Markets are good at allocating resources

By now, this idea is pretty widely accepted. But there’s somewhat more skepticism when dealing with shortages of important goods during an emergency. Consider these tweets:

I’m not qualified to opine on the specifics of this issue.  But after all the missed opportunities of 2020, I’m skeptical of claims that society could not possibly be missing out on “no-brainers”.

This long article discusses logistical problems in rapidly scaling up vaccine supplies:

Take large original equipment manufacturers like 3M, for instance – they have as many as 5,000 direct suppliers, and each of those suppliers have their own suppliers. This results in quite large supply chain networks that extend all over the world – and it only takes one incident to disrupt these operations. Plus, many organizations don’t even know who is in their supply chain. This is what we saw earlier on with N95 masks, gowns and gloves.

So what we have is a much more delicate or fragile supply chain for healthcare supplies, which really sets the stage for where we are now. Because the supply chain has become a much bigger factor, many of the components of the vaccine are subject to these same potential risks.

These are genuine problems, but these are also exactly the sorts of problems that markets are good at addressing.

Though Pfizer has already manufactured 20 million or so doses, Pfizer, Moderna and other vaccines are experiencing severe bottlenecks due to a lack of critical materials – including vials and rubber stoppers for the vials.

How might China’s vast and highly flexible manufacturing sector respond to price signals for producing more of these supplies, say a 50-fold increases in vial and stopper prices?  Hint, here’s how they responded last spring to the mask shortage:

Between March and May, China exported more than 50 billion face masks — a tenfold increase for total production last year, according to analysts

Read that again.  In three months, China exported enough masks to give everyone in the world 6 masks, ten times their normal annual production.

One mistake frequently made by non-economists, even non-economists that know far more about their own industry than economists do, is to underestimate all the margins by which supply can respond to market signals.  Almost nothing is “fixed” in quantity.  I won’t say it’s necessarily true that “where there’s a will there’s a way”, but when there’s obscene profits to be made then there’s almost always a way.

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Zico and Ammo under Price Controls

In the current shortage economy, why are some goods are in shortage (in the economic sense: none available at the on-going price), others are simply not produced (intensifying the shortage), and some others (I’ll consider the case of ammunition) are produced as needed and sold at higher prices in violation of the states’ “price gouging” laws or the federal Defense Production Act?

To answer this question, it is necessary to understand the economic concept of shortage, as opposed to a blob intuition (I call it “smurfage”) encompassing all situations where somebody does not have something that he would like to have, but not necessarily more than something else.

In another post, I mentioned many ways in which producers—incentivized by consumers who bid up prices instead of having nothing—can stealthily increase prices (see “Why Shortages Are Not More Widespread,” August 17, 2020). One way is for producers to limit the diversity of their offerings, reallocating production to higher-margin products. Another example of that was provided by the Wall Street Journal a few days ago (“Coca-Cola to Discontinue Zico, May Drop Coke Life,” October 4, 2020).

Like many social planners at heart, Bernie Sanders and Donald Trump don’t understand how product diversity is efficient when it corresponds to consumer demand backed with money. Sanders declared:

You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers…

In the same mode but for other reasons, Trump said, in his typical baby talk:

I see people buying five dolls for their daughters, maybe buy two dolls for their daughters…

Ways of satisfying consumer demand when government edicts (price controls or political allocation of available supplies) interfere include the black market or, when repression is haphazard and irregular, the grey market. This appears to be the current situation in the retail market for ammunition. As one can easily check online, established ammo retailers charge prices close to pre-control levels but, most of the time, the products are “out of stock” and the shelves, even online shelves, are bare. This market, however, is very competitive with many online competitors who are apparently willing to risk government suits or prosecutions, don’t have a politically-correct reputation to maintain, and charge what the market will bear. Consumers who need ammo for self-defense, shooting, or hunting can thus get some at higher prices—but, needless to say, they remain free to benefit from low government-capped prices and have nothing to buy.

To give an example of the phenomenon, take 9mm cartridges, the most popular caliber for semi-auto pistols. You can easily check at any large retailer that 9mm ammo is still priced at roughly (or discreetly more than) pre-control prices: around $12 for a box of 50 cartridges used mainly for target shooting and twice that price for 20 premium self-defense cartridges. You can also check that on the grey online market, these prices are now much higher—typically about five times more, when they do have the ammo in stock. It is not perfect but it’s better than to have no choice at all.

