What Causes Shortages?

What’s causing widespread shortages?

It’s a combination of pandemic related shutdowns and inflation. The shutdowns part is obvious; the inflation part merits explanation.

From Econ 101 we know that price balances supply and demand. If supply is greater than demand, prices fall; if demand is greater than supply, prices rise. If prices fail to adjust adequately, some supply and demand imbalance remains. If prices are above equilibrium level, the imbalance manifests in surpluses. If prices are below equilibrium, the imbalance manifests in shortages.

In an environment of accelerating monetary inflation, prices may fail to keep up due to frictional and psychological resistance. Shortages are the result.

That this is not solely pandemic related is apparent from historical examples. In the wartime inflation of the 1940s shortages were imposed through rationing. In the accelerating inflation environment of the 1970s, shortages were blamed on everything from Arab oil producers to greedy corporations to bad weather. Price and wage controls were tried and gas lines were formed. Shortages were widespread, but most famously in the energy sector. Peak oil panic ensued as the world became convinced it was running out of oil.

But then a funny thing happened. The Federal Reserve under the leadership of Chairman Paul Volcker dramatically tightened monetary policy … and before long the oil shortages that were supposedly caused by everything but loose money turned into an oil glut. Inflation faded, and along with it so did the shortages.

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