Supply Chains

Eakinomics: Supply Chains It’s the day after a holiday, which Eakinomics usually devotes to idle musing – like, “what did I do yesterday?” Having had a sedate Memorial Day, let’s instead do some idle musing on the topic of supply chains. Prior to the arrival of the coronavirus, nobody ever talked about supply chains. In the 2+ years since, we’ve seemingly talked about little else (although not with any great clarity, as Eakinomics pointed out here and here). So, is there something genuinely new and different in the post-coronavirus world that merits rethinking supply chains? From the perspective of the private sector, perhaps. Let’s think about Twizzlers, which are evidently made by combining sugar with petroleum and adding strawberry dye. Ingenious. The final-product supply chain consists of purchases of the three inputs by the final manufacturer, while there would be supply chains leading to petroleum, sugar, and strawberry dye, as well. Firms arrange the contracts for the quantity, quality, and timing of the inputs to optimize their product delivery. Why should the pandemic change that? One of the oldest and most interesting questions is what determines the boundaries of a firm. One answer is that if a transaction/activity is cheaper to do internally, it is part of the firm’s activity. If it is cheaper to do via market contracts, it is done by another firm and purchased by the firm. In this case, it is too difficult and expensive to master producing petroleum, sugar, and strawberry dye; these are outside the Twizzlers firm and done via market transactions. One thing we have seen, however, is that the coronavirus can disrupt the production and delivery of these kinds of inputs. It may be (that is, might, perhaps, could be) the case that these delays and disruptions are so costly that it would make sense to bring some or all those activities under the firm umbrella so that it can control the health environment and human resources policies. So, maybe there is something there, but I doubt the world has changed so much that a complete rethink of supply chains is in order. But in any event, it is the private sector’s problem. What about public policy? Clearly, to change status quo, it must be the case that supply chain disruptions rise to the level of being a policy problem. That might be the case for personal protective equipment (PPE) and other public health-related goods and services. The problem arises when an undisciplined policy analysis errantly concludes that basically everything is the government’s business. Modern progressives have no commitment or faith in a private sector and evaluate all outcomes based on vague notions of equity. From this perspective, everything is fair game for the government because, if lawmakers engage in such regulation, the outcomes can be made “fair” – in other words, the federal government can bridge the Twizzler divide. A corollary is that the supply chain for anything is fair game, as well. This seems to be the best explanation for the massive uptick in supply chain “policy” discussions. In sum, it seems much more likely that the obsession with supply chains stems from the perverse policy framework employed by the progressives than actual changes traced to the coronavirus.