Why Shortages Are Not More Widespread
By Pierre Lemieux
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 Ronald 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.