The effect of shipping upon inflation
We do tend to think that this is a really bad idea.
Weber has highlighted the case of shipping companies, which profited from a jump in the demand for goods, including medical supplies, during the pandemic. Can it be true that the only way to overcome a rise in shipping costs when the next crisis hits will be to increase the number of container ships, even though that will take years and no government is going to build them and park them in a port ready for an emergency?
She reckons shipping costs added a full two percentage points to inflation between 2021 and 2022. Surely the solution is for governments to take a large slice of the profits and use it to subsidise prices?
There was indeed a jump in shipping costs. 500%, 600%, that sort of level to get a container across the oceans. As the source itself, an IMF paper, says:
The pandemic spike in shipping costs is more than a year behind us, and our research suggests that we should already have seen most of its inflationary impact by now. Our estimates, moreover, are symmetric, such that declines in shipping costs would tend to bring inflation down in the following year. The implication is for the big moderation in shipping costs in 2022 to contribute to a reversal of inflationary pressures.
Things change, prices change, then things get back to normal as the effect of price changes work through the system. Sounds pretty good to us. In fact that looks like the price system working to us.
At which point the suggestion is to cripple the price system by confiscating righteously earned profits and using them to subsidise. Which is, as we say, something we think is a really bad idea. If we’ve a system that works then why wouldn’t we allow it to, well, umm, work?
Those excess profits being why it does work of course. For the increase in shipping capacity comes not from people launching new ships - takes two to three years from ordering a new one to being able to sail it away. It comes from owners not scrapping old and inefficient ships. Things that are no longer profitable to sail or charter because it’s being outcompeted by newer, larger, more efficient shipping stock. But which can indeed still run for another few years if only the price of shipping rises. Therefore it becomes the scrap yards that are empty as that old stock is run for a little longer thereby increasing shipping capacity and bringing shipping costs right back down again. This is such a well known feature of the market that even the European Union has noted it (last para, page 2).
As ever, the cure for high prices is high prices. Yet the suggestion is that we should short circuit the very process that makes this work? As we say, a very bad idea indeed.
Tim Worstall