Here is a keeper quotation for the ages, courtesy of Fed Chairman Jerome Powell.
The other day, he told Bloomberg, in a rare moment of candor, “It turns out it’s a heck of a lot easier to create demand than it is to, you know, to bring supply back up to snuff.”
You don’t say! So you cannot just compensate for a year-long lockdown policy by easing money, covering debts piled up by Congress, and pulling every lever on the central bank dashboard to make up for government policies that actively shut down whole swaths of economic life for a year?
Apparently not. Who knew? Productivity requires that people actually produce things. To demand them is the easy part; the hard part is meeting that demand. Now that one thinks about it, that is the very essence of the problem that economics attempts to solve: how to meet demand in a world in which supply is always relatively limited. It’s called scarcity, a permanent condition of the world.
To mitigate this economic problem, the social order has to figure out how to create wealth. Making that happen, and discerning the conditions under which productivity is maximized, is the great puzzle to which economists apply their craft.
Well, that’s something that’s been known for the better part of half a millennium. It was the problem that inspired Adam Smith to write The Wealth of Nations. It’s just that the people in charge decided to ignore that wisdom, among many other teachings of old, for a very long time.
Now, the idea that this is settled wisdom requires a bit of a proviso. In the 1930s, the great “discovery” of John Maynard Keynes was that downturns in the business cycle were really due to a collapse in aggregate demand that might be repaired by gaming economic forces. The lack of demand could be replaced by government spending, thus inspiring productivity in response.
The main contribution of the “supply-side revolution” of the early 1980s was to observe that this Keynesian-style prescription bypassed the real issue, which was how to incentivize and reward wealth creation, which comes from the supply side of the ledger. This was the great neglect that could be fixed by deregulation and tax cuts. The result was indeed dramatic: it kicked off boom times.
That “revolution” in thought and practice happened 40 years ago, too long ago for the memory to stick in people’s minds (one could say the same about a host of issues). As a result, during 2020 and especially in 2021, demand-side theory has made not just a small return but a huge one. Congress and the Fed have gone hog wild with the purpose of spurring demand.
Thus comes Powell’s remarkable statement. To restate: “It turns out it’s a heck of a lot easier to create demand than it is to, you know, to bring supply back up to snuff.”
Now the Fed finds itself in a fix. Everyone is looking to the great Oz to repair the strangeness among us, believing that magic comes from its printing presses hidden in the basement. In fact, it is actually powerless to do so. The Fed has absolutely no power to produce anything consumable by actual people. The attempt only creates crazy distortions in markets.
The latest oddity is a nationwide shortage in what everyone previously believed was a given part of life: chicken itself. That’s right, there is an enormous chicken shortage affecting restaurants, fast food, private cooks, and grocery store consumers, as you can discover by venturing out and placing an order. After weeks of private discussion of this problem, it’s finally made the headlines.
By now, after months of random shortages, you know the drill. There are a number of factors, and it’s hard to figure out which predominates. Tyson reports that they tried different roosters which didn’t quite work out, for whatever reason. Processing plants are having a hard time getting workers back, thanks to a new stay-at-home entitlement. Demand is through the roof for America’s favorite food. Also, retailers have been reluctant to raise prices in a way that would clear the market for fear of upsetting consumers.
Nonetheless, prices are rising, as they inevitably must when demand outstrips supply. There is plenty of money burning holes in people’s pockets now to make it possible for chicken markets to clear at a higher price. But here we are many months into unrelenting upward pressures on prices in a huge number of sectors, and markets find themselves in fear of the inflationary poltergeist.
Is it real inflation or are there structural reasons for so many increases in prices? This is the great question that is consuming the financial commentariat. Behind the concern are not only economic ones but also political issues. The inflationary times of the late 1970s absolutely doomed what might otherwise have been a well-remembered presidency. If Biden presides over another inflation on that level, there will be no rescuing this administration.
This is in part why financial prices find themselves under intense pressure now. Commentators are blaming the suggestion by the Fed that it will raise rates in 2022. Thus is the possible future discount to the present in the form of falling prices for financial assets. This is the problem when financial markets get psychologically addicted to easy money policies. They have to come to an end at some point.
The true beauty of Powell’s statement is that it implicitly makes a rare admission. It suggests that reality limits the imaginations of policy makers. During the last period of American and global economic life, we’ve lived in a fantasy world where politicians could just control whole sectors with a hammer and there would be no downside that legislatures and central banks could not cover with their special sauce (which is also in short supply). This was never to be.
If Chairman Powell really wanted to do something good for the American consumer right now, he might go into the business of breeding and selling chickens. That would alleviate the most pressing production problem afflicting newly unlocked people desperate to make up for a year of suffering via eating, drinking, and merrymaking.
Powell is right: until he gets out of the central banking business, there is nothing he can do to bring supply “up to snuff.”
