Constrained supply ultimately results when providers use their political power to insulate themselves from the market forces that drive innovation and cost reductions in the long run. A family physician can see only one patient at a time, for example, but for every doctor there are many nurse practitioners, physician assistants and other practitioners who are trained to perform procedures, run tests and make diagnoses — yet too often, they can’t because regulations limit their scope-of-practice.
What is true of constrained labor supply is also true of constricted housing supply. Incumbent homeowners love restrictive zoning and land use regulations because they push up property values and displace development into someone else’s backyard, if not prevent it from happening at all. But when virtually every local jurisdiction implements similar restrictions, the result is a crisis in housing affordability, urban sprawl, segregation, excessive energy use and moats around the nation’s centers of growth and opportunity.
Or consider student loan subsidies, which research finds pass through into higher posted tuition. In turn, American universities are highly overcapitalized, with expansive administrations and amenities designed to appeal to the children of the upper-middle class. Curbing tuition inflation will require robust institutional experimentation, from making it easier for America’s long-tail of underperforming private colleges to go under to imposing the discipline necessary for universities to forgo building that extra football stadium.
Greater choice by purchasers can also improve resource utilization, as in the case of child care. Free or heavily subsidized day care would lock the United States into a particular model that fails to satisfy the nearly two-thirds of parents who state a preference for home-, church- and family-based arrangements. Providing parents with a flexible child benefit, as Democrats have done with their expanded Child Tax Credit, is both a better way to respect the diversity of American family life and one that allows parents to choose child care options on the basis of real market prices.
This should not be confused with a suggestion to deregulate and call it a day. A sufficiently generous and user-friendly welfare state is a key complement to any modern, dynamic economy. But this is an entirely separate issue from whether dollars should flow to families and individuals or to the intermediary producers who have interests of their own. When the good or service in question suffers from cost disease — upward spiraling prices — such subsidies won’t be sustainable anyway.
In the years to come both inflation and debt will play a role in our public debate that they have not in years. The last time these twin menaces were this central, they produced a politics of austerity and mass unemployment, which then provided the raw material for populism. A politics focused exclusively on either socializing costs or cutting budgets leads nowhere good.
By contrast, a true supply-side agenda of liberalizing regressive regulations would drive down costs of basic goods, unlock economic innovation and address a fundamental driver of inequality by stripping affluent professionals and homeowners of their government-granted protections.