Paul Lachine

Demand or Supply?

Typically, supply and demand are equal, and, if not, powerful forces push them towards each other. But, with high and persistent levels of unemployment in the US, there is a real question about the nature of the problem: is aggregate demand too low, or are there problems with supply?

CHICAGO – Economics is all about demand and supply. Typically, the two are equal, and, if not, powerful forces push them towards each other. But, with high and persistent levels of unemployment in the United States, there is a real question about the nature of the problem: is aggregate demand too low, or are there problems with supply?

President Barack Obama’s administration seems to think that the problem is one of demand, and has passed stimulus measure after stimulus measure, reducing taxes and increasing transfers and government spending in order to boost consumption and investment. The Federal Reserve is of a similar mind, not only maintaining rock-bottom short-term interest rates, but also embarking on an adventurous policy targeting long-term rates. Some progressive economists want even more.

Why have these policies not worked thus far in bringing down unemployment, even though the growth recovery is well under way? The progressive economist says that stimulus worked, staving off a much deeper recession – if not worse – but that the measures were too timid to generate a robust recovery.

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