Note that there is less diversity on this grey market than there used to be on the white market. One reason is that the established manufacturers of ammo are still forbidden to “price-gouge” the retailers and thus have presumably reduced the diversity of their production.

One interesting question is, Why do government prosecutors close their eyes to gray-market suppliers who offer ammunition at market-clearing and illegal prices? One hypothesis would that the government loves gun owners and rednecks, on whom the electoral fortune of the current administration may hinge. By allowing ammo prices to rise up to their market-clearing level, government prosecutors at least allow gun owners (and hunters) who need ammo more urgently to bid up prices; otherwise, long and haphazard queues would be the only hope. Of course, this hypothesis does not make sense as these same governments claim that laws against “price gouging” favor the consumers! Moreover, there are more than 40 state attorney generals who are supposed to enforce “price gouging” laws, a sizeable proportion of whom don’t like private gun owners at all.

The opposite hypothesis—that governments hate private ammo buyers and do not mind throwing them in the jaws of price gougers—does not make more sense.

One explanation of this strange government tolerance for the grey ammo market is consistent with what classical liberal and libertarian theorists have demonstrated. When a government tries to control prices and allocate goods (like in the current emergency), it cannot respect the abstract and impartial rule of law; it has to arbitrarily discriminate among people and treat them unequally. Moreover, government planners are seldom efficient because they have little incentives to be and because they lack the knowledge necessary to control a vast, diversified, and complex economy. Arbitrary interventions and prosecutions also come from the difficulty and cost of going after everybody breaking the law: the personnel of state attorney generals is not infinite and their employers are broke.

We are getting a glimpse at why, in a government-controlled economy, nothing works. The less government-controlled the economy is, the better things work.

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Zico and Ammo under Price Controls

In the current shortage economy, why are some goods are in shortage (in the economic sense: none available at the on-going price), others are simply not produced (intensifying the shortage), and some others (I’ll consider the case of ammunition) are produced as needed and sold at higher prices in violation of the states’ “price gouging” laws or the federal Defense Production Act?

To answer this question, it is necessary to understand the economic concept of shortage, as opposed to a blob intuition (I call it “smurfage”) encompassing all situations where somebody does not have something that he would like to have, but not necessarily more than something else.

In another post, I mentioned many ways in which producers—incentivized by consumers who bid up prices instead of having nothing—can stealthily increase prices (see “Why Shortages Are Not More Widespread,” August 17, 2020). One way is for producers to limit the diversity of their offerings, reallocating production to higher-margin products. Another example of that was provided by the Wall Street Journal a few days ago (“Coca-Cola to Discontinue Zico, May Drop Coke Life,” October 4, 2020).

Like many social planners at heart, Bernie Sanders and Donald Trump don’t understand how product diversity is efficient when it corresponds to consumer demand backed with money. Sanders declared:

You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers…

In the same mode but for other reasons, Trump said, in his typical baby talk:

I see people buying five dolls for their daughters, maybe buy two dolls for their daughters…

Ways of satisfying consumer demand when government edicts (price controls or political allocation of available supplies) interfere include the black market or, when repression is mild or irregular, the grey market. This appears to be the current situation in the retail market for ammunition. As one can easily check online, established ammo retailers charge prices close to pre-control levels but, most of the time, the products are “out of stock” and the shelves, even online shelves, are bare. This market, however, is very competitive with many online competitors who are apparently willing to risk government suits or prosecutions, don’t have a politically-correct reputation to maintain, and charge what the market will bear. Consumers who need ammo for self-defense, shooting, or hunting can thus get some at higher prices—but, needless to say, they remain free to benefit from low government-capped prices and have nothing to buy.

To give an example of the phenomenon, take 9mm cartridges, the most popular caliber for semi-auto pistols. You can easily check at any large retailer that 9mm ammo is still priced at roughly (or discreetly more than) pre-control prices: around $12 for a box of 50 cartridges used mainly for target shooting and twice that price for 20 premium self-defense cartridges. You can also check that on the grey online market, these prices are now much higher—typically about five times more, when they do have the ammo in stock. It is not perfect but it’s better than to have no choice at all.

Note that there is less diversity on this grey market than there used to be on the white market. One reason is that the established manufacturers of ammo are still forbidden to “price-gouge” the retailers and thus have presumably reduced the diversity of their production.

