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Bottlenecks in specific sectors of the economy can limit growth and spur inflation, as demand for certain goods outstrips supply capacity. When this happens, conventional policy often calls for interest rate hikes to curb overall demand and bring inflation down. However, from a Modern Monetary Theory (MMT) perspective, this one-size-fits-all approach is misguided for bottleneck-driven inflation, since the root cause is limited supply, not excess demand. Instead, MMT argues governments should use their monetary sovereignty to target support for expanding bottlenecked supply capacity to match demand.
As issuers of their own currency, governments are not revenue-constrained and can fund investment in sectors where growth is hampered by tight supply. This could include:
Direct funding of infrastructure, research, technology, and worker training to scale up bottlenecked industries. For example, government grants could expand transport and utilities for a region experiencing supply chain issues, or finance worker training and recruitment drives for healthcare and education services facing staff shortages.
Coordinated procurement policies stabilizing orders and funding for critical supplies. By working with domestic producers to ensure steady pipeline of orders and resources, governments could protect against volatility leading to price spikes or shortages of essential goods. Long-term purchasing commitments give industries assurance to invest in capacity to meet demand.
Price control safeguards when scarcity lets companies price gouge. As a last resort, governments could cap prices on necessary supplies or services when market prices soar due to limited supply and unmet demand. Once additional capacity comes online and supply/demand rebalance, price controls could be lifted. Rather than an overall slowdown, this targets the distributional effects of isolated bottlenecks.
Incentives or aid for private sector supply expansion. Tax reductions, low-interest loans, or other assistance could encourage businesses to invest in and ramp up production of essential goods facing high demand and tight supply. Governments could work with industries on coordinated solutions, recognizing their insight into production and investment requirements. Such partnerships can harness private sector skills and resources to fulfill public purpose.
These are not the only possibilities but some potential paths that could be taken to loosen bottlenecks. MMT acknowledges any policy can have costs or trade-offs that depend on specific circumstances. It also highlights the options available to monetary sovereign governments facing supply-side inflation or bottlenecks. Rather than relying on interest rate hikes and their broad costs, governments can take a targeted approach using their currency issuance power to grow bottlenecked supply capacity and achieve balanced growth.
By understanding the economy as resource-constrained more than financially limited, policymakers can choose interventions designed to directly address struggles emerging in a particular sector, protecting wider interests even when some areas face scarcity pressures. With their flexibility as issuers of the national currency, governments can play a stabilizing role and craft an economy serving public purpose.
Overall, the key for MMT is that governments recognize the possibilities at hand and wield their tools to support communities and industries, not let themselves be unnecessarily constrained.
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