The Folly of ‘Modern Supply-Side’ Economics (Janet Yellen's version)

Janet Yellen tries to sell even more spending as a growth and anti-inflation policy. It’s the opposite of what’s needed now

By Phil Gramm and Mike Solon. Excerpts:

"In a final desperate effort to save Build Back Better and elevate government to the center of American life, Treasury Secretary Janet Yellen is trying to pitch the Biden economic agenda as “modern supply-side economics.” But whereas real supply-side economics creates a private incentive to work, save and invest, Ms. Yellen’s approach expands government benefits as a way of “fixing supply-chain bottlenecks” and substitutes “public investment” for private investment.

In virtually every case where Ms. Yellen claims Build Back Better will expand employment and production, experience and logic suggest otherwise. Almost 43% of the first year’s cost of the bill is funding the expanded child tax credit with no work requirement. A quartet of University of Chicago economists have concluded the expanded child tax credit would reduce labor supply by 1.5 million workers, just as soaring pandemic transfer payments resulted in 2.5 million workers dropping out of the labor market. More than 20% of the bill’s first-year cost, $52 billion, would fund tax cuts for rich people in high-tax states, not exactly a supply-chain fixer.

Build Back Better would expand ObamaCare and other healthcare subsidies, which the Congressional Budget Office has consistently found reduces the supply of labor. The CBO concluded that it is “unclear” if family and medical leave would have a positive or negative effect on employment but “the magnitude would probably be small.”

Ms. Yellen’s modern supply-side economics argues that government can invest based on enlightened political motives more efficiently than the private sector can invest based on the profit motive. But “federal investment is estimated” by the CBO “to yield half of the typical returns on investment completed by the private sector.” The European Union, with its larger government benefits, greener policies and more government intervention in the marketplace, doesn’t seem to be benefiting from modern supply-side economics. Europe has grown at 1.57% for 20 years while the U.S. has averaged 2.1% growth—that’s more than a third higher. All of Ms. Yellen’s claims ignore the negative economic effects sure to be produced by Build Back Better’s tax increases."

"When means-tested transfer payments rose dramatically, the share of prime work-age people in the bottom 20% of American income earners who actually worked fell to 36% from 68% over the ensuing 50 years. All analysis of the labor component of the supply chain must recognize that if the government gives people things they typically get by working, many people will quit working."

"Democrats would be better off trying to replicate President Clinton’s approach to welfare reform and spending restraint. He didn’t expand the size of government, but in his last four years in office he did preside over 4.5% average annual growth, 2.3% inflation and a reduction of the federal debt."