Price Controls, COVID Tests, and Supply Chains
Written by Rodney Johnson January 19, 2022
Price Controls, COVID Tests, and Supply Chains
When Adam Smith wrote about the “invisible hand” guiding the economy through capitalism, he didn’t envision a system built by ruthless profiteers. He described a civil society acting as a moral guide and judge when businessmen strayed from fair and equitable practices. Bad actors were to be shunned by consumers and suppliers. Beyond that, Smith believed that businesses operating on sound moral principles while pursing maximum profits created the best path for nations to succeed.
Capitalism has raised more people out of poverty than any government program in the history of the world, but can it compete with COVID?
How will the supply chain, the economy and COVID compete with capitalism?
The Biden administration and several members of Congress are considering price controls for food items. They contend that meat processors have raised prices because just a few players control 80% of the market and they are capitalizing on increased demand. The government contends that current shortages give the meat processors the cover they need to pad profits. The government also plans to fund small players in the meat processing business to increase competition.
At the same time, the Biden administration has ordered one billion rapid home COVID tests to be distributed for free through a government website. People can order four tests at a time, which will be delivered within seven to 12 days. The possible price controls on food and free government COVID tests are related. Both seek to correct a perceived failing of the private market, and both are likely to do more harm than good.
It’s not clear that meat processors are taking advantage of the markets.
Their profit margins have increased but from exceptionally low levels. The processors have been struck by work stoppages due to COVID infections among workers, which has led to less product processed and, therefore, lower prices to suppliers (the ranchers) and less finished product to end users. Meanwhile, consumers have more cash to spend and more time at home, so they are demanding more meat for home consumption just as product availability is falling short. Markets that fall out of balance between supply and demand find equilibrium through price. If we force processors to charge a lower retail price for meat, the end result won’t be that all meat consumers will pay less, it will be meat shortages: suppliers won’t be able to satisfy demand at the low price because they can’t process enough meat during COVID.
As for new processors coming online, there’s a reason that the industry has just a few players that tend to be large producers. Meat processing doesn’t have a high profit margin; it requires a large investment and involves a lot of regulatory oversight. If new businesses spring up just as we get back to normal, they likely will experience falling profits, which will lead them to sell to the large producers… which is how we ended up with just a few players in the first place.
There’s no doubt that the Biden administration wants to ensure home test availability.
But by purchasing one billion units, the government is stepping in front of retailers who make tests available today. Centralizing test availability won’t make tests easier to get, although they will be cheaper. We’re likely to see even less test availability in drug stores, where we can shop every day, often for 24 hours a day, because test suppliers will be selling their inventory to the government. While we will be able to get tests for free from Uncle Sam, we won’t be able to get them today. Given the long lead time for delivery, it’s likely that consumers will order as many tests as possible to stock up, even if they don’t need the tests. With the price set at the incredibly low level of “free,” there’s no reason not to order as many as allowable, which, like with low meat prices, will lead to shortages.
Can the government do it?
The common themes running through the meat industry and home test kit market are mismatched supply and demand and disrupted supply chains. Unless the government can dramatically increase the number of workers for the meat industry and can ramp up test production, then government intervention won’t alleviate problems in either market, it will simply shift the balancing mechanism from price to availability. Working with a retirement advisor can be more important than ever to help navigate during these uncertain economic times.
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The views expressed are those of Rodney Johnson and not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Rodney Johnson is not affiliated with Mutual Advisors, LLC or California Retirement Advisors.