One interesting question is, Why do government prosecutors close their eyes to gray-market suppliers who offer ammunition at market-clearing and illegal prices? One hypothesis would that the government loves gun owners and rednecks, on whom the electoral fortune of the current administration may hinge. By allowing ammo prices to rise up to their market-clearing level, government prosecutors at least allow gun owners (and hunters) who need ammo more urgently to bid up prices; otherwise, long and haphazard queues would be the only hope. Of course, this hypothesis does not make sense as these same governments claim that laws against “price gouging” favor the consumers! Moreover, there are more than 40 state attorney generals who are supposed to enforce “price gouging” laws, a sizeable proportion of whom don’t like private gun owners at all.

The opposite hypothesis—that governments hate private ammo buyers and do not mind throwing them in the paws of price gougers—does not make more sense.

One explanation of this strange government tolerance for the grey ammo market is consistent with what classical liberal and libertarian theorists have demonstrated. When a government tries to control prices and allocate goods (like in the current emergency), it cannot respect the abstract and impartial rule of law; it has to arbitrarily discriminate among people and treat them unequally. Moreover, government planners are seldom efficient because they have little incentives to be and because they lack the knowledge necessary to control a vast, diversified, and complex economy. Arbitrary interventions and prosecutions also come from the difficulty and cost of going after everybody breaking the law: the personnel of state attorney generals is not infinite and their employers are broke.

We are getting a glimpse at why, in a government-controlled economy, nothing works. The less government-controlled the economy is, the better things work.

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Economics: Prices, Pri-ces, P.R.I.C.E.S.

It is impossible to understand the economy—that is, the economic consequences of individual actions—without understanding the role that prices play or are prevented from playing. This was a crucial scientific discovery of modern times. For that very reason, microeconomic theory used to be called “price theory.” So it is troubling to observe that many of our contemporaries and even many financial journalists ignore that discovery. Even economists tend to forget it when their moral values or virtue signaling is at stake.

An illustration of the problem was given by a Wall Street Journal feature of August 21 titled “Why Are There Still Not Enough Paper Towels?” The role of prices and price controls is nowhere mentioned. The very word “price” only appears twice, mainly from a management perspective: the competition of “Japan’s low-price cars” in the 1970s and the fact that overcapacity “would not allow you to price in a way that meets customer needs.” This last phrase, from P&G’s chief executive, could be read as referring to prices established on free markets, but it is as close as the story comes to prices. Not surprisingly, the report cannot explain why a shortage of paper towels persists:

The United States of America, heralded as the land of plenty, still doesn’t have enough paper towels. … An average of 21% of household paper products were out of stock at U.S. stores as of Aug. 9

The story’s “economic” explanation is essentially that

[t]he scarcity is rooted in a decadeslong quest by businesses at all levels, handling many different products, to eke out more profit by operating with almost no slack.

In other words, the culprits are bad capitalists who are trying to maximize profits with tricks such as lean manufacturing and just-in-time delivery. The authors do not conclude, but they could as well have concluded, that this is why so few shortages exist under communism and socialism, in Cuba or Venezuela, not to mention the former Soviet Union.

The real reason for persistent shortages, as I explained in many recent Econlog posts (including “Why Shortages Are Not More Widespread,” August 17), is that prices are capped under the threat of government prosecution. It is that consumers are forbidden to bid up prices. It is that bad capitalists are forbidden to maximize profits to respond to consumer demand, except sometimes stealthily. Being an obedient government crony is becoming an easier path than serving consumers.

The featured image of the present post is a photograph I took last week of the gun counter at a major retailer in Maine. It illustrates what a “land of plenty” looks like when price adjustments along supply and demand curves are forbidden.

The Wall Street Journal story has some feebly redeeming value. It provides many examples of why marginal cost increases with production. It hints at the fact that reducing product diversity has been a stealth way of responding to consumer demand despite price controls. But as a purported explanation of why shortages persist, it is at best misleading.

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Why Shortages Are Not More Widespread

Many grocery items are still in shortage in the sense that they are absent from the shelves even if some buyers would be willing to pay more to have them available. The Wall Street Journal asked the question last week, “Why Are Some Groceries Still So Hard to Find During Covid?” The newspaper’s big-data analysis concludes that at least half the grocery shortages persist:

During the peak shopping spree at the end of March, stores ran out of 13% of their items on average. Now, roughly 10% of items remain out of stock, compared with a normal range of 5% to 7% before the pandemic.

The WSJ story does not explain why that happens. It also happens in many other sectors of the economy. A few days ago, for example, the same newspaper had a story titled, “Why Is It Hard to Get a Rapid Covid-19 Test? The Machines Are in Short Supply” (August 12).

Economic analysis can help. “Shopping spree” is less than half the answer.

