I was shopping at the grocery store this week, and I noticed something peculiar: empty shelves. It felt like the beginning of the pandemic when there were food shortages and people were scurrying around trying to find toilet paper. Those empty shelves acted as a reminder that there are not just supply chain disruptions in food production. We have found ourselves in a bona fide supply chain crisis. The reason why our current predicament should be called a crisis is because it exists across borders and across industries. It affects consumers, including you and me, in various aspects of life. Goods and services, including electronics, clothing, food production, toys, and appliances will become harder to come by. Even those goods and services that we do acquire will become more expensive as a result, as we will see shortly. With a holiday shopping season quickly approaching, the effects of this supply chain crisis will be all the more evident.
International trade is a complex web of markets, companies, market players, inputs, and outputs. Given the interconnectedness of the global economy, it should come as no surprise that there are multiple factors contributing to the supply chain crisis. My goal here is to analyze the primary contributors to this supply chain crisis.
Let us start off with the catalyst of this supply chain: the COVID-19 pandemic. You would have to be living under a rock to not know that we are still undergoing the worst pandemic in a century. At the beginning of the pandemic, millions of people were under lockdown. Those who could not work remotely or did not have an "essential job" had to stay home in order to "flatten the curve." Many past recessions have been due to demand shocks. The Niskanen Center correctly pointed out in March 2020 that the pandemic recession was worse because this recession dealt both a supply shock and a demand shock (see below). You can also read this paper from the Federal Reserve Bank of St. Louis to understand the difference between a demand shock and supply shock in the context of this pandemic.
Consumer demand for many services and goods plummeted due to greater unemployment, lower disposable income, and the closure of numerous businesses. The worker absenteeism caused by the lockdowns also caused issues on the supply side, as well, mainly in the form of major supply chain disruptions. Since pandemic lockdowns greatly limit economic activity in attempts to minimize the spread of a virus, it would make sense that lockdowns adversely affect supply chains, at least in the short-run (Guan et al., 2020). While the lockdowns played their role in reducing aggregate supply, past pandemics show us that a reduction in aggregate supply would have been inevitable due to fear of infection and actual illnesses (Inoue et al., 2021; Turner and Akinremi, 2020).
Unemployment racked up in a way that we have not seen since the Great Depression. The U.S. government was proactive in fiscal and monetary policy with the intent of making sure a bad situation did not become worse. While there were multiple policy interventions, two are worth mentioning at this time. The first is that of quantitative easing (QE). QE is when "a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment." The second policy is economic stimulus payments. These payments in this context refer to tax rebates or tax credits issued by the U.S. government to spur consumer demand. Let's forget for a moment that we did not see the intended result of boosting the economy. Why do I bring up quantitative easing and economic stimulus payments? Because they both contributed to a greater money supply. Initially, this increase in money supply did not have a great impact on the economy because money velocity (i.e., the rate at which money is exchanged in an economy) was slower due to the pandemic and the COVID restrictions. Once COVID restrictions became less strict and businesses were opening up again, people had money burning a hole in their pockets, or in economic-speak, the pent-up nature of consumer demand caused demand to spike. What we are seeing in multiple markets is that demand has considerably outpaced supply. As a result, there are shortages and a rate of inflation that the United States has not seen in years.
Part of what makes demand greater than supply is the shortage of workers. Companies that run ports, warehouses, railways, and trucking are operating with fewer workers although demand has never been higher. This gets into the unemployment debate that has been raging. In spite of businesses opening and the vaccines, there is still a struggle with unemployment rates and labor force participation. Some would like to attribute that issue to the pandemic itself. The argument for not working because of fear of catching COVID was stronger at the beginning of the pandemic. However, as we accumulated more data on the severity of COVID (especially in comparison to past pandemics) and with the rollout of the vaccines, the argument of people staying unemployed due to COVID diminishes. Anyone using COVID as an excuse to keep people home are participating in fear-mongering that only serves to prolong the pandemic. There is another argument that is commonly used to try to explain the return to a normal unemployment: lack of childcare. However, recent research from former Council of Economic Advisors shows that parents generally did not reduce their work hours during the pandemic, thereby undermining the argument that lack of childcare was a major contributor to unemployment (Furman et al., 2021).
