President Joe Biden recently challenged the press to explain how supply chains work. Liberty Nation takes that challenge seriously and will provide you with an explanation of how they work and how Biden unchained them, causing inflation.
The Boom-Bust Cycle
As the industrial revolution was ramping up in the 19th century, people started noting a curious phenomenon. There would be a few years of a booming economy, during which businesses had trouble keeping up with the demand, followed by a collapse and large quantities of unsold goods in stock. It was called the boom-bust cycle. Economists have been arguing about its cause ever since.
The Bullwhip Effect
In the 20th century, supply chain researchers decoded part of the mystery. They noticed a pattern of increased volatility further down the supply chain. Even if consumer demand varied only slightly, every extra supplier in the chain added more volatility. In the 1990s, Procter & Gamble called it “the bullwhip effect,” and the name stuck.
People in the field realized that the increased volatility along supply chains was partially the cause of the boom-bust cycle. Even better: They identified how to fix it. It turns out that the bullwhip effect is an information problem.
Have you ever spoken on a satellite phone or an internet line with a significant latency? It’s awful. You think the other person is finished speaking, and both mutually interrupt each other.
The delay causes information loss. You don’t know that the other person has started speaking because it takes a second for you to find out. That is what happens in supply chains, too. The further down a supply chain you get, the longer it takes from the customer purchase until the order is completed. When the suppliers furthest down the chain fill their orders, demand in the shops may already have dried up.
There are only two ways to fix this problem. One must either reduce the response time in the supply chain or slow down the demand. When you talk to someone on the other side of the globe, you can either get a better internet connection with less latency or wait a little longer until you are confident that the other person is finished speaking before you respond.
During the 1980s, the information revolution dramatically reduced latency in the supply chains. Order cycles were reduced from up to two years down to only weeks or days. When you swipe your credit card at a mall to buy a shirt, an order is instantly transmitted electronically to the supplier on the other side of the globe to refill that order. Thanks to this dramatic technological improvement, the boom-bust cycle has been significantly reduced.
In 2004, two economists, Finn E. Kydland and Edward C. Prescott, were awarded the Nobel Memorial Award in Economics “for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles.” That’s a fancy way of saying that they recommended central banks not fiddle with the money supply and just keep it flowing slow and steady. A sudden dramatic change in the money supply send waves through the economy and cause a massive bullwhip effect.
Now you know how supply chains work and how to prevent disruption. What has happened under Biden? First, he introduced time-consuming COVID-19 regulations that caused delays that rippled through the supply chain. At the same time, he and his party pushed for a gigantic stimulus package that injected a massive pulse of newly printed money into the economy. Those fresh dollars started chasing goods, causing a sudden increase in demand, which also rocked the supply chain.
Thus, Biden has created a textbook case of supply chain mismanagement. Apart from war or a natural disaster, Biden’s actions are optimal to disrupt the economy. Only price controls could make it worse. The market fixes this information distortion by pushing up prices. Ordinary Americans pay for Biden’s incompetence while corporate cronies who have access to cheap loans will reap the benefits. Perhaps this is what Thomas Jefferson had in mind when he said: “[L]et no more be heard of confidence in man, but bind him down from mischief by the chains of the constitution[.]”
~ Read more from Caroline Adana.