| Biden to lay out infrastructure plan, pandemic restrictions, and Lagarde says market can test the ECB. TrillionsPresident Joe Biden will unveil a $2.25 trillion infrastructure plan in Pittsburgh this afternoon. The four part, eight year plan, which the White House says will be the most sweeping since the 1950s interstate highway program, will target transportation, non-defense R&D, manufacturing and quality of life issues. The administration said that tax increases would "fully pay for" the plan, with corporate income tax rising to 28% from 21%. Also today, Biden is expected to allow the ban on H-1B visas, which hit tech companies particularly hard, to expire. More restrictions French President Emmanuel Macron may announce further restrictions as Europe's third largest economy deals with a surge in cases. Germany has again moved to restrict the use of the AstraZeneca vaccine after a handful of new cases of blood clots emerged. Ruili, a city in southwestern China, moved to test all residents after six cases were confirmed there. Brazil set a record for daily deaths, with fatalities in the country reaching 317,646. Bring it onEuropean Central Bank President Christine Lagarde said that investors can "test us as much as they want" and that policy makers won't shy away from using all their powers to stop bond yields moving higher. She said the bank would continue to use current asset purchase programs with "maximum flexibility" in an interview with Bloomberg Television. Also this morning, the latest euro-area inflation data showed that prices rose 1.3% in March from a year earlier, below the bank's target level. Markets mixedThere is very little movement in global equity markets, with trading subdued on the last day of the quarter. Overnight the MSCI Asia Pacific Index slipped 0.7% while Japan's Topix index closed 1.1% lower. In Europe the Stoxx 600 Index was 0.1% higher at 5:50 a.m. Eastern Time. S&P 500 futures pointed to little change at the open, the 10-year Treasury yield was at 1.728%, oil slipped and gold was flat. Coming up... A busy three days for the jobs market kicks off at 8:15 a.m. with the March ADP employment change report. The latest Chicago MNI PMI reading is at 9:45 a.m., with February pending home sales at 10:00 a.m. Crude inventories data is at 10:30 a.m. The Federal Reserve is expected to confirm it is not extending the emergency SLR exemption which expires today. Walgreens Boots Alliance Inc., Dollarama Inc. and Micron Technology Inc. are among the companies reporting results. What we've been readingHere's what caught our eye over the last 24 hours. And finally, here's what Joe's interested in this morningPolicy makers have engaged in a historic amount of fiscal expansion over the last year in an attempt to keep the economy afloat during the pandemic. But with bottlenecks, shortages and other constraints emerging, some economists such as Tyler Cowen have argued that we perhaps need to pay more attention to the supply side of the equation, as opposed to just maintaining total demand. But can we neatly separate supply and demand into distinct concepts? On this question, I did a short Q&A with Skanda Amarnath, the research director at Employ America. He argues that one way to ensure ongoing investment in building out our capacity is to ensure that the demand is always there, such that the investment is worth it. JW: Whether it's the Texas electrical grid, the capacity of the canals or the strains on the semiconductor industry, there's a lot of talk about problems emerging on the supply side of the economy. In your view, is there a common story with all of this, or is it all a random coincidence?
SA: While I certainly appreciate the idiosyncratic nature of each story, at least one of these examples is indicative of a broader story at play. 1. We just went through a historic shutdown of global economic activity and now we're in the process of bringing production and capacity back on line at a historic pace. It would be surprising if that did not put some strain on production processes. 2. We have also engaged in historic fiscal support, both in terms of scale and its diffusion and particularly so in the U.S. Had we not, the income shortfalls from the pandemic would have sustained, forcing balance-sheet constraints to bind while weakening demand in a more persistent manner. That in turn would have caused fewer capacity constraints to bind, and we would at least have seen fewer such stories. 3. Capacity is also not well prepared for the current moment because we have seen persistently weak investment spending and final demand over multiple decades. If investments in future capacity are a function of expected demand -- and firms justifiably presume that demand is going to be "structurally" weak -- then it makes a lot of sense for firms to structure their processes to avoid high risk, low payoff capacity expansion and bias their decisions towards liquidity-preservation instead. The result will be a systematic pattern of underinvestment. But demand also does not have to be "structurally" weak. Fiscal policy can be used directly and actively to generate demand, as we have seen over the past 12 months. JW: So my impression of Econ 101 is that there's something called "supply" and something called "demand" and there are two diagonal lines and they intersect at a price where they come into balance. You've pushed back on the idea that the two can be disaggregated. What does the traditional story get wrong? SA: For at least some economists, the usefulness of supply-demand as an analytical framework stems from the ability to separate out and classify shocks as either "supply" or "demand." But such an approach tends to look very different depending on whether the classification is conducted ex ante vs ex post. If you listened to economists like Ken Rogoff when the pandemic was first unfolding or followed the suggestions of an econ 101 textbook, you would have heard that the pandemic was a "supply shock" for which stereotypical demand-oriented responses (fiscal and monetary stimulus) would prove to have very limited effects. If you look back at what transpired, output fell but prices also disinflated, which is more consistent with a demand shock than a supply shock. This is even more striking in light of how the historic fiscal and monetary responses identifiably boosted demand. Supply and demand are highly co-integrated processes at the macroeconomic level, such that neat decompositions are just as likely to confuse as they are to illuminate. Capacity expansion is inherently motivated by the demand outlook. Demand is not unlimited but a function of how private sector balance sheet constraints bind. Policy can relax balance sheet constraints, not only through lower interest rates but also through the injection of free cashflow (government transfers and spending). When there is more demand being generated, firms have a greater incentive to invest in developing the requisite inputs and production techniques. JW: Thanks, so final question. Obviously we've seen the government take the demand side of the equation seriously during this crisis, plying households with stimulus cash and so forth. As things begin to normalize, what lessons can we take from the past, such that demand is maintained and the supply side has the incentive to keep building out capacity? SA: I think we should not view deficit-financed government spending as this narrow emergency measure strictly reserved for worst phase of a recession. Given the uniqueness of the government's balance sheet, fiscal policy has an important role to play in actively shaping the demand outlook, such that nominal incomes are growing adequately and with sufficient breadth. Of course with more nominal income growth, there comes some additional inflation risk. But if you listen closely to the Fed itself, there is an acknowledgement that policy makers have leaned too heavily on constraining inflation at the expense of growing nominal wages. Should fiscal policy take a more active posture outside of recessions, it can play a valuable role in removing demand uncertainty. By ensuring a baseline rate of aggregate income and revenue growth, fiscal policy can improve the expected payoff associated with hiring and investment. Joe Weisenthal is an editor at Bloomberg. Like Bloomberg's Five Things? Subscribe for unlimited access to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close. | 
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