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The economics of toilet paper shortages is the same as bank runs. [thread]

Even if you’re not freaked out about a pandemic, you worry that everyone else is & they’ll stockpile to 🧻, & you don’t want to be the left paperless. So you stockpile to avoid being shut out by others.
So you run and get toilet paper not because you need dozens of rolls, but because you fear that others are going to stockpile leaving none for you.

And they’re buying because they fear (correctly) that you’re running to the store to stock up, leaving none for them.
So you run and get toilet paper not because you think society is about to crumble, but because you fear that others fear this. Fear of a run on toilet paper — like a run on banks — is enough to create an actual run.

And when the runs start we need help. (pun intended)
The result is that shelves are empty. Capitalism fails, and we all start to worry about 💩 🖐.

The whole mess is created by fear, but the reality of toilet paper shortages means that fear is rational.
The problem is we have two equilibria:

1. Normal times: Everyone believes there will be 🧻 so no-one stockpiles.
2. Panic times: Everyone fears shortages, which leads them to stockpile, which creates shortages.

That’s happening now.
Here’s how we solve the self-fulfilling panics that cause bank runs:
1. The FDIC insures your money, so even if everyone else is running to the bank, you don’t have to try to beat them.
2. Lender of last resort: The Fed lends to banks facing these runs, so they can keep operating
All of this says that what we need right now is a government-backed Strategic Toilet Paper Reserve.

That Reserve makes a promise that even if your local Costco an out, you still have the right to buy 2 rolls per week from the government’s stockpile.
The Strategic Toilet Paper Reserve removes the incentive to stockpile. It ensures that even if you see others running to the store to stockpile toilet paper, you no longer need to try to run to beat them. You can relax, knowing that you’ll still be able to wipe your bum.
So the economics of bank runs really is the same as the economics of toilet paper shortages. Both point to problems with unfettered markets. And both have problems that can be solved with clever government regulation. The only difference is what’s on the paper.
So, ummmm... that’s the economics of deposit insurance. 💩 💩 💩 #sorry #notsorry ( Credit for the eco-pun: @ProfMKavanagh)
Career highlight: The BBC had me on for ten minutes discussing the urgency of a Strategic Toilet Paper Reserve. (Click through: Starts at 16 minute point.)…
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