The suffocation of the global minotaur

The supply disruptions affecting the US economy are not the result of “excessive demand,” “central planning,” or a lack of efficiency. Rather, it is that a logistics ecosystem that was developed to feed the beast of American consumption was not designed for a pandemic.

AUSTIN – A supply chain is like a Rorschach test: every economic analyst sees in it a pattern that reflects their own preconceptions. This may be unavoidable, as we are all a product of different upbringings, backgrounds, and prejudices. But some observed patterns are more plausible than others.

Consider the following sample of perspectives. For Jason Furman, former chief economic adviser to US President Barack Obama, and Lawrence H. Summers, former US Secretary of the Treasury, the current global supply chain problem is one of excessive demand. According to Furman, it is an “upper class” issue that reflects a strong economy. The “original sin” was the American Rescue Plan, which provided too much support through funds disbursed directly to American households.

For John Tamny of RealClearMarkets, the supply chain problem is one of “central planning”. If the administration of President Joe Biden had not issued directives to port managers, free markets would have solved it all. And for Awi Federgruen, a professor of management at Columbia Business School, the problem is inefficiency, whose remedy is to work harder and do more with less. Neither of these interpretations stands up to scrutiny.

The excess demand hypothesis fails at a glance. After all, there is no shortage of goods. The ships carrying the supply, 30 million tonnes, are now out of US ports and more are on the way. Producer prices have not risen much either.

Most of the “inflation” so far has been in energy (driven in part by a rebound from the pandemic depression) and in used cars and trucks, previously produced goods that are in demand due to semiconductor shortages affecting markets. car manufacturers. And no, that particular shortage is not the result of “excess demand” either.

During the pandemic, semiconductor manufacturers predicted a shift in the composition of demand, toward household appliances and away from automobiles, greater than actually occurred. Now they have too much of one type of semiconductor and not enough of another.

As for “central planning”, the mockery is to be expected in certain circles. The implication is that everything would be fine if only the Biden administration hadn’t been paying attention. Never mind that the scope of Biden’s intervention was simply to urge port managers to work “24 hours a day, 7 days a week” to unload the ships, an idea that one assumes would have already passed them by. head.

The point about “efficiency” is closer to reality, except that the problem is not too little efficiency, but too much. To be precise, the extreme efficiency of today’s global supply chains is also their fatal flaw. Well-managed ports are high-performance, low-cost models. They incorporate docks, rail heads, truck bays, storage areas, and heavy lifting equipment to accommodate the expected traffic. Building capacity beyond a small safety margin would be wasteful.

In normal times, any excess capacity sits idle, generating no income, while interest on the debt issued to build it still has to be paid. Over time, efficient operators will minimize excess and keep their docks and machinery out of the way. The spectacular success of global supply chains, thus far, reflects the relentless operation of this principle.

In the pandemic recession, much of the United States’ port capacity was briefly idle. When production came to a halt and container ships remained anchored in Asian ports, American trucks left their own empty containers to pile up in ports, waiting for the ships to take them back to Asia. But then demand picked up and production resumed, even accelerated, as households diverted income from services to goods. The ships carrying the goods began to appear again. But there was a new problem: to unload full containers, you must have a place to put them. According to press reports, the yards and warehouses were already full of empty spaces. Furthermore, trucks carrying new empty containers could not unload them and therefore could not accept new containers.

And so the shipments sit and wait. Partial solutions, for example stacking empty packages higher, can only go so far. Over a longer period, new docks and railways can be built. But all of that takes time, land (which turns out not easy to find), and heavy equipment, which in turn must come from somewhere, possibly by boat.

A supply chain is a complete ecology, a biophysical entity. It requires all its parts to run smoothly all the time. Failures are not isolated to one segment, nor can they be fixed by a simple price or rate increase, or by some rapid change in techniques.

Instead, they cascade through a system that was built in a specific way; a breakdown into one part can become a general one.

The author

James K. Galbraith, Trustee of the Economists for Peace and Security, holds the Lloyd M. Bentsen Jr. Chair in Government / Business Relations at the LBJ School of Public Affairs at the University of Texas at Austin. From 1993 to 1997 he served as Senior Technical Advisor for Macroeconomic Reform to the China State Planning Commission. He is the author of Inequality: What Everyone Needs to Know and Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe.

Copyright: Project Syndicate, 2020

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