Long Term Solution to Inflation & Economic Growth
Last week we discussed what our government could do immediately to quell the onslaught of crippling inflation in the face of impending recession.
Today we’ll look at the longer term and things to accomplish to keep inflation at bay and the economy growing.
Economists know that inflation is caused by higher demand for goods and services than the supply of those goods. There’s more money chasing a limited number of goods thereby increasing the cost of those goods.
It’s obvious to me, and hopefully to you, to decrease the pressure demand is putting on goods that come up short on their availability is to increase the supply.
It’s known as supply side economics. If you were around, you remember it was the hallmark of the Ronald Reagan administration.
The counter to supply side is called demand side. It’s the hallmark of Keynesian economics which claims an increase in economic activity is a product of increasing demand. That is done by tax reductions for the lower and middle classes thereby motivating those classes to buy more.
By contrast, supply side economics centers on relaxation of taxes on producers and suppliers, thereby increasing the motivation to invest in more production – more supply. The theory explains increasing supply requires more employment which in turn increases the number of people and families with discretionary income. The theory goes on to postulate the reduction in proposed taxes, and therefore the motivation of investors, increases net tax revenue to governments. I’m not going to agree or disagree with the latter proposition. For my thinking, supply side economics makes a lot more sense than the demand side variety for long-term, economic growth and reducing the threat of inflation.
I also know that Reagan’s supply side bent directly addressed the economic mess he inherited, including high inflation and sky-high interest rates, and cleaned up and fixed an economy in disarray.
What the Biden administration is doing is limiting supply. Unfortunately, it’s not based on demand side economics or any economic theory I’m aware of. Frankly, I don’t know the reasons for Biden’s policies other than he’s not focused on economics, but other ideologies, namely climate change, diversity, and equity.
If I was the president right now, I’d be focused on increasing the supply of oil and gas, bringing production of many products home from China and elsewhere abroad, and removing impediments to production here – regulations.
It’s obvious from the first 18 months of this administration that increasing supplies is not on its radar. Yet that’s the proven formula for long-term economic growth with minimal inflation.
Since the 1990’s, when the US was swept into globalization with numerous free trade agreements – especially granting favored nation status to China – we’ve experienced $12 trillion in trade deficits and a loss of 70,000 factories and 5 million manufacturing jobs.
And the fact that the US has been badly beaten in creating and retaining jobs is only half of the story. We’ve become dependent on China for pharmaceuticals, medical equipment, and other medical supplies. Couple that with China’s currency manipulation, flooding markets with cheap products, and subsidizing certain industries and we look pretty sad in competition with many other countries.
In addition, with an administration blindly focused on green energy, 80% of the solar panels and 7 of 10 companies producing batteries used in the US currently come from Asia, dominated by China. In plain words, policies around solar energy adopted by this administration would make us dependent on China for solar energy – unless something is done to change that. One of the last US companies in the business, LG Electronics USA, based in Huntsville, Alabama, announced they were exiting the solar business because they were being severely undercut by Chinese imports. SunPower is now one of few solar panel producers left in the US.
Supplies.
BTW, wind turbines rely on powerful magnets, and those magnets need compounds that tend to come from China. China dominates the supply of rare earth minerals. China also owns a huge wind farm in Texas, built with US subsidies.
Add to that this administration’s proposition to increase the corporate income tax makes the US investment environment even more risky. It is the opposite of what should be happening to increase US based suppliers, and jobs – and long-term economic growth – with Federal Reserve controlling inflation if the economy gets too hot.
The fact that we are dependent on China and some other countries for various essential products, including computer chips – and green energy components, also makes us dependent on the functioning of our ports and subject to supply chain interruptions. Wouldn’t it be nice if any problems with our ports was not centered on getting imports in, but getting exports out?
Understand I’m not proposing isolationism, just policies and a business-friendly government that makes and keeps our economy healthy, markets viable and responsive, with both the domestic and foreign capital needed to sustain and grow it. We can increase the supply side of our economy with some simple policies around supporting that proven solution.
In order to contain inflation in the longer term, we need to change the course we’re on. The path we’re on will ultimately result in government takeover of many industries, and we know when that happened in Venezuela – hyperinflation.
Increase the supply side by making more of what we need and want here. Accomplish that by adopting economic growth policies, trade agreements and tariffs that result in that happening.
Supplies.
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Have a great and prosperous week.
Hug somebody.
References:
https://www.wallstreetmojo.com/supply-side-economics/
SPIDER Bites
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