A Supply-Shock Era?

Economists and policy-makers know, in a broad sense, how to respond to a negative shock to aggregate demand in an economy, like the financial meltdown leading to the Great Recession of 2007-09. The financial crisis shrinks demand in the economy, recession hits, and unemployment rises. The government can play a role in softening and shortening the recession through expansionary fiscal policy (spending increases and tax cuts) or monetary policy (lower interest rates). To be clear, this policy recipe is not about building robust long-term economic health, which would require thinking about education and job training, incentives for capital investment, research and development of new technology, and balancing the benefits and costs of regulation. But softening and shortening the immediate blow of recessions is a worthwhile objective. But when the shocks that hit the economy are about about aggregate supply, like the pandemic recession, the policy prescriptions based on responding to…