cochrane2_JIM WATSONAFP via Getty Images_labor shortage JIM WATSONAFP via Getty Images

The Revenge of Supply

Policymakers should not have been caught off guard by surging prices and shortages of goods and labor. Practically the entire post-pandemic agenda is built around policies that stoke demand and discourage work, making supply-side constraints entirely predictable.

STANFORD – Surging inflation, skyrocketing energy prices, production bottlenecks, shortages, plumbers who won’t return your calls – economic orthodoxy has just run smack into a wall of reality called “supply.”

Demand matters too, of course. If people wanted to buy half as much as they do, today’s bottlenecks and shortages would not be happening. But the US Federal Reserve and Treasury have printed trillions of new dollars and sent checks to just about every American. Inflation should not have been terribly hard to foresee; and yet it has caught the Fed completely by surprise.

The Fed’s excuse is that the supply shocks are transient symptoms of pent-up demand. But the Fed’s job is – or at least should be – to calibrate how much supply the economy can offer, and then adjust demand to that level and no more. Being surprised by a supply issue is like the Army being surprised by an invasion.

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