Freedom in Prices Ends Shortages. Even with Toilet Paper.
In a column containing a rebuke of the Mises Institute, Medium Marker writer Will Oremus has come up with what he fervently believes is The Explanation for the empty shelves in big-box and grocery stores that once had toilet paper for sale. There is a lot at stake in this debate, for if Oremus and many others are correct and economists and basic economics cannot explain the simplest exchange phenomena such as surpluses and shortages, then economics sits on the same plane as astrology and is no longer a credible discipline, nevermind a social science.
In "What Everyone’s Getting Wrong About the Toilet Paper Shortage," Oremus cites explanations such as "anticipatory anxiety," "zero-risk bias," and herd mentality. With respect to the Mises Institute, he takes particular aim at a March 17 post by Sandra Klein, "Anti-Gouging Laws Are the Reason There Is a Toilet Paper Shortage," which he thinks is off the mark, at the very least. No details are provided as to why Klein is wrong, just a figurative contemptuous eye roll at what those wacky libertarians will come up with these days.
So what are PhD economists missing that Will sees?
In short, the toilet paper industry is split into two, largely separate markets: commercial and consumer. The pandemic has shifted the lion’s share of demand to the latter. People actually do need to buy significantly more toilet paper during the pandemic—not because they’re making more trips to the bathroom, but because they’re making more of them at home. With some 75% of the U.S. population under stay-at-home orders, Americans are no longer using the restrooms at their workplace, in schools, at restaurants, at hotels, or in airports.
He then proceeds with a litany of details including estimates of increases in demand, unused toilet paper inside office buildings and Starbucks shops and the inability to redirect such commercial paper to Kroger or Walgreens, the differences between retail consumer toilet paper and institutional toilet paper, the myriad difficulties involved in switching commercial production to retail production, and high volume coupled with small profit margins.
What does all this have to do with empty retail shelves? In terms of Economics 101, zilch. No increase in demand anywhere or in any way can explain empty store shelves, no matter how much Oremus and legions of other similar-thinking pundits are unshakably convinced of the contrary.
First, demand and supply are always shifting to some extent in most markets (hurricanes, fires, a poor crop of trees, recession, changes in markets for production factors, ad infinitum). However, supply and demand can both stay as still as statues and a shortage generated. All it takes is for a maximum below-equilibrium price to be declared and enforced by a government or other authority for a particular market and a shortage will appear. Blood donors used to be paid for blood until the practice was ended and an effective price ceiling of zero dollars and cents imposed. Now there are chronic shortages (a severe one now) between blood drives.
The retail price of toilet paper not being able to adjust upward to market-clearing levels explains today's empty shelves, period, end of story. An increase in demand can double the price of a six-roll package ($6 to $12) and retail shelves will stay full. Prices staying at $6 means that quantity demanded exceeds quantity supplied (AB, QD-QS), giving us empty shelves.
Price-gouging laws, as mentioned by Klein, play a role of course, but even in jurisdictions where they do not exist or enforcement is lax, the Twitter and Facebook mobs, online news sites, and television news casts leaping to thrash any retailer raising prices to more accurately reflect new market conditions impose an effective ceiling. The price rise is spun as greedy stores "taking advantage of a crisis to gouge consumers." Ask coastal convenience store owners who just saw a hurricane move through their town. They can keep their shelves full selling a $2 bottle of water for $5, but it's not worth being targeted by sensational media and publicity-hungry state attorney generals where applicable.
Hence it's no accident that retail company policy (explicit and implicit) from Publix, Kroger, Wal-Mart, and Target in the US to Coles in Australia to Tesco in the UK is to let shelves go empty. It's not worth the adverse publicity, and panic stockpiling by consumers will be blamed, not retail stores. Misallocation is a reality. Neurotics with closets full of toilet paper are still out driving from store to store to get in line in front of consumers who do not even have a sheet of it left at home.
Further confirmation of the adverse effects of price inertia are found in the current shortages of pet food, among many other items, which are not explained by need-based increases in demand. Pet owners certainly aren't feeding their animals more meals at home during the COVID-19 lockdown than they fed them before it was implemented. If you read Oremus's article carefully, he concedes that some panic stockpiling is occurring, so it's hard to see what the point of his article is. Regardless, price inertia is causing the shortages in pet food, not increases in demand motivated by either panic or genuine need from being at home more.
Gasoline Prices in 1973: Different Forces, Same Result
In 1973, OPEC (Organization of the Petroleum Exporting Countries) reduced the world supply of oil. As a result, retail supplies of gasoline were reduced, and days later long lines formed at gas stations. The public blamed OPEC for the lines but overlooked the price ceiling on gasoline, which created the shortage (AB, QD-QS in the graph below) which in turn led gas station owners to implement a ten-gallon limit per purchase.
Sound familiar? Of course, as quantity limits on "essential items" are pervasive in today's supermarkets and big-box stores during the current COVID-19 lockdown.
Again, disequilibrium brought about misallocation of the good. Neurotic drivers with ¾ of a tank of gas who wanted to top off were in line in front of drivers whose gas tanks were empty, with engines running on gas fumes. When did the long lines at gas pumps disappear? Harvard economist N. Gregory Mankiw:
Eventually, the laws regulating the price of gasoline were repealed. Lawmakers came to understand that they were partly responsible for the many hours Americans lost waiting in line to buy gasoline.1
"Partly" is Mankiw's usual charitability to a fault. But in other words, at the higher price, the neurotics and others who should not have been in line stayed away and market efficiency returned.
In conclusion, it appears that economics is safe for now and will not become the new astrology, while it is Medium's Marker which seems to have some rethinking to do. Attributing shortages to increases in demand is ironic for a new publication dedicated to "Making you smarter about business." A good move might be to hire some writers who actually understand Economics 101 before telling PhDs in economics that they don't understand how markets work.
- 1. Mankiw, N. Gregory, Principles of Microeconomics, 8th ed. (Boston: Cengage, 2018), p. 115.