There is a popular idea in popular economics discussions that the left wing is on the demand side and for the working class, and the right wing is on the supply side and for the bourgeoisie.
This could not be farther from the truth.
Housing costs
In the case of zoning, zoning is a supply-side policy that keeps the supply of housing low. As the population increases, the demand for housing increases. Without the supply of new housing being created for natural population growth, people either have to emigrate to keep demand the same, which is difficult, or prices will increase in the most desirable places to live. Increase demand, stagnant supply, increase price.
Restrictive single-family home R1 zoning is a supply-side reform that benefits landlords.
Option 1 is to increase taxes to subsidize low-income housing, which in the real world means a sales tax, which would disproportionately impact low-income people. So, do you tax more low-income people to subsidize rent for low-income people? That does not make any sense to me. Increasing property tax will mean increased rent for everyone who rents and more seniors who have to sell their homes. New York has done this, and the two things that make New York relatively affordable are the subway and the competition between small local businesses, drastically reducing other parts of the family budget. Rents have increased substantially under the demand side system of subsidized rent, a boon of simply giving tax money directly to landlords. That is all subsidized housing means in practice. It’s a massive policy failure. Let’s not replicate it. So, is the supply side pro-developer?
Option 2 is to make our cities miserable, and the demand to live in them goes down, but nobody wants that.
Option 3 is to increase supply faster than demand, and the price will decrease. Reverse the supply-side gift to landlords, which has been restrictive zoning.
I do not know of another serious option. Housing shows how the supply side = bad, and the demand side = good dogma is anti-progressive.
Carbon Tax
On the flip side, if you talk about something like a carbon tax to reduce the consumption of fossil fuels that cause climate change, the policy receives hate from both the left and the right. Pigouvian taxes reduce demand for a good which creates massive negative externalities… which means the right wing hates it because it is a tax, and the left wing hates it because it isn’t strictly spending more money to solve a problem. You get ridiculous policies like the California governor giving citizens gas cards of $200 to “offset the cost of gas,” which only increases gasoline demand, keeping prices high.
So, is a carbon tax a right-wing policy? Definitely not. It is a tax. Is it a left-wing policy? From the right wing, they see it as left-wing from a simplistic tax=bad viewpoint. From the left wing, they see it as being not demand side enough because it’s not spending money, which makes it conservative. They claim that it only increases costs on families, even if the money is spent on a universal basic income as they do in Canada (they call it a rebate) or in Alaska, but the far left still hates it. The only people who support the carbon tax end up being environmental economists who spend their entire lives, but what do they know?
The options for climate change are varied. We can do deadlines (“I love deadlines, I love the whooshing sound they make as they pass by” ~ Douglas Adams), which can encourage people not to do enough now because we will take care of it later.
Spending more money on renewable energy increases renewable energy consumption, but this will never lead to a 1-1 relationship between increased electricity production and reduction in carbon emissions because the substitution effect is never 100%. Some of it will be induced demand. On top of this, most of this money will probably be raised via a regressive sales, property, or payroll tax. It is highly unlikely this will come from progressive taxes, so it is inefficient and increases the tax burden on low-income people. Renewable energy subsidies are better than nothing but far less than we should aim for.
Carbon sequestration is great when combined with a carbon tax, but it can be used by companies to offset the emissions they are already spewing simply. Carbon sequestration should reduce carbon already in the air; otherwise, it is usually greenwashing. Encourage carbon sequestration in the form of policies like biochar, though, because biochar is awesome!
Only the carbon tax has the benefit of being a policy to reduce emissions immediately; it is direct, the substitution effect does not apply, and it cannot be used as simple greenwashing.
So, is a carbon tax a supply-side or demand-side solution?
It’s both!
Health care
Healthcare costs are going up for two reasons:
- An older population means more healthcare demand. Increase demand, price goes up.
- Drug patents give companies monopolies on drugs.
So we can’t do much with the first issue. Killing seniors on their 85th birthday just seems wrong to me. I don’t know. Maybe I’m a snowflake.
Increasing health care supply through better wages increases prices, but that’s not the main reason prices are increasing.
The government can also have generous subsidies to increase the number of nurses and doctors graduating from college, which is a “left-wing” supply-side solution. This helps health care professionals’ wages from ballooning, saving the government money.
The main reason healthcare costs are increasing is that many life-saving drugs are under patent, and the monopoly granted by the patent increases the costs when no monopsony purchases the drug or the insurance company refuses to use its power to pay a lower rate. Shortening health care patents is another “left-wing” supply-side solution.
So, either abandon patents or let Medicare negotiate drug prices. Simply ballooning government health care expenditure forever for smaller and smaller benefits is not a good solution, because you will eventually run into the issue of not enough doctors.
From a pure demand-side solution, we can just spend as much money as we want on private insurance and private drug companies and have that written off as tax breaks for employer-sponsored health insurance, which is a “right-wing” demand-side solution. It is right-wing because it is corporate welfare.
Health care requires a combination of demand (universal health insurance) and supply (free college for doctors and nurses) to keep costs under control.
Railroads and other infrastructure
If infrastructure is owned by a private monopoly, you can either:
- Regulate it to the point where the private monopoly has no agency, e.g., the Japan model.
- Just own the infrastructure, e.g., what most of the world does.
- Let the private monopoly operate with few restrictions, e.g., the American model.
The first two work well. You get great service at affordable prices through this supply-side solution which benefits consumers.
The third one means you harness the full impact of the private monopoly graph, which gives you less of a good thing and at higher prices.
Hooray!
The demand-side solution is to subsidize the railroads until we pay the price demanded by the monopoly and the government pays the cost. This is expensive and does not work.
Fun!
If the market can be broken into a competitive market, do that, but that is not true with most infrastructure. A track from Los Angeles to Phoenix is not a substitute for one from Chicago to Minneapolis. In this situation, dividing monopolies up is not a real solution.
The supply-side solution, in this case, is to nationalize the railroads.
So supply-side = left wing?
Sometimes, yes.
Education
Education has many clear positive benefits. It increases people’s incomes, increases longevity, and educated people are more likely to vote. It’s the cheapest way to increase the quality of life for the entire population. These are clear positive externalities, which is why subsidizing education (within reason) to have more people go to college is good for society. This is a positive externality. Positive externalities are where demand-side policies make sense!
We can also increase the supply of education by building more universities so that more people can get a college education. This is another “left-wing” supply-side solution to a problem.
Conclusion
When we look at housing costs or climate change, we need to eliminate our mindset of demand side = good and supply side = bad, because that mindset usually only harms progressive movements. We need to look at problems holistically, analyze policies in full, and think about the long-term consequences of each policy.
Most economic problems are caused by either an imbalance of supply and demand, externality issues, or a principal-agent problem.
Tax cuts to big companies are a supply-side policy, and the one most people think of, but as we see in the preceding sections, many supply-side policies can benefit consumers.
The demand side, as well as corporate tax breaks for health insurance premiums, can benefit corporations while leaving consumers in the dark.
Not to be the annoying economist, but… it depends!
Once we identify whether a problem is a demand-side issue or a supply-side issue, we can then identify the solutions that are going to actually be effective with minimal side effects. Simple cheat sheet:
- Negative externality: tax the good or service to reduce consumption.
- Positive externality: consider subsidizing the good or service to reap those sweet, sweet, positive externalities.
- Monopoly: either end it through a break-up or nationalization or have the government use negotiating power to keep costs under control.
This is a better lens to analyze policy and is far less likely to cause undesired results.
