Opinion | The liberal case for supply side reform

Why policymakers should increase supply to combat inflation.

Opinion+%7C+The+liberal+case+for+supply+side+reform

Shahab Khan, Opinions Columnist

Iowa city needs a new strategy to combat the recent bout of inflation inflicting the American economy.

 

Policymakers should focus on supply side reforms, like abolishing exclusionary zoning laws and concocting tax schemes that bring more businesses to the community.

 

To put it simply, policy makers in liberal cities need to start promoting policies that give more stuff to people if inflation is to be lowered nationally.

 

We are currently in what economists call demand-pull inflation. On a macroeconomic level, this type of inflation occurs when cash awash people and businesses spend money in the economy at a more frequent rate.

 

As a result, suppliers cannot keep up with consumer demand and thus raise prices to make sure they do not run out of goods produced.

 

The traditional way to combat demand-pull inflation is to curb the demand for goods through the country’s central bank, the Federal Reserve. This involves utilizing tools of contractionary monetary policy.

 

When implementing contractionary monetary policy, the Federal Reserve raises the federal funds rate, or the interest rate at which commercial banks can earn on their excess reserves, the money that they lend out to consumers in the economy.

 

Thus, when the federal fund rate increases, commercial banks are more likely to hold on to their excess reserves instead of lending it out to consumers. Since consumers do not have access to this cash, they are disinclined to spend money thus curbing inflation.

 

However, if the Federal Reserve raises the federal funds rate too steeply, there is a chance that a recession could occur. Consumers would not be able to spend money in the economy, leading businesses to losing profits and people losing their jobs.

 

This scenario played out in the late 1970s and early 80s when in order to combat inflation, the Federal Reserve inadvertently caused a recession. The reality of the situation was the Federal Reserve playing a guessing game when it comes to fighting inflation.

 

An alternative, albeit more deliberate approach to fighting inflation involves local policymakers concocting policies that would encourage firms to increase the supply of goods and services in the economy. This would lead firms to increase production and meet consumer demand.

 

While supply side policies take longer to affect the economy than the demand side fiscal and monetary policies, they also are less likely to have unintended consequences.

 

To exemplify supply side policy in action, if the Iowa City City Council were to vote to liberalize exclusionary zoning policies in the city, that would increase the supply of homes and decrease their prices, making homes more affordable for everyone.

 

Likewise, in order to decrease the cost of eating out, Iowa City should introduce policies that incentivize new restaurants. This would increase the competition of restaurants, decrease the prices of meals, and combat inflationary pressure on the economy.

For the record, demand side policies in curbing macroeconomic problems such as inflation are absolutely necessary. That said, these policies should be pursued along with supply-side reforms that increase the amounts of goods and services in an economy.

 

In the long run, if supply side reforms are taken, the economy will be more stable and resilient to crises of inflation and thus make the quality of life of average Iowans even better.


Facebook Comments