Behind almost every shortage and price spike is failed government policy
In a market economy, persistent shortages of goods and services are not expected to occur, unlike in socialist economies. In free markets, if demand begins to exceed supply for something, producers will raise prices to the point where supply and demand are in balance. Higher prices serve to motivate sellers to produce more and allocate scarce resources to avoid shortages. There may be temporary supply shocks, where an essential raw material becomes scarce due to flood, drought, earthquake, war or otherwise. But normally producers adapt quickly and find ways to meet demand.
How then can we have persistent shortages of toilet paper – a product invented more than 150 years ago – when there is no shortage of trees? Insulin was invented a century ago and is essential for the world’s 537 million diabetics (37 million in the US alone), and the price has skyrocketed to now cost 10 times more in the US than in any other developed country. The world, and especially the United States, is awash with oil and gas, but prices have tripled in the past two years and are at record highs. There has been a global shortage of semiconductor chips, especially high-end chips. Formula – a product made for decades – is suddenly virtually unavailable in many places.
In communist and socialist countries, production decisions are made by state bureaucrats, who often make incorrect forecasts, resulting in shortages of things people need and want and surpluses of things they need and want. there is little demand.
In a market economy, a lack of competition – too few competitors or competitors colluding – can lead to higher prices and less innovation. This is why monopolies, and many organized collusive oligopolies, are often considered illegal. A large body of antitrust law has developed to deal with the perceived problem. Government antitrust authorities have often missed the mark by attacking companies that posed little or no danger, while completely missing real dangers to the system.
Decades ago, when I took my first course in antitrust, the big fear was that GM would monopolize the auto industry. (This was just before many foreign auto companies opened factories in the United States, nearly destroying Detroit.) Another fear was that IBM would monopolize the computer industry – just before more innovative companies like Apple, Microsoft and Intel almost drive IBM out of business. And then there was the fear that US Steel (a company few even know existed) was monopolizing the steel industry.
The government is too often responsible for the lack of competition in many industries due to regulations, patents and other intellectual property provisions, trade agreements and subsidies, and political attacks on the industry.
President Biden, before being elected, said he was going to shut down the oil, gas and coal industries for environmental reasons. He then appointed many people in his administration who are very anti-industry and make endless costly rules, not only on production but also on refiners, distributors and transporters of oil. Given the situation, it is not surprising that there is less new investment in the oil and gas industry and that prices have skyrocketed.
Mr. Biden likes to blame Russian President Vladimir Putin for high prices, but Russians produce huge amounts of oil, while loving the high prices that Mr. Biden’s policies have caused. Mr. Biden is making Saudis and Russians richer while making American consumers poorer. His policies result in more dirty oil being produced by foreign countries at the expense of cleaner US oil. It is difficult to be more false and petty than that.
Much of the pharmaceutical industry has been producing overseas for decades, putting American consumers at risk from potentially hostile foreign actors like China. For many drugs, there are very few producers – often because existing patent holders have found legal ways to extend their intellectual property protections even for decades. World insulin production was almost completely controlled by three companies – Novo Nordisk (Denmark), Lilly (USA) and Sanofi (France). In March 2021, the US FDA introduced interchangeability regulations that make it easier for other companies to enter the market.
West Virginia has had an acute problem with diabetes, where 16% of the adult population has it. Last year, the average gross cost of insulin in the United States was $6,459 per patient, which hits a poor state like West Virginia especially hard. Last week, there was some very good news when UNDBIO, a South Korean company, announced the launch of an insulin production facility in West Virginia. The state of West Virginia is supporting the effort with tax and other incentives, which is expected to create 1,200 new jobs in Morgantown.
Subsidizing the creation of new competitors is far from an ideal solution, but far superior to the Biden administration’s proposals for price controls. Price controls almost always lead to shortages, black markets and corruption.
Behind almost every shortage and price spike is failed government policy. Other than less government regulation in general, there is no simple solution other than to tackle each market barrier one by one. The solutions to all listed shortages are known. It’s not rocket science – it’s common sense.
• Richard W. Rahn is President of the Institute for Global Economic Growth and of MCon LLC.