About securing sources of supply: what the government should repatriate.

Since the beginning of 2020, the world economy has been severely disrupted. Covid himself, Covid Lockdown, protests against Covid Lockdown, and most recently Vladimir Putin’s heinous invasion of Ukraine, have disrupted the flow of supplies to all world economies. Since we Americans are a major participant in this economy, we have certainly suffered some of the worst consequences of being disrupted on the global supply web. (The familiar term “supply chain” is very wrong. The global economy is much more like a giant web than a chain series.)

A common reaction to these supply disruptions is to demand that the government solve the problem by increasing the domestic production of those supplies that we now have problems importing. This ‘solution’ seems so simple! If we Americans made items here on our own coast that we now have difficulty obtaining from foreigners, we would not experience such difficulties when future epidemics and shooting wars begin. QED

Alas, in the case of much more economic-policy advice, the truth, which seems simple, is in fact simply wrong.

The specific products that we import, and the quantity that we import, for a good reason: the cost we incur to get these products from abroad is less than the cost we incur instead of producing these products internally. . And so if we produce these products internally, it will cost us more to acquire them. Instead, since it would cost us more to acquire these products, we would have to make less use of these products. But this is not the worst consequence we will suffer. Since we cannot produce more of these products at home without removing resources from the production of our other products and services, we may also lose access to other products and services.

When people call on the government to provide us with more masks, more drugs, more ventilators, more steel, more of these ‘critical’ inputs and more of those ‘essential’ items, many of these people find it easy. . Unknown is the fact that we have to sacrifice a relatively large number of other products and services for the successful fulfillment of their aspirations. But even those who are aware that this cost is inevitable speak with strange, blind faith and write that the benefits we will achieve through the successful fulfillment of their aspirations will be worth the price.

In reality, however, the benefits – though often real – are very likely to be Less Compared to the cost

The main reason why the benefits of forced repatriation of the ‘supply chain’ (as it is sometimes called) is likely to be affected by the cost is that there are already strong incentives to ensure that private companies are best protected against supply disruptions. Any government intervention would then undermine these best personal arrangements.

Consider, for example, an automobile manufacturer. The managers of these firms are aware that, relying on only one steel supplier or microchip supplier, compared to multiple suppliers, the company is at risk of finding itself one day without key input. Further, these managers have a keen incentive to accurately identify these risk levels, as well as to accurately assess the consequences that will actually occur if their firm’s supply is actually disrupted. So these managers must consider diversifying the source of supply of the firm. Whether they will do so – and if so, the extent to which they pursue such diversification of the firm’s supply sources – depends on the cost of diversification. And the cost of diversifying the source of supply depends, consequently, on the price difference that the firm has to pay to different suppliers.

If sheet metal can be purchased from Smith Steel Co. for 500 500 per tonne and the same quality sheet metal can be purchased from Jones Steel Inc. for 5 510 per tonne, the automobile manufacturer may well decide to buy a significant portion of its sheet metal. Jones is successful. But the greater the difference in price charged by Jones than the lower price charged by Smith, the more reluctant the automaker would be to buy sheet metal from Jones. The price difference can be so great that the automaker chooses to take the risk of acquiring its sheet-metal supply from a single source.

Suppose this price difference is so great that the automaker voluntarily carries the risk of buying all its sheet metal from Jones. Further, suppose that one day a fire destroys most of the productive capacity of Jones. Can we conclude – since we are shutting down the automaker indefinitely, or shaking frantically to buy sheet metal from other companies at much higher prices in the spot market – that the automaker was wise to rely solely on Jones for all its sheets? No- metal supply? No. When the automaker decides to rely exclusively on Jones, it determines that the much lower price charged by Jones compensates for the risk of relying on a source of sheet-metal supplies.

It is possible that the amount of money that the automaker has saved year after year by exclusively purchasing sheet metal from Jones exceeds the amount lost today – or must be spent – as a result of Jones’ sudden failure to supply sheet metal. If so, the automaker made the right call despite its current unfortunate condition.

But even if the amount of money saved by the automaker, which relies exclusively on Jones for sheet metal, is less than the cost of facing a supply cut off from Jones, the automaker’s earlier decision should be evaluated as correct. . The fact that the automaker is now suffering the unfortunate consequences of suddenly being unable to get supplies from Jones proves that the automaker was not wise to rely solely on Jones to pay an insurance company a few thousand dollars in compensation. Customers for fire damage prove that the insurance company was not wise to sell fire insurance to those specific customers.

We all have to take risks for the unknown of the future. Per The course of action involves some risk. Yet even the most prudently chosen steps sometimes reveal themselves when over time we would be rejected if we had a better knowledge of the future.

The unusually heavy challenges, misfortunes, and difficulties that manifest themselves today are not necessarily proof that yesterday’s decisions – the decisions that led to today’s problems – were wrong.

This fact should be borne in mind whenever we see domestic companies facing disruption in their sources of supply. Each of these firms had a strong incentive to weigh the costs of diversifying their sources of supply as opposed to the convenience of doing so. There is no good reason to assume that these companies usually made their sourcing decisions unreasonably or unjustly.

Even politicians, pundits and bureaucrats – none of whom risk their own money in such an assessment – have less reason to assume – that private firm owners and managers know better or less how much or how little source of supply for a particular business. ‘Should. For politicians or pundits, when supplies from abroad are disrupted due to war preferences or cowardly lockdowns, it is not easy that government tariffs or subsidies should have been used to avoid disruption. Yet the fact that private companies themselves – at their own financial risk – have chosen not to source their supplies in a way that is later approved by politicians and pundits is strong evidence that these politicians and pundits are less likely to publicize their proposed plans. The best interests of the country in the long run.

Background, as they say, 20/20. (In fact, I suspect that although at least the recent past is actually more visible than the future, in reality it is closer to 20/40. This is a matter for another time.) The fact that scholars and politicians can take stock of the current situation and describe How much better it would have been if different choices had been made in the past is insignificant evidence that these individuals should be trusted with the ability to ignore the decisions of traders regarding future sourcing of supplies.

In short, the government is too weak to take supply chain repatriation seriously. Exclude.