Recent months have seen an economy that is continually struggling with supply chain driven shortages. As the world grapples with these challenges, the evidence suggests that much of these shortages are because of central economic planning based on Covid-driven public policy.
In the complex world of the pandemic, Americans have been inundated with information on the possible causes. Fires in key factories, natural disasters, and the like have been propounded as contributing factors in combination with the “effects” of the Covid pandemic. Yet, the question must be asked how much of these factors are attributable to the effects of people actually falling ill. While the tragedy of these cases is very real, the pandemic’s effects have been grossly aggravated by central government planning that determined “essential” and “non-essential” businesses.
Lessons from the Soviet Union Show that Central Planning Leads to Shortages
In order to understand how central government planning causes chronic supply chain shortages, it is helpful to heed the lessons of the Soviet Union. While the concept of shortages is relatively new to Americans, the Soviet Union saw consistent shortages, primarily for consumer goods. Long lines had many Soviet citizens waiting for simple items ranging from clothing to toilet paper. Shortages were so common, that when Soviet Parliament member Boris Yeltsin visited Houston in 1989, he was astonished by how well the grocery stores shelves were stocked, almost convinced that it all must have been staged just for his visit.
There was a reason that a shortage of consumer goods was a way of life in the Soviet Union. Using the Socialist economic model, the Soviet government engaged in centralized economic planning that prioritized certain sectors over others. The Soviets did this via 5-year plans that gave specific priority on outputs for certain sectors. While the plans were made to look good for paper and propaganda, such plans failed to account for unexpected circumstances and were determined by the minds of bureaucrats instead of being informed by the market.
Supply Chains Have Had Disruptions Before, Without Such Widespread Impact
In 2021, a casual read of the headlines could lead one to believe that many of the economic disruptions brought about by Covid just so happened to occur along with other unprecedented supply chain disruptions occurred that were unrelated to Covid. Yet, it is important to note that factory fires, hurricanes, labor shortages, blockages of shipping canals, geopolitical instability, and other factors are not new. These challenges have consistently occurred over the course of modern history.
While the effects of such challenges do have a real impact, the ability of the supply chain to respond to these challenges is the real test of strength. In former days, supply chain shortages in the free world were usually short-term and relatively isolated to specific sectors.
The laws of supply and demand were generally able to alleviate the pressures. As the demand for certain products went up, the cost went up as well. In turn, these additional revenues helped alleviate supply chain challenges. Lower then return as the supply chain system adjusted to the new demand. But as the lessons from the Soviet Union demonstrate, this can only happen when a free market is permitted to operate and respond quickly to unexpected challenges.
“Disaster Socialism” is a Prelude to Supply Chain Disaster
With Covid, many at the highest levels of government decided that the circumstances justified central economic planning based upon a model that many admittingly called “disaster socialism.” “Disaster socialism” is the idea that the free market cannot operate properly in a time of disaster and that government must implement economic controls. Under this application of “disaster socialism” certain businesses found themselves being labeled as either “essential” or “non-essential.” Meanwhile, the federal government did a massive welfare expansion program and moved America forward towards a more thorough economic reset.
Initially, the long-term effects of such policies were not as easily detected. The government simply pumped out money and mailed out stimulus checks to keep the economy afloat. But it wasn’t long before the realities of this arbitrary central planning began to take effect, particularly on the supply chain.
The Model of Covid Central Planning
The federal, state, and local governments adopted a two-pronged model of central economic planning during Covid. While not all jurisdictions applied this model in the same way, the basic tenets were the same. This economic planning model employed:
- Simultaneous ban on the operations of certain businesses that were arbitrarily deemed “non-essential.”
- Pouring federal funds into the economy through unprecedented government spending.
In the area of sector-specific planning, governments determined what elements of the economy would operate based on their priorities. For instance, if a state government could determine that liquor stores should be open (note, a large source of tax revenue) while restaurants should be closed.
While state governments were primarily responsible for lockdowns and the closure of “non-essential businesses,” the federal government stepped in. It provided the additional element of central planning that called for an influx of funds in the economy. This was accomplished through massive spending plans.
The primary effects of such spending plans brought about inflation combined with a decrease in active workforce participation. Regardless of whether or not they had been directly labeled as a “essential” or “non-essential,” all businesses now had to grapple with the consequences of inflated prices and a labor shortage.
The Effects of Central Planning on the Supply Chain
All of these factors come full circle back to the principle of supply and demand and its impact on the supply chain. The logistics sector has now been hit by the same collateral effects of central planning that other sectors have been impacted by. Furthermore, the logistics sector had to deal with additional challenges due to government restrictions on movement and a lack of raw materials.
As the demand for products increases to at or above pre-pandemic levels, the logistics sector has to deal with that demand while still attempting to address the backlog brought about by the effects of lockdowns and a decreased workforce. Like the failed socialism and central planning of the Soviet Union, the American economy is seeing what happens when those in power attempt to orchestrate the economy.
Yet there is a contrast to such failure, in 1776, the economist Adam Smith referred to the forces of the free market as an “invisible hand” that brings about the best outcomes for the economy and consumers. Such a belief in the free market has driven America forward. The whims of central government planning have failed the test of history. To see an effective supply chain in the future, America would do well to return to the free market principles of its past.