeper than delayed goods deliveries and a year’s worth of sharp price increases. From the end of World War II to 2000, U.S. real (inflation-adjusted) GDP per capita grew 2.3% per year, from $14,171 to $44,177 (in 2012 dollars). Americans became healthier, lived longer, reduced poverty, and paid for a much cleaner environment and a vast array of social programs. But since 2000, that post-war growth rate has fallen almost by half, to 1.4% per year. And it’s worse in Canada and Europe, where many countries have not grown at all since 2010 on a per capita basis.
Nothing matters more for human flourishing than long-term economic growth. So, no economic trend is more worrisome than growth falling by half, especially for the well-being of the less fortunate.
The eruption of inflation settles a long debate. Sclerotic growth is not the result of demand-side “secular stagnation,” fixable only with massive fiscal and monetary stimulus. Sclerotic growth is a supply problem. We need policies to increase the economy’s productive capacity — either directly or by reducing costs.
How? The simplest and most important thing governments can do is to get out of the way. Byzantine regulations and capricious regulatory authorities stymie business. We do not need thoughtless deregulation, but rather smarter regulation that is simple, effective, avoids disincentives and unintended consequences, and is not distorted to protect current business and prop up regulatory empires. That means adding sunset clauses to regulations, regularly re-evaluating existing measures, and instituting a right to external appeal.
The United States needs infrastructure. The problem is not money. The problem is that building anything in America has become almost impossible, owing to the thicket of regulations and lawsuits that will stop or drive up the costs of any project.
Start by repealing the Jones Act, a 1920 law that requires all intrastate shipping to use expensive US merchant marine vessels (in practice, it is the “Send It by Truck Act”). Repeal the Davis-Bacon and Related Acts, which deliberately add to the costs of building highways. Reform the National Environmental Policy Act, which allows people to sue to stop and delay projects on specious environmental grounds. Overhaul the Nuclear Regulatory Commission. Not one new nuclear plant has been built since the NRC was founded in 1975.
Protectionism reduces supply. Tariffs and trade restrictions make products more expensive and deprive other countries of the dollars they need to buy from America. Yet the Biden administration has kept longstanding restrictions and even the Trump administration’s tariffs in place. It also doubled the tariff on imported lumber last November, just as construction costs were skyrocketing.
High housing costs in the parts of America with good jobs create barriers to opportunity and force people to make long commutes that contribute to congestion and emissions. The cause is clear: restrictions on land use and zoning and building codes that make it impossible or expensive to build and to build densely. Rent controls help today’s tenants at the expense of today’s landlords, but also deny opportunities to newcomers, especially the poor, and ruin the rental housing stock.
America’s failing public schools are another barrier to opportunity and productive capacity. Again, money isn’t the issue: Nationally, K-12 schools spend an average of $13,000 per student. New York’s dismal public schools spend $28,000. The problem is teachers’ unions and politicized education bureaucracies, which are now busy dumbing down curricula. A solution that puts students first is more educational choice and competition.
Many Americans are neither working nor looking for work. It is not for a lack of jobs. Employers are begging people to work. One problem is that many people lose a dollar or more of benefits for each additional dollar they earn. Disincentives add up across programs such as food stamps, housing subsidies, health insurance subsidies, educational subsidies, disability payments, and more. Reforming entitlement programs to limit the overall disincentive to perhaps 50 cents on the dollar would help.
Labor laws and regulations are rife with cost-increasers and disincentives. Detailed regulations cover working hours, scheduling, mandated benefits, and more. Occupational licensing requirements, unions, regulatory compliance burdens, and payroll and income taxes all raise the cost of employment.
The U.S. needs workers. The country needs truck drivers, child-care providers, teachers, nurses, and construction workers. It needs entrepreneurs. It needs taxpayers to fund the government’s spending obligations. All these workers are standing at the borders. Immigration reform that increases economic migrants is a prime supply policy. “Creating jobs” with policies such as the Green New Deal is now a cost, not a benefit, as those workers must stop doing something else.
To raise revenue with minimal economic distortion, taxes should feature low marginal rates, a broad base, simplicity, and predictability. The U.S. system is the antithesis of this description.
U.S. health care and insurance are a bloated government-created oligopoly. Market-oriented reforms can cut costs and improve performance. The U.S. can no longer just throw more money at the problem.
Alas, getting out of the way is terrible politics. Economic regulation largely serves to protect constituency A at the expense of constituency B. Supply policies require painful reforms to thousands of different markets and regulations.
But there is hope. Progressives, in particular, are noticing the problem. Spurred on by a “YIMBY” (“yes in my backyard”) movement, California is beginning to crack down on zoning restrictions that prohibit housing construction and price the poor out of areas with economic opportunity. The Obama administration was early to criticize occupational licensing and zoning. Progressive writers such as Ezra Klein, Derek Thompson, and Matthew Yglesias are decrying supply-side restrictions on growth, using terms like “supply-side progressivism,” a “progress agenda,” or the “abundance agenda.” The Biden administration, or its successors, may follow with effective strategies.
A version of this essay originally appeared in Project Syndicate.
