The Reincarnation of Modern Supply-Side Economics

The administration has recently decided to rebrand its Build Back Better legislative plan and recently have given it intellectual support by saying that it is justified by calling it, Modern Supply-Side Economics," (MSSE).

In its basic form, supply-side incentives boost production when aggregate demand exceeds aggregate supply which in theory should lower inflation. How can any non-partisan individual disagree with this premise? The problem is that in the real world, we have lots of partisanship. It is not unusual to see one political party in power favoring an economic initiative only to oppose the same initiative when they become the opposition party.

But in the spirit of non-partisanship, let’s try to review various parts of the BBB legislative package to see which parts of the legislation if any justify the MSSE label.

· Universal Pre-School – This item tops the list of being fully compliant with the MSSE provisions. Children that attend pre-school programs are more successful in their work careers. But can we do it better? Yes, we can offer this benefit only to families that have at least one or both parents working. That is a tradeoff because if we succeed, we will increase the U.S labor force which is in dire need of more workers. The downside to including this provision is that it holds the young children hostage. If parents don’t cooperate, then the children will suffer throughout their lifetimes by losing the opportunity to get a head start. But once again, the role of a non-partisan observer is simply to point out these issues and let voters decide which route to take. Others argue that we should also place income limits on these benefits to prevent the wealthy from taking advantage. While that is a valid point, the legislation still notes that families could opt to enroll their children in more expensive private sector pre-schools and pay the full cost of such education. This leads me to believe that wealthy families might not reap the benefits of this subsidy as they would probably enroll their children in other non-public programs that offer more attractive educational outcomes.

· Free two-year Associate Degree Community College Tuition: This is another good option that supports the MSSE criteria. While some are worried that wealthy families will benefit too much from this program, I am not overly concerned because those families are likely to enroll their children in more expensive four-year colleges and forego the subsidy.

· Child Care Tax Credit – This is another program that supports the MSSE criteria, albeit not as strong as the prior two programs. Today 12 million children live in poverty and this tax credit would lift 50% of all U.S. children living below the poverty line above that threshold. This is important because numerous studies find that children perform less well in school when they are hungry. Some moderates and conservatives argue that we should only make this tax credit to parents that have a job. That is a worthwhile feature that will boost our labor force. But once again, this feature makes our children hostage to the positive behavior of their parents. However, I will leave it up to the reader to decide whether this employment feature should be a prerequisite for receiving the credit.

· Low-Income housing: This item could be put into the MSSE category. By providing more low-income housing, we can reduce homelessness and incentivize these individuals to become a part of our productive labor supply especially if we attach an employment prerequisite to qualify for this benefit.

Other items of the BBB legislation that are not fully compliant with MSSE include:

· Tax credit for buying an electric vehicle (EV) along with an extra tax credit if that EV was produced in a unionized factory is a hard sell. While this credit could be justified on the grounds that it will help the U.S. achieve its climate change goals, it is difficult to justify this legislation on pure MSSE grounds. From a non-partisan perspective, I could understand how some would favor this part of the bill on behalf of generating a cleaner environment while others would oppose it on the grounds that it would do little to boost aggregate supply. If I tried hard, I could argue that with more EV’s, and a cleaner environment people would get sick less which would lead to fewer impediments to our labor supply. That of course is a stretch but that is the best I could do to justify this item on MSSE grounds.

· Expanding Medicare offerings to include Vision, Hearing, and Dental benefits: is another item that is hard to justify as a pure MSSE item. One can easily argue that having such benefits would be a good thing to improve the health and well-being of our senior population like myself but harder to justify as meeting MSSE criteria.

· Paid Leave Benefit: This perk started out as a 12-week benefit but was later reduced to 4 weeks. It is activated when parents bear a child, (via childbirth or adoption). It also offers a 3-day bereavement benefit for workers that lose a family member to death. While this benefit could be easily justified on humanitarian grounds, it is hard to justify using MSSE criteria.

Summary and Conclusions:

There are numerous items in the BBB legislative agenda that can be justified using the MSSE criteria that could boost aggregate supply. However, other parts of the legislation do not fall as neatly under the MSSE umbrella and would require political support from one side of the political aisle for passage. Given the human and production supply-side bottlenecks in existence today, parts of the BBB legislative program could generate bipartisan support in Congress.

Those that say the program would be inflationary should realize that fiscal stimulus as a share of GDP will be reduced by 8% plus in 2022 even the entire BBB program was passed. If only those parts deemed MSSE compliant were passed, the impact on the deficit in 2022 would be less than 0.5% and still generate almost a negative 8.0% fiscal drag on the U.S. economy as the legislation outlines federal spending over the next 10-years!