The Bullwhip Effect: The Economic Law Making Certain Costs Soar Now

Inflation Roaring Back? Used Car, Material Prices, shortages, gas lines pointing to a 1970s revival?

Joseph Serwach
May 12 · 4 min read
Image by Gerhard G. from Pixabay.

DETROIT — Feeling any “deja vu” about the 1970s? Crime is up. Job growth is lagging expectations. Shortages mean vehicles and commodities are more expensive, and suddenly we see the return of long lines at gas stations.

Critics (from the Right and Left) compare Joe Biden to Jimmy Carter while asking about the Bullwhip Effect.

“Having lived through the tumultuous 1970s, he is an unlikely candidate to repeat the mistakes of the decade — like inflation and high crime,” Matt Lewis lamented in The Daily Beast. “Those who fail to learn from history, the aphorism states, are doomed to repeat it. Welcome back, Carter!”

From the Right, Matthew Continetti at the Washington Free Beacon notes Biden became a senator in 1973, yet seems to have “a lackadaisical attitude toward inflationary fiscal and monetary policy. Was he paying attention? It was the great inflation of the ’60s and ’70s, caused in part by high spending, the Arab oil embargo, and spiraling wages and prices in a heavily regulated and unionized economy, that helped ruin the presidencies of Gerald Ford and Jimmy Carter.”

Used car prices have soared by as much as 52 percent after 25 years of annual gains of less than 2 percent. Meanwhile, unsellable new vehicles are piling up because they’re missing key chips.

Auto industry executives around the world are grappling with a chip shortage already hitting Detroit, the home base of General Motors, Ford, and Chrysler:

  • Dearborn-based Ford Motor Company says it may need to cut production by 50 percent until factories get an adequate supply of parts. “The semiconductor shortage and the impact to production will get worse before it gets better,” Ford CEO Jim Farley said, predicting Ford may build 1 million fewer vehicles.
  • Taiwan Semiconductor Manufacturing Co Ltd. expects to “catch up with customer demand by mid-June. TSMC Chairman Mark Liu told 60 Minutes: With “car chips particularly, the supply chain is long and complex. The supply takes about seven to eight months.”
  • Logitech CEO Bracken Darrell told CNN the global chip shortages could continue for another year.
  • The shortage has left a short supply of popular vehicles, including Ford’s F-150, the Jeep Grand Cherokee, the Chevy Equinox, Chevy Camaro, Chevy Malibu, and the Ford Mustang.

Auto sales fuel Detroit’s economy, but a host of shortages involving everything from lumber to cheese impacts the overall economy.

The famous Zingerman’s Delicatessen in Ann Arbor near the University of Michigan is grappling with a shortage of Tronchón, the cheese they usually use in popular sandwiches, driving up their costs for cheese.

Lumber prices, meanwhile, have tripled, adding $36,000 to the cost of the average new house, according to a new analysis from the National Association of Home Builders.

What caused that unprecedented leap in lumber prices? A record number of people deciding to add or upgrade decks during the 2020 summer of lockdowns.

Adding to the 1970s comparisons: A hot real estate market as a growing number of Americans move from urban areas (hard hit during the pandemic), opting for more remote careers and suburban lifestyles.

Imagine you’re driving a stagecoach full of people and cargo, cracking a small bullwhip to get your team of horses racing forward.

Similarly, tiny motions rev up racing economic engines, creating “the bullwhip effect.”

Numerous businesses worldwide “crack the whip,” buying up certain supplies to stay competitive and creating shortages locally and worldwide. Remember the lines for toilet paper?

The shortages are classic examples of the bullwhip effect, says John Taylor, associate professor of global supply chain management and chair of the department of marketing and supply chain management at Wayne State University in Detroit.

“Companies are having difficulty figuring out what their customers’ real demand is and are putting a lot of extra orders into the system,” Taylor told Crain’s Detroit Business. “Everyone is hedging their bets.”

Taylor added, “This all leads to a lack of clarity on what the demand signal really is. When you get a bullwhip, (businesses) begin to see out-of-stock conditions and then overflowing inventory. Industries are gyrating from having not enough product to having too much.”

The Consumers Price Index through March rose 2.6 percent over the past year, its biggest increase since August 2018, with bigger increases in food and energy costs. However, when adding in April 2021 data, the CPI leapt 4.2 percent over the past year, its fastest change since 2008. Economists had only expected a 3.6 percent increase.

“We’re seeing very substantial inflation,” famed investor Warren Buffet warned shareholders. “We’re raising prices. People are raising prices to us, and it’s being accepted.”

Michigan’s 5.1 percent rate remains higher than the 3.7 percent rate recorded before the pandemic but lower than the national unemployment rate of 6 percent.

Leuthold Group chief investment strategist Jim Paulsen warns there are “descent odds” inflation could grow out of control in coming months. Paulsen wrote investors that 1970s-style inflation would be the greatest threat to the future growth of the economy.

“I would put decent odds that it could get out of control and require the Fed and other policy officials to kneejerk to shut down the overheat (of the economy, ” Paulsen told CNBC.

Paulsen wrote investors that 1970s-style inflation would be the greatest threat to the future growth of the economy. However, he said inflation could be temporary with the bull market continuing for years.

Photo by Imelda on Unsplash

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