Keep the big picture in mind when thinking about America’s supply chain problems

Along with many other profound changes that affect everyday life in America, COVID-19 and the responses to it have accelerated the use of certain words and phrases. Our common, everyday vocabulary has been altered. Among the additions are “social distancing,” getting “boosted” and “flattening the curve.” Then there’s an older and more familiar term which, after a long hiatus, is once again seen and heard frequently. “Supply chain problems” now command a lot of attention. 

Until COVID, we did not seem to have a supply chain crisis. What happened? And where do we stand right now?

Americans’ recognition of the concept understandably resurfaced in 2020-21, when the U.S. economy was turned off and back on again after having been practically shut down. With the economy reopening and $4 trillion in new purchasing power eventually injected into consumer, business and state government checking accounts by federal stimulus programs, Americans went on a grand shopping spree — or at least tried to. New cars disappeared from dealers as fast as they could arrive. Countless rooms were added to houses, kitchens were rebuilt and pantries were restocked.

A glance at trend lines in Federal Reserve data, combined with my own look into some of the numbers, tells us a few things: In the spring of 2021, retail sales jumped some 40 percent on a year-over-year basis. New auto sales jumped by more than 100 percent, auto parts and production jumped almost 300 percent and exports from China to the United States rose roughly 100 percent. These massive reactions – representing exploding demand for more of just about everything – stressed production facilities and supply chain elements far and wide. Indeed, search as we may, there is nothing like this sudden increase in demand and stress on supply to be found in America’s post-World War II history.

As a result of all this, when the Biden administration took charge of the White House, it saw a crisis worth including among its other early priorities. Last February, Biden issued an executive order calling for a 100-day review that began by pointing out that: 

“The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security. Pandemics and other biological threats, cyber-attacks, climate shocks and extreme weather events, terrorist attacks, geopolitical and economic competition, and other conditions can each reduce critical manufacturing capacity and the availability and integrity of critical goods, products, and services.”

Some of the called-for supply chain reports have now been issued, with more to come in February. At this point, the focus is on four sectors: semiconductors, large-capacity batteries, critical minerals, and pharmaceuticals and advanced pharmaceutical ingredients. The reports recommend taxpayer-funded chip production, tighter scrutiny of intellectual property rights abuses by foreign suppliers, placing greater emphasis on reshoring or onshoring manufacturing, and pushing for greater world compliance with U.S. labor and environmental standards. In sum, we might say that the plan is stiffer government regulation of trade and international investment, along with government itself becoming a producer of certain items in short supply. 

Will this solve a basic supply-and-demand problem? Time, along with the new reports and what our leaders decide to do with all this information, will tell. As of now, it’s fair to question whether the plans will address the underlying cause of our woes.

This is where we are now that “supply chain” has entered the common vocabulary. But we should remember that to the extent that it’s a crisis, it’s a product of a COVID crisis which, we all hope, is temporary. A recent Morgan Stanley analysis examining both the supply and demand sides of the problem indicates that things are already getting better, primarily because demand pressures are relaxing.

This is to be expected. Once Americans have spent the money burning holes in their bank accounts, pre-pandemic supply-chain capacity may again start to look adequate for many goods. Rising inflation may also temper the urge to keep spending and stressing supply lines. 

Let’s keep the big picture in mind as policymakers continue to address the question in the coming months.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson College of Business and Behavioral Sciences.