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  • Writer's pictureOren Levin-Waldman

The Consequences of the Supply Chain Crisis

As the economy reopens in the wake of the pandemic, we find ourselves confronted with inflation due to interruptions in the supply chain, as well as worker shortages. Of course, there is the usual chorus on the right that blames inflation on policies pursued by the Biden administration. If the government spends too much, there will be inflation. So who is to blame for all of this?

First of all, the Biden administration can certainly be faulted for not addressing the supply chain issue for more than a year now. A virus that originated in China coupled with many of our needed phamaceuticals and chemicals to be used in pharmaceutical production here, should have been a signal that it was time to find ways to bring manufacturing activity back to the U.S. That we have offshored much of our production facilities to save on labor costs is bad enough. But that we have effectively sent our capital to China is a serious national security risk.

Perhaps we should rehearse the basics. As an economy reopens and more people return to work, they naturally spend more which leads to an increase in demand for goods and services. A shortage in supply which can be due to lack of capacity given the level of demand will result in higher prices. If goods are coming from China and there is a shortage of workers to unload ships and get goods to market via trucks, rail and other means, then there will be an interruption in supply thereby causing prices to increase.

It was foolish to think that an economy that had been shutdown for so long could simply be reopened with the flick of a switch. Part of the problem with transporting goods by truck resides with the states themselves. Many of the state departments of motor vehicles which issue special licenses to truck drivers are still closed. There are workers who are prepared to drive the trucks, but the shortage here is due to their inability to get licensed.

Critics will still belabor the role that extended unemployment insurance benefits, and now increased child care credits have contributed to the labor shortage because many workers have less incentive to work. As we have said in the past, until the schools reopened, many workers were simply unable to go back to work. Also, a labor shortage may be due to the fact that many workers choosing not to go back to work were older and simply decided, given COVID, to retire.

Even if it were true that these policies create a disincentive to work, the laws of supply and demand do offer a solution to all of this. Employers who are having a hard time finding workers can always offer higher wages. Where is it written that the government is obligated to ensure that employers will be able to find cheap labor? When a McDonald’s, for instance, in a good labor market cannot find workers, it raises its wages until it finds workers willing to work. But when the same McDonald’s cannot find workers in the wake of a pandemic and increased government spending in response to that pandemic, we then say it is the government’s fault?

Does the government have a role to play when there is inflation? Usually the federal reserve board (Fed) will increase interest rates, thereby making it more costly to obtain money in an effort to bring down inflation. But this type of contraction in the money supply can result in lower employment, which is something we don’t want if we are trying to get more people back to work

As the Congress still debates the Democratic party’s massive spending proposals, we should be asking ourselves not only which spending is important and which is not, but also how can the tax code be used to encourage firms to reinvest in America and to prevent more capital from moving offshore.

The tax code really should not be about social engineering, but if policymakers want to continue using it to achieve certain ends, then why not strive for ends that satisfy the public interest as opposed to special interests? Progressives in Congress, at a minimum ,want to reverse the Trump tax cuts. To pay for their massive spending, they propose taxing the rich, including corporations. The problem with this is that although it may sound just and equitable, the rich always find ways to evade paying taxes, which has included moving capital offshore. Moreover, increasing taxes on corporations only results in higher prices as corporations pass those taxes onto consumers.

Among the taxes that have been a bone of contention is the capital gains tax. Raising it too high puts the U.S. at a competitive disadvantage relative to other countries. But lowering it too much may create some perverse incentives. Corporations with a lower tax bill will have more profits, but they won’t necessarily share them with their workers with higher wages. Instead of reinvesting in the U.S. they may still invest abroad. And yet, a cut in the capital gains tax could be conditional. It could be conditional on 1) maintaining plants in the U.S. and 2) expanding in the U.S. Firms that want to invest abroad would then be faced with a much higher capital gains tax.

Ideally, we would not tax corporations at all. Instead we would tax individuals’ earnings at low rates, but with no deductions. Americans like having deductions, but we pay for them with higher marginal tax rates. It would be so much more efficient to have low rates and no deductions. If we really want to tax corporations because they put their profits before people, then we could be more mercantilist and place the public interest first and tax those corporations that export American jobs.

Critics, of course, will point out that corporations have been going off shore in search of low wage rates so that we can be more competitive, not to mention affording the greatest share value to shareholders. But what the supply chain crisis dramatizes is that the savings to consumers in low prices because these companies have been paying low wages has been lost because of the interruptions in the supply chain.

More capital in the name of the public interest needs to be returned to the U.S. The language in capitalist markets is often that of rights. Firms have rights to profits, and in a well run economy profits will benefit all. What we don’t hear enough about is the language of obligation. What are the obligations that we have to one another. In a more mercantilist society, we might have more corporate obligations to society. Instead of playing the class-warfare card of taxing the rich, Progressives might want to use the language of obligation and the meaning of community.

To tell people that they aren’t paying their fair share may serve to divide people into warring camps. To talk about new programs paid for by more taxes on the rich only perpetuates the worst of redistributive politics and divides us even more. The goal ought to be to get companies to invest in the country again, and to create good paying jobs.

The continued discussion of changes in the tax code does not result in serious economic development that can benefit the middle class, rather it perpetuates the type of economic growth that got us into this mess in the first place. Because to the casual observer, the wrangling in Congress over budgets, programs, spending, and taxes appears to be nothing more than a discussion of what set of cronies will have their interests served and be able to profit most from a specific set of policies.

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