Responses to Pandemic Ills That Slow the Recovery
When the Covid-19 pandemic struck, governments shifted their economies into critical care and put them on life support. While the US economy is still traumatized, it is time the government stopped treating it like a critical care patient in order to allow self-healing market forces to continue rehabilitating the patient.
Similarly, the private sector needs to move out of the triage phase of its responses to the pandemic. Day-to-day problems such as chronic shortages of vital components need to be managed, but not at the expense of recovery goals.
Federal largesse interferes with the recovery
Wide-ranging product shortages are one of the most visible signs of the pandemic’s fallout. Lumber and microprocessors are two of the long list of product categories in short supply, causing major supply chain disruptions.
There are various reasons for the scarcities, but pandemic-related disruptions to supply and demand are at the core of the problem. As consumer demand nosedived during the pandemic, companies cut their manufacturing capacities. When the recovery phase started to gather steam, the US economy rebounded more robustly than anticipated, creating huge supply/demand imbalances and price rises.
Left to their own devices, markets will recalibrate, and these imbalances will gradually disappear. We are already seeing this in the lumber market. As the Wall Street Journal reported, after climbing to record highs in a supply-constrained market, prices are now falling rapidly. Although prices are expected to remain relatively high owing to the strength of the housing market, “the supply bottlenecks and frenzied buying that characterized the economy’s reopening and sent prices to multiples of all-time highs are winding down,” says the Journal. Similarly, Bloomberg reported that Canadian home sales, which peaked at the beginning of March 2021, declined by 17.5% by the beginning of May.
However, markets generally are not being left to self-correct without government interference. The federal government has pumped trillions of dollars of stimulus money into the economy, including the $300-a-week supplemental unemployment benefit that will remain until September 2021 in many states. While these payments may have been well-intentioned when first approved, now they are boosting consumption and further distorting markets already unbalanced by the pandemic. The longer these external stimuli persist, the longer it will take markets to recover from the pandemic.
President Biden’s proposed $2 trillion infrastructure investment plan represents another massive shot of adrenaline at a time when markets need to heal themselves. There is no question that the US needs to invest in infrastructure (see my blog post The Truck-Size Hole in America’s Infrastructure Plans). However, such a huge increase in government spending needs to be introduced in such a way that it does not interfere with the market dynamics that will ultimately bring the US economy back into equilibrium.
Enterprises need to behave differently
While the federal government needs to curb market-distorting stimulus measures, the private sector needs to get on with the job of rebuilding businesses for a post-pandemic world. Knee-jerk reactions to pandemic-induced problems detract from this job.
Over-ordering is a huge problem during these times of widespread product shortages. Customers assume that production limitations will force suppliers to allocate only a fraction of the product quantities they want to purchase. Consequently, customers inflate their orders to ensure they will have enough product even if their allocation is only a fraction of what they ordered. Suppliers understand this, and, in many cases, ignore actual orders and use, for example, historical buying patterns to decide how much product to send to each customer. Phantom orders also expose markets to the bullwhip effect and cause suppliers to “fly blind” in their businesses. Moreover, when grossly inflated orders are canceled (or “de-committed”) as shortages ease, suppliers are left with unwanted inventory that throws markets off balance again.
Another wasteful byproduct of the knee-jerk school of management is using legal action to punish suppliers for not fulfilling orders. For example, earlier this year, automaker Volkswagen was reportedly in talks with its main suppliers about claiming damages due to a shortage of semiconductors. Becoming embroiled in these sorts of actions wastes valuable management time and resources, does little to address the underlying issues, and diverts attention from the all-important task of putting the pandemic behind us.
Government should not repeat past mistakes
A more constructive attitude toward curing pandemic-related economic ills might also enable us to learn some valuable lessons.
For example, taking a more judicious approach to investing in infrastructure could include a review of America’s track record in getting the most bang for the buck when funding large-scale capital projects.
An opinion piece in the Washington Post argues that the country’s performance in this area is notoriously poor. The article argues, for instance, that the per-mile cost of a new tunnel in Seattle is more than three times the cost of a recent tunnel project in Paris, France, and more than seven times that of one in Madrid, Spain. A host of issues, including unwieldy and unnecessary regulation, are behind America’s profligate capital spending, according to the author.
The pandemic took the world by surprise, and it is understandable that our immediate response was far from perfect. However, failing to deal effectively with its aftermath is less excusable.