The main reason, of course, is that, under the so-called “price gouging” laws that exist in the majority of American states, price controls kicked in when states of emergency were declared. They were reinforced by the invocation of the federal Defense Production Act. The price caps had the effect of both increasing quantity demanded (why not hoard paper toilet if it remains cheap and people can panic?) and discouraging domestic suppliers from increasing quantity supplied (which is subject to increasing marginal cost). The result was shortages, a situation where goods are cheap but unavailable or available only at the end of a queue—weeks or months of waiting in this case. (I wrote a number of Econlog posts on this; my last one was “Good Government Greed, Bad Economic Freedom.”)

News media (and even many economists!) ignore supply and demand when they are blinded by sudden emergencies or by their redistribution values. In reality, emergency is a constant feature of consumer demand and it is by using price signals that the market satisfies demand without shortages. Of course, very short and localized “shortages” happen all the time—until the supply truck comes back to the grocery store, as suggested by the 5%-7% normally missing items on the shelves of a given grocery store at any point of time. There are random variations around just-in-time deliveries. (The 5-7% estimate still seems a bit high to me compared to the free market as we have experienced it in normal times.)

The shortages continue because, in most states, emergency declarations seem to have been extended and the federal Defense Production Act (which controls the prices of medical supplies and PPE) remains in force. One must look at prices, which would normally clear the market without authoritarian interference. If prices are prevented from clearing the market, waiting lines appear. It took four months to receive the freezer you ordered in March for roughly the same reason that it took 8 to 12 years in the former Soviet Union to receive a car: price signals were dampened or silenced.

A joke attributed to Donald Reagan went as follows:

In the Soviet Union, there is a ten year wait to buy a car. So a buyer comes, pays a deposit and then the fellow who is in charge tells him: “OK, come back in ten years to get your car.”

“Morning or afternoon?”

“Ten years from now—what difference does it make?”

“Well, the plumber is coming in the morning.”

We are not there yet. Still, what’s surprising is not that shortages are still around but that that they are not more widespread given the legal risk in letting prices clear the market. One reason is that prices have increased, if only stealthily. Price-gouging laws often allow for unequal and arbitrary enforcement by using vague words such as “excessive” or “unconscionable” prices. These laws may allow price increases if upstream costs have increased. Many items in the consumer price index did increase between March and June: the price of food at home increase 4.3%, which incorporates price increases of 10.3% for meats, poultry, fish, and eggs, within which beef and veal increased 20.4%. (Slight decreases in July made a dent in the upward trend.) Farmers seem to be more immune to the heavy and arbitrary hand of the state.

Suppliers tried and still try, unconsciously or not, to hide the price increases that allow them to continue satisfying consumer demand. Many tricks are available up to a point, a point at which shortages begin. For example, retailers eliminate or reduce promotions (“two for the price of one”). They sell products in larger containers, toilet paper in larger rolls, or ammo in 500-round orders instead of 50-round boxes. They stock only their most profitable items, clearing shelf space of the others. As time passes, reductions in quality become another possibility.

The reduction in the diversity of consumer offerings is another way to reduce suppliers’ marginal cost, compensating partly for capped prices. The non-compensated part is the remaining shortage. Moreover, consumers who would be willing to pay more for a slightly different product and don’t get it are victims of an invisible shortage. This reduction in diversity was noticed in a previous Wall Street Journal story, “Why the American Consumer Has Fewer Choices—Maybe for Good” (June 27, 2020). As of June, the typical IGA store carried only 4 varieties of toilet paper instead of 40 in pre-pandemic (that is, pre-price-control) times. Harley Davidson cut some models from its list. Smucker paused production of reduced-sugar Uncrustables. The average number of different items sold in grocery stores was down 7.3%.

Microeconomic theory shows that as time passes enough for plant or store size to increase, marginal cost will decrease by switching to the long-run supply curve. This has the potential to partly alleviate the shortage—and of course totally solve it if prices are liberated. What will happen in the long run thus depends on the extent to which governments will continue to interfere with prices. Disguising the problem by replacing price analysis by supply-chains talk is a dead-end street.

Perhaps even more worrying is the question of the extent to which formal price controls are reinforced by the cries against “price gouging” that rise from the populace. Large companies are the most vulnerable as they would probably be crucified on the public place, besides being liable to prosecution, if they were seen as trying to “profit from an emergency”—even if, by not profiting from the emergency, they make it worse. To which extent the main impetus comes from Leviathan or from a socialist-minded populace or from straight ignorance is an important question to understand how state power grows.

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