The competition between the political parties in the US, has caused both of them to claim their policies strengthen economic growth. Potential as the supply capability of the economy, as you would imagine, is based on inputs primarily the availability of physical capital , natural resources, and labor. The existence of Slack and its size is the usual trigger to set off government policy actions to re-balance the aggregate economy like the very, very large fiscal package recently enacted. The now standard way that is done is to ramp up Keynesian style fiscal policy spending of either government related projects or to mail green Treasury checks to selected «needy» people so they have the mean to spend more.
It has now become standard for both political parties to react to Slack in this classic Keynesian mannerof Federally financed spending. Indeed, one of the early and large Covid fiscal policy spending packages passed the Senate 100 to zero so both parties were on board. The other means to cure Slack has been to encourage the more politically independent central bank to engage in expansionary monetary policy to attack the problem by creating the availability of cheap funding to encourage private spending. So, for economic slumps, both parties include a lot of Keynesian style demand support but there is a lot more to it.
Now where the parties disagree on economic policy is addressing the issues that drive US producers to foreign shores. Trump had made this a macroeconomic policy that is, to shift the incentives to produce on shore vs. The country of choice to produce is also affected by relative energy costs, which with the elimination of fracking, is creating a relative energy cost handicap for US production and in addition corporate tax rates matter as well. The Trump polices of seeking to entice US producers back home was done to generate US spending for factory, equipment and training but they were immediately wiped out by the stroke of the Biden Executive Order pen so we have a clear idea of how the respective parties feel about this.
First, private producers spending on new production equipment or to further train workers is private spending that in turn creates income and in turn additional spending that eliminates Slack. So, efforts to expand Potential are demand creating and antithetical to Slack. This used to be known as «Say’s Law» meaning private expansion of the means of production creates its own income and its own demand in turn. Furthermore, as the below plot of yearly estimates of the future path of Potential GDP made by the CBO in the years following the housing recession, the estimates of future path Potential shifted downward every year that Slack continued to exist.
There was no catch-up of the level of projected future Potential that existed prior to the housing bust. The implication is not just lower levels of future Potential output but if the government resorted to higher minimum wages as a Slack buster, which it is on the way, while not implementing supply side policies to add to worker productivity means that the higher minimum wages will create far greater unemployment and firm failure. They might be US companies, as in where chartered and headquartered and where its equity shares are traded, though they contribute more to the production and income of foreign countries. With far greater ability to deliver final goods to the US end users, and with many goods now delivered, via on-line delivery, a producer friendly environment becomes ever more critical for production, employment and income in order to be realistic about whether US firms will stay home.
So, its not just production that leaves but the youth of the country and indeed the culture as well.
Source: The Spellman Report
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