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 the others off shelf space. 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.
READER COMMENTS
blink
Aug 17 2020 at 2:09pm
Yes, there is a good deal of poor economic reasoning and policy regarding price controls. In this case, though, I do not think the laws themselves are to blame — even without the laws, we would have “voluntary” price restrictions by popular demand; simply removing the legal limits will not solve the problem. The final paragraph alludes to this reality.
Jon Murphy
Aug 17 2020 at 2:24pm
Some suppliers may do voluntary price controls, but not all. When those suppliers inevitably run out of inventory, people can switch to other suppliers. This is evidenced by the sales of shortage-goods on eBay and Amazon, sales which were forceably ended/persecuted by the authorities because of the aforementioned legislation.
Pierre Lemieux
Aug 17 2020 at 3:00pm
@blink: You are quite probably right that, even without formal price controls, large retailers would have refrained from increasing prices too much given the socialist-minded public, including among their customers. However, I don’t think it could have lasted long, or at least not to the extent of the current shortages. This is because many of the customers of the big retailer who offers good prices but doesn’t have the products for sale would have gone online or to a smaller brick-and-mortar supplier to get the goods at higher prices. Cabela could not continue for long selling for $12 boxes of 50 9mm cartridges that are always out-of-stock, without some of its customers buying some (in lower quantity, no doubt) for $50 online (as I found a couple of days ago); sometimes, the price difference is lower. When you see your competitor “stealing” your customers by selling something they want and that you don’t have, the temptation will be irresistible to buy the stuff at a higher price and sell it at a higher price yourself. Multiply this phenomenon all over the economy and you will see that, in a system of free enterprise, voluntary price control can’t last. Otherwise, everything we buy would cost half the price and then again, with voluntary price caps, half the half-price, and so forth…
Steve Stinson
Aug 17 2020 at 2:46pm
Ronald Reagan, not Donald Reagan, told that joke.
Pierre Lemieux
Aug 17 2020 at 3:06pm
@Steve Stinson: Thanks! I just corrected my typo. I must not give comfort to people who accuse me of being obsessed by the Donald.
Thomas Hutcheson
Aug 18 2020 at 6:11pm
I just do not think price controls are that effective. I think a much more important factor is firms not wanting to annoy customers. The supermarket that kept raising the price so as always to have some TP in stock will live in infamy longer than the the annoyance with the store that ran out. Consumers are probably irrational to feel that way, but business have to take their customers as they are, not as they ought to be.
Jon Murphy
Aug 19 2020 at 10:42am
The shortages of essential goods and crackdown on 3rd party suppliers begs to differ. See my comment above
Pierre Lemieux
Aug 19 2020 at 11:58am
@Thomas Hutcheson: Jon indeed has already answered that question. I think my post also contains many elements of an answer. Let me try to repeat. Suppose the market is totally free and a widget sells for $10. That’s the market price that clears the market. Why wouldn’t retailer A, not wanting to not annoy its customers, charge $5 and ration the widget to one per customer until it lasts? The answer is simple: after the widget is gone (in no time), its customers will start buying from another retailer and A will just have lost money for nothing (except if the temporary discount prices are part of marketing plan and he reverts to the market price after his discounted widgets have gone). In other words, if all other retailers are not forced by price controls to participate in the shortage, retailer A has no reason to allocate the goods among his customers except by price or for a very short time. This is why, in normal times, the widget sells for $10, not $5 with none on the shelves. It is true that retailer A may want to keep its socialist-minded customers happy but it won’t last long except if attorney generals prosecute those who try to sidestep price decrees.
By the way, if you really think that price controls are not effective, there is a real and easy fortune waiting for you on the market.
Michael Pettengill
Aug 19 2020 at 10:55am
Price gouging laws do not limit price hikes to meet higher costs. A factory producing food products required to pay more in labor costs and invest more in protective capital has higher costs that results in higher prices, and often lower return on capital, and thus is NOT PRICE GOUGING.
A factory owner might believe Trump, and not invest in protective capital, because the problem will just vanish next week, so he simply produces less under his existing supply contracts which set prices. Or the supermarket refuses to agree to higher prices to fund investment for a problem that will go away next week, according to Trump.
Raising supermarket prices will not increase the number of factories to solve a problem that will go away next week, or next yyear.
Pierre Lemieux
Aug 19 2020 at 12:13pm
@Michael Pettengill: You write: “Price gouging laws do not limit price hikes to meet higher costs.” This may be correct in some state price-gouging laws. But at least some don’t make this distinction (a compilation in this perspective would be very useful), and neither do decrees under the Defense Production Act. That your statement is generally not correct is illustrated by observing that if you import PPE at high prices and resell them in your convenience store (or auction them on eBay) even at the same high prices with a “small” profit, you will be breaking most if not all price-gouging laws. If that were not true, there would be an easy fortune to be made by importing goods in shortage here (foreign sellers to American intermediaries or to American governments are not subject to price-gouging laws) and reselling them at black-market prices; shortages would have rapidly disappeared (at least before many governments started controlling exports).
Jon Murphy
Aug 19 2020 at 12:34pm
That may be true in some states, but that applies explicitly to accounting costs, not economic costs. Economic costs (which contain, but are not exclusively, accounting costs) are how decisions are made. Some firms need prices to rise not because they are necessarily facing higher material or labor costs, but because they face higher economic costs.
Remember that in economics, “cost” refers to the foregone opportunities. If resources are being used to produce X, they cannot be used to produce Y (NB: this holds true even if the resources are sitting idle, despite what some commentators might say).
So, for a firm to employ more resources in creating X, they must get a higher price than they could get in creating Y. If you are a company like 3M, where you produce both PPE and Scotch Tape, you need to get higher prices for your PPE compared to your Scotch Tape in order to switch some resources over. The higher the price you can get, the more resources you can devote. This point holds true even if your accounting costs of inputs do not change.
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