As such, I would contend that the unemployment benefits during this pandemic have been exacerbating the unemployment issues, as research from the Mercatus Center suggests (Farren and Kaiser, 2021). When unemployment benefits are comparable to or exceed one's previous salary, which was the case for a majority of those receiving the benefits throughout the pandemic, it should come as no surprise that many are disincentivized to find work. After all, why have a job when you are paid the same amount or even more to not work? Normally, supply and demand would have more workers enter the shipping and trucking industries. However, as we saw in the Great Recession, lavish unemployment benefits slow down economic recovery. As long as these unemployment benefits continue, it will become harder to close the gap on that worker shortage. You can go here and here to read more of my analysis on the economic effects of unemployment benefits.
There is not only a shortage of workers in the transportation industry, but there is also a shortage of shipping containers. As the American Institute for Economic Research illustrates, the increase in COVID-related demand resulted in fewer shipping containers, which also resulted in a skyrocketing of shipping container prices. The Howe Robinson Container Charter Index shows that the cost chartering a giant container ship has increased ten-fold since the beginning of the pandemic! In its analysis, the Cato Institute brings up how tariffs on the chassis, which are the trailers and undercarriage used to transport shipping containers via truck, are increasing global shipping prices and increasing transportation bottleneck. The chassis tariffs are one example of how Trump's trade war has not helped this shipping crisis since these tariffs were the result of an investigation towards the end of the Trump administration. Trump's trade war caused a shortage in semiconductors that has been made worse by the pandemic. The reason I bring up semiconductors specifically is because those are the chips that are in multiple devices, including computers, smartphones, and automobiles. As nice as it would be to only blame Trump, it's even worse because President Biden is continuing a blander version of the harmful protectionism of "America First" and the trade war with China, a war that has reduced consumer well-being (a.k.a. welfare) by 7.8 percent (Amiti et al., 2021).
In terms of trade policy, we can go back further than even the Trump administration. I was also thinking about the Merchant Marine Act of 1920, which is also known as the Jones Act. As I describe in my 2017 analysis of the Act, this 101-year-old piece of legislation increases the cost of shipping. How so? By mandating that any goods carried between U.S. ports must be done by ships constructed by U.S. companies, that are owned by U.S. citizens, and manned by U.S. citizens. This law limits supply of the ships and shipping containers available in the United States, thereby driving up shipping costs.
I would like to address another issue with this supply chain crisis: unions. In Europe and Asia, major ports are open 24 hours, seven days a week. In the United States, ports are only operating at 60 to 70 percent capacity because they are closed on weeknights and on Sunday. Why is that? Union contracts prohibit operating at such a capacity, according to AIER. AIER also points out that the unions oppose automation. Normally, my gripe has been with public-sector unions. However, it turns out that the International Longshore and Warehouse Union is a private-sector union. Conversely, the Los Angeles Port, which is the largest port in the United States, is run by the government. Take it either as a reminder of the rigidities of unionism or that the government is not the only entity to screw up because to err is to be human. In any case, the Los Angeles Port is going to be open 24/7 after some pressure exerted from President Biden, which will hopefully help with the large amounts of port congestion in the future.
Another market failure worth pointing out is that over time, businesses have relied on just-in-time inventory (JIT) systems. While JIT is great for keeping costs down, it has also resulted in lower inventories. Having multiple industries start off with lower inventories to begin with does not do any favors in terms of making sure that consumer demand can be met because the run-down inventories means the global economy has less slack. This shortage is going to have consumers panicking, especially during the upcoming holiday season. In anticipation of delays, we are going to see more hoarding reminiscent of the beginning of the pandemic, which will worsen already-existing shortages.
To conclude, the fact that I have covered multiple topics, whether it is monetary policy, unemployment benefits, tariffs, unions, or the pandemic, shows how just interwoven supply chains really are. Labor shortages, increasing shipping costs, and a congested transport system show how complex this issue is...so complex that I am certain that I have not covered every cause of the supply chain crisis here. The domino effect we are seeing play out in real life shows that there is not going to be one simple answer. Much like with the inflation, this is a problem that unfortunately is not going away anytime soon.
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