When I was in MBA school at Chicago Booth, I had an epiphany. It just sort of hit me one day. I don’t recall the class, but think it was Operations. Operations are not, will never be my strong suit. I know enough to ask the right questions.
It occurred to me that each action on the supply chain from getting raw materials to the end of the chain when you ship finished goods has a probability distribution associated with it. My insight came most probably when we were discussing how Toyota manufactured cars. Each action of doing something is an experiment with data kept.
Where there is a probability distribution, there is variance. That means you can do things to make the variance smaller. When variance is smaller, you are more certain.
This is one reason why the Keynesians always miss on their estimates. It’s why global warming people are wrong consistently. It’s why the Covid scientists, in the beginning, were wildly wrong. Their initial assumptions are wrong, and that creates the wrong statistical distribution, which leads to the wrong statistics being spit out.
It’s like a horrific chain reaction.
Supply-side economics gets a terrible rap. The reason being is the economists that have the ear of the media detest it. It’s also more elegant and simpler than economics that tries to describe the demand side. It also works. Supply-side is where business gets done.
When you are focusing on demand, it always leads to bad outcomes. Demand is very difficult to forecast.
One reason we will have persistent inflation over the next couple of years is that the Biden Administration discounts the supply side. They are totally focused on demand. If you want to beat inflation, you must focus on supply.
It’s more than just unloading ships and making supply chains less brittle. That’s the easy stuff believe it or not. What you need to do is increase the supply of all goods and services. Enact policies that encourage expansion of supply. Moving the supply curve changes the price, especially given static demand.
From Biden’s first day in office, he’s enacted policies that limit supply. Supply is tighter. The oil market is one example. Limiting exploration doesn’t affect demand. It only has an effect on supply.
As I said in my prior post, they are morons. They think that people are puppets and they can pull the strings. Body parts are supposed to move. What happens when they don’t? They increase subsidies and continue to do things that decrease supply to try and get them to move.
Things like “Build Back Better” are hyperinflationary. Any logical person understands this. But, as we have seen the past couple of years, logic has gone out the window.
Supply… Just happens! You flip the switch, the electricity comes on. You go to the gas station, there’s gas in the pumps. You go to the store, the stuff you want to buy on the shelves. This all happens by some automatic magical process. The imbeciles in charge of our country are about at that level of primitive thought. Fortunately there is plenty of practical wisdom out there about what increases supply, largely by changing incentives, and making rules that facilitate it, and there may even be people who would like to be in power who would like to act consistently with that practical wisdom. Maybe some of them will even run for office? But for now we are stuck with the imbeciles.
It really matters. On November 3 crude oil was $37.44/barrel. Now it's over $75.