Supply Chains Are Not The Cause Of the Bottlenecks Clogged Supply Chains Are the Result Not the Cause (Revised)

Two months ago I considered writing a short paper on the existing highly publicized supply chain issues that are global in dimension. I decided against doing so because it is impossible to adequately address a topic as complex as supply chains in a short paper. The complexity attached to supply chains relates to the massive scheduling detail associated with coordinating inputs (goods and services) that are embedded in virtually every final product. Due to a number of requests from friends for input relating to the existing supply chain quagmire, I have decided to address the topic by concentrating on the macroeconomic aspects of the problem along with the logical (and most efficient) resolution of the underlying causes, without getting buried in a detailed analysis of the supply chain of a generic or specific good. I will, however, address the likely ongoing supply issues associated with food and paper products.

From a macroeconomic viewpoint it is impossible to separate supply chain issues from energy policy, fiscal policy, balance of trade, stable growth, labor policy (including mandates), inflation and economic disruptions. Supply chains for goods produced in the US have far fewer links than than those produced off shore and are far less fragile. Unfortunately, as more and more production moved off shore over the past thirty years, supply chains radically increased in length and complexity and, consequently, dependence on less reliable sources (as reflected in ever worsening product quality and balance of trade figures). Stable economic growth is critical to the overall dependability and flexibility of complex supply chains which have become more and more fragile. The greater the volatility in domestic and global economic activity and growth, the greater will be the impact of the consequential supply chain disruptions. Restrictive energy policy and unbalanced demand focused fiscal policy in an inflationary environment, will only serve to aggravate inflation which, in turn, will intensify supply train issues. Always keep in mind that constrained energy supplies and high energy prices impact every link in virtually every product’s supply chain. Also keep in mind that the supply chains that exist today are, in essence, “just in time” functions that tend to minimize the need for massive warehousing capacity (which is operational if there are few disruptions in the supply chain for any reason). For this reason most supply chains, especially those with offshore elements, are fragile by nature.

The Covid-19 Pandemic resulted in the widespread mandated shutdown of business and services. Needless to say supply chains of virtually all offshore goods were radically disrupted at every link in every their chain. The total mismanagement of mandate protocols by the Federal government and most foreign governments not only led to unnecessary deaths, but also to massive economy damage, including supply chains. Given that seniors above sixty-five years old make up sixteen percent of the population but eighty percent of the covid-19 related deaths it is clear that the global generic shutdown mandates did not adequately address the severity of this disease for the elderly and immune compromised and definitely did not efficiently address the risk to the business and commerce sector of the economy. The onerous shutdown of the supply side of the economy, coupled with the massive demand side stimulus from the emergency transfer payments to assist covid-19 related laid offs, has led to sustained inflation. Consumers cut back radically on entertainment expenditures during the shutdown and changed their buying patterns, shifting entertainment related expenditures to goods primarily sourced from offshore. The economic gurus of the Biden Administration irrationally cling to the hope that the present high inflation is temporary will only prove to correct if they succeed in cratering the economy in record time. Virtually all of their agenda driven energy and government spending plans are pointed in that direction.

Given the confluence of the functional realities discussed above, the massive supply chain bottleneck that is grabbing all the headlines today should not be a surprise to anyone. Most of the goods impacted by the massive surge in demand are nonperishable and, therefore, are waiting in containers to be unloaded and are staking up because the transportation link in most of those supply chains is unable to clear these goods in a timely manner. The supply chains themselves are not the guilty party. The basic immediate problem today revolves around labor and the shift in consumers’ buying patterns as referenced above. In the long run automation will participate in meeting transportation demands, but in the short run financial incentives through higher pay will be inevitable to attract more dock workers and truck drivers. The ultimate long run solution is to bring industry back to the United States by making domestic production more competitive though whatever means possible (automation, fiscal policy, etc), which will radically shorten and simplify supply chains.

A vast majority of the basic food, paper and medical products consumed in America are produced in America and are not subject to the extreme supply chain bottlenecks as is the case for most of the non perishable goods with supply chains with offshore elements. They have still been affected by pandemic related infections and lock downs, where less popular jobs such as food processing (especially meat processing) and long haul trucking are hard to fill especially given the labor shortfall caused by the over extension of covid related benefits. Production facilities of food and paper good are widely dispersed throughout the United States and any shortages of specific foods and paper goods should be, at most, sporadic and temporary. Basic economics intuitively tells us that when demand exceeds supply and the cost of intermediate goods and services increases the price of the final product will increase. This is and will probably continue to be the case for all food and paper products for a while (six months to one year, maybe more depending on Biden’s executive actions). The shortage of truck drivers will be alleviated at least to some extent in the short run by the inevitable increase in wages and signing bonuses, and in the longer term by increased automation. This will be the case until Biden’s regressive fiscal policies slow down economy growth sufficiently that demand flattens out and the economy grinds down to Obama’s new normal of virtually no growth.

Gasoline supplies are subject to similar issues as basic food and paper products. Virtually all of the gasoline consumed in the US is produced in the US. As in the case of food and paper products virtually all of the gasoline shortages experienced in the US have been sporadic and have been attributable to temporary pipeline issues and truck driver shortages. Future gasoline shortages will also be expected to be sporadic and temporary in duration. The price increase in gasoline across the US is partially due to minor and temporary domestic supply chain issues, but is actually more attributable to the global shortage of gasoline and increased global demand. The brilliance of the Biden Administration’s energy policy related to fossil fuels did not wait for fiscal policy stupidity to shrink future energy supplies and spike gasoline and other fuel prices. Immediately upon taking office Biden steered the US away from energy independence by restricting drilling and pipeline expansion. Biden’s myopic energy agenda, coupled with the increasing pressure of short sighted agenda driven ESG sustainable (environmental social and governance) policies of many lenders has stifled the ability of domestic drillers to respond in a timely manner to market signals. When the global futures market realized that US production of fossil fuels was going to be constrained, the pricing power relating to crude oil and therefore gasoline and other fossil fuels shifted back to OPEC from the US. OPEC (modeled on the old Texas Railroad Commission format), immediately set production quotas to maximize short and long run profit. In a moment of unparalleled naively Biden requested OPEC to increase production in order to lower the cost of gasoline and virtually all other crude oil byproducts. “Viral idiosis” is a humorous nonsense term that could be coined to define his surprise when they told him to “pack sand”. I believe that the phrase, “dumber than a box of rocks”, which is more in line with Louisiana Senator Kennedy’s choice of phrasing, is perhaps a more fitting description of ongoing Biden Administration decision making.

Given that the ultimate energy goal for the world, as a whole, is to eliminate dependency on fossil fuels, it seems as though the socialist green energy endeavor of the woke community in the US, that has pushed the ESG lending guidelines, does not care about the amount of domestic economic pain it takes to make even minuscule improvements in the degree of realistic global environmental sustainability. The US has radically reduced all types of pollution since 1970 (see EPA release – www.epa.gov/newsreleases/wheeler-highlights-americas-environmental-progress). Much of this is attributable to Federal and State level regulatory action, and even more is attributable to free market forces that have dramatically shifted domestic fossil fuel usage from coal to natural gas. China and Russia must surely getting a good laugh out of the Biden and American left’s self destructive push to strangle domestic crude oil production, while China builds new coal fired power plants (30-40 year life expectancy) and Russia enjoys the oil and natural gas profits enabled by the shift in pricing power away from the US and back to OPEC. The small relative improvement in global environmental quality that can conceivably be achieved through domestic restrictions, even if totally destructive to the American economy, will probably not even counter the negative environmental actions of other nations, whose hostility to the US is so obvious.