The hits just keep coming. First, lumber prices exploded. Second, there was a terrible jobs report. Third, there was a gas shortage. These are all SAD storiesSupply And Demand. They are also, of course, stories about adaptation, adjustment, resilience, and unintended consequences.
First, consider the lumber market. As my AIER colleague Peter C. Earle points out, lumber prices at the beginning of May 2021 were about six-and-a-half times what they were at the beginning of April 2020. On the supply side of the lumber market, lockdowns have limited production. In August, the Financial Post reported that A plague of tiny mountain pine beetles...has already destroyed 15 years of log supplies in British Columbia, enough trees to build 9 million single-family homes. Good, old-fashioned protectionism is at play, as well, but The Wall Street Journal reports that tariffs and trade restrictions on Canadian lumber dont play that large a role.
On the demand side, the US is in the middle of another housing and construction boom. Zillow is calling it The Great Reshuffling and reports that about 11% of Americans have already moved during the pandemic. My family is among them: we moved this past fall in search of more space, home office space in particular. Not long after moving, we added stairs to our back deck in no small part because we expect to be spending more of our time with friends outdoors. Moving, new building, and remodeling is being driven at least in part by low interest rateswe knocked our rate down from 3.75% to 2.49% when we movedand, I suspect, aggressive Fed purchases of mortgage-backed securities during the pandemic. The Fed has added about $800 billion in mortgage-backed securities to their holdings since March 11, 2020:
It will be a while before people have done the empirical work that will untangle and measure the contributions of these different causes, but at a fundamental level, its a Supply And Demand story. The massive increase in lumber prices, of course, has some people worried, but as Thomas Sowell constantly reminds people, There are no solutions. Only trade-offs. People adjust to the new reality by making incremental substitutions that might not be terribly revolutionary or that might not be especially easy to see but that still reflect exactly how people respond to the signals they are getting from rising prices. High lumber prices say Are you sure you need to do that project right now? Sometimes, the answer is yes and other times the answer is no. We considered buying lumber and building a doghouse, but at current prices, were going to delay that project for a while.
Second, there is the labor market. The rhetorical battle is between people outraged by the laziness and moral failings of people who dont want to work anymore and people outraged by the rapacity and callousness of people who expect others to go back to work for low wages. Maybe it is a sudden explosion of laziness. Maybe it is a sudden development of class consciousness that finally has us on the brink of Solidarity Forever.
Or maybe its a change in peoples incentivesspecifically, the extension of high unemployment benefits. As David R. Henderson points out, Paying people an extra $400 a week as long as theyre unemployed is a bad idea. In a post for EconLog, Henderson notes that he got this wrongits only $300, but with these extra benefits, it shouldnt be surprising that people arent jumping at employment opportunities. In his article on unemployment in the Concise Encyclopedia of Economics, Lawrence Summers explains:
...government assistance programs contribute to long-term unemployment...by providing an incentive, and the means, not to work. Each unemployed person has a reservation wagethe minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.
Why? A sign at a local fast food place advertises starting wages of $11 per hour. That doesnt sound like much, but two people each working 35 hours per week at that rate would have a household income of $40,040. Thats about 80% of the Alabama median household income of about $50,000 and well above the federal poverty guideline of $26,500 for a family of 4.
According to this unofficial unemployment benefits calculator, someone in Alabama who earned $20,020 by working in fast food would, upon becoming unemployed, be eligible for $193 per week in unemployment benefits for 20 weeks. If you add to that the additional $300 per week in the new stimulus bill, you get $493 per week. Is it any surprise that fewer people want to work 40 hours a week at $11 an hour when they could take home about $50 a week more than that by remaining unemployed?
Scott Sumner offers an interesting hypothesis: Because millions of unemployed workers in low pay service sector jobs earn more on unemployment than they did on their previous jobs, and because most of those jobs are unpleasant, employment will likely remain quite depressed all summer, before bouncing back in the fall. Alabama is ending the payments on June 19, but thats still more than a month from this writing of reservation wages propped up by high unemployment benefits.
Third, a cyberattack shut down an oil pipeline. This led to panic buying at gas stations, a tweet from the US Consumer Product Safety Commission saying, Do not fill plastic bags with gasoline, the usual social media hand-wringing about people panic-buying gasoline and storing it stupidly, and, of course, the usual sabre-rattling about price gouging, which Ive previously called knowledge embargoes.
Once again, supply and demand does the explanatory workand if we had left the mechanism alone and let prices rise after the pipeline shutdown, we wouldnt have had the mess we were in (or, it must be admitted, the entertaining memes). People who dont pay attention to current events would get the message that they need to conserve gas pretty quickly, and we wouldnt be dealing with shortages. Its a minor inconvenience, but when your gas light comes on (as mine did the other day), its cold comfort to pull into a gas station and discover that there is no gas at $2.89 a gallon rather than some gas at $5 a gallon. A station across the street had gas, fortunatelybut they had run out of premium (which I dont need for my Toyota Corolla) and customers were limited to $20 purchases. As economists emphasize whenever price gouging rules kick in, ignoring what supply and demand analysis has to teach us usually means making the problem worse rather than better.
An apparently apocryphal curse says May you live in interesting times. Alas, we do. We neednt be confused, however. I tell my students that I love economics because it gives me a simple set of tools that makes a lot of sense out of seemingly-disparate situations. Are we wondering what is going on with lumber? Its a SAD story. Labor? Also a SAD story. Gas? Another SAD story made genuinely sad by politicians ignoring the storys lesson. While I wish I could say Theyll know better next time, it saddens me to say They wont.