Progressive think tank warns: We need supply-side economics

The current price inflation comes from multiple sources, but the Federal Reserve Board has only the blunt tool of demand reduction to deal with it. The Fed has begun raising interest rates to reduce demand for goods, services, and labor. If rates are raised enough, output and employment will be reduced, price and money wages changes will slow, and, eventually, core price inflation will be reduced. However, the Fed’s attempt to reach its 2 percent inflation target could produce a very large reduction in demand, leading to big losses in output and employment.

In these circumstances, it makes sense to explore ways to address the supply disruptions that are affecting the current expansion and may constrain growth in the future. …

This changed economic landscape calls for a broader approach to inflation policy. Relying exclusively on Fed demand management is far too passive. Things will greatly improve if economic policy addresses the supply issues brought into high relief during this recovery. The policy measures discussed above provide a reasonable starting point. Adopting them will relax the inflation constraint on output and employment growth. Moreover, they will provide important benefits to public health, families, and climate. There is much to be gained from a change in approach.