The Choking of the Global Minotaur: James K. Galbraith

The supply disruptions plaguing 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: each economic analyst sees in it a pattern reflecting his or her own preconceptions. This may be inevitable, since everyone is a product of differing educations, backgrounds, and prejudices. But some observed patterns are more plausible than others.
Consider the following sampling of perspectives. For Jason Furman, formerly US President Barack Obama’s chief economic adviser, and Lawrence H. Summers, a former US secretary of the treasury, today’s supply-chain problem is one of excessive demand. According to Furman, it is a “high 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 US households.
For John Tamny of RealClearMarkets, the supply-chain problem is one of “central planning.” Had President Joe Biden’s administration not sent directives to port managers, free markets would have sorted everything out. And for Awi Federgruen, a professor of management at the Columbia Business School, the issue is inefficiency, the remedy for which is to work harder and do more with less.
None of these interpretations withstands scrutiny. The excess demand story fails on a glance. After all, there is no shortage of goods. Ships bearing the supply – 30 million tons of it – are sitting right now outside US ports, with more on the way. Nor have production prices risen by much. Most of the “inflation” so far has been in energy (driven partly by a rebound from the pandemic slump) and in used cars and trucks, previously produced goods that are in demand because of the semiconductor shortage affecting automakers.
And no, that particular shortage is not the result of “excess demand,” either. During the pandemic, chipmakers predicted a bigger shift in the composition of demand – toward household gizmos and away from cars – than actually occurred. Now they have too much of one kind of chip and not enough of another.
As for the “central planning” jibe, that is to be expected from certain circles. The implication is that all would be well if only the Biden administration had not been paying attention. Never mind that the extent of Biden’s intervention was merely to urge port managers to work “24/7” to get the boats unloaded – an idea that one assumes would have already crossed their minds.
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The point about “efficiency” gets 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-run ports are models of high throughput and low costs. They incorporate docks, railheads, truck bays, storage areas, and heavy-lifting equipment to suit the traffic they expect. Building capacity beyond a small margin of safety would be a waste.
In normal times, any excess capacity sits idle, yielding no revenue while interest on the debt issued to build it still must be paid. Over time, efficient operators will minimize the excess and keep the docks and machinery they have humming away. The spectacular success of global supply chains – up until now – reflects the relentless operation of this principle.
In the pandemic slump, much of America’s port capacity was briefly idle. When production stopped and container ships remained anchored in Asian ports, American trucks left their own empty containers to pile up at the ports, awaiting ships to carry them back to Asia. But then demand revived and production restarted – even accelerated – as households diverted income from services to goods. The ships bearing the goods started showing up again. But there was a new problem: to offload full containers, one must have a place to put them. According to press reports, the yards and warehouses were already filled with empties. Moreover, trucks bearing fresh empties could not unload them, and thus could not take on new containers.
And so, the cargoes sit and wait. Partial solutions – stacking the empties higher, for example – can go only so far. Over a longer period, new docks and rail lines can be built. But all of that takes time, land (which is not easy to find, it turns out), and heavy equipment, which itself must come from somewhere, possibly by ship.
A supply chain is an entire ecology, a biophysical entity. It requires all of its parts to function smoothly all of the time. Failures are not isolated to one segment, nor can they be fixed with a simple increase in prices or fees, or by some rapid change in techniques. Instead, they cascade through a system that was built in a specific way; a breakdown in one part can become a general one.
In his remarkable 2011 book, The Global Minotaur, the economist (and future Greek finance minister) Yanis Varoufakis compared the United States to the mythical monster that lived in a labyrinth from which nothing that entered could escape. For 40 years, the US economy has taken in the consumption goods produced by Japan, South Korea, China, and others. To sustain the insatiable Minotaur, the world built a global labyrinth of ports, ships, more ports, warehouses, storage yards, roads, and rails.
Then, one day, the Minotaur got sick and missed a meal. The next day, he sought to catch up by eating four meals, only to find that his gullet was not quite wide enough to get them all down. So, now the Minotaur sits, choking and helpless, hoping the blockage will clear. If it doesn’t, the consequences could be grave. If choking the beast in this way had occurred to Theseus, he might not have needed Ariadne, her sword, or her ball of yarn.
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Nov 11, 2021 Daron Acemoglu
Nov 11, 2021 James K. Galbraith
Nov 11, 2021 Lucrezia Reichlin
Nov 11, 2021 Shashi Tharoor
Nov 8, 2021 Kristen Ghodsee & Mitchell A. Orenstein
Writing for PS since 2015
22 Commentaries

James K. Galbraith, a trustee of 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 1993-97, he served as chief technical adviser for macroeconomic reform to China’s 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

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This is no great mystery, what constitutes the current supply chain woes. When consolidation happens at a massive scale (90% of useful capacity is consolidated in 10 hands globally) driven by complete lack of global regulation in the shipping space; this is just the tip of the iceberg, from carriers to Port Terminal operators, who have also simultaneously consolidated into a handful, the dance of the Titans is complete.

But this disruption exists, because it can be financed.

The consolidation extends to sharing of parcel space in every conceivable element of transit, use of slow movement to reduce cost, allowing special conditions that cannot be given by smaller players like keeping the transit in abeyance, including storage and space use, the entire network effect of large consolidation is fully in view.

Massification of container shipping ( average number of TEUs) is now at 10000 per vessel, that makes asynchronism a reality, which sends shock waves to the entire supply chain space on both sides, that the rest of the supply chain must endure. The cost of all this is finally going to be borne by the consumers.

Add to this the posturing by the giants of retail and on-liners who prepone and postpone at will, raising the disruption by a few more notches in those goods.
Persons are paying close attention to inflation and any lapse or oversight attributable to a lack of scrutiny is not easy to identify. There is little incentive to predict future dynamics of prices. Still, some zero in on specific issues for varied reasons, maybe preconceptions, and so there is a chance that the following will not regurgitate excessively.

Multiple narratives pertain to trucking. There are claims of a shortage of drivers, others write that working conditions are dominant and deterrent as an issue. Perhaps a lowering of the entry age for drivers, from 21 to 18 years, would increase the supply of those who use commercial licenses and adhere to stringent standards; as compared to staff that is sometimes paid a lower wage to maneuver a company van or similar, as within a regional constituency?

Younger persons may help alleviate some supply chain pressure(s)—which could have a moderating effect upon industry wages. However, if working conditions prevail, difficulty could be perpetuated. Additionally, fuel prices are up.

There are also products such as synthetic gypsum; which might be substituted away if its cost goes up over time. The lumber market appears to have corrected. Copper’s has not.

The dollar has strengthened recently and we use it to price such commodities. A weakening dollar is not currently an inflationary worry. It is not an observation that Jerome Powell is any kind of shill or stooge, for those who would devalue—the Trump administration maybe discernable from Coxey’s Army's message of "Death to interest bearing bonds" in that regard–whether he is clear choice for his job or not.

Excess demand is not emphasized in the piece above. At any rate, material indicates that no projects are shovel-ready. Legislated infrastructure spending is probably imminent. Therefore, support of a domestic labor market through future years, and associated demand, is likely.

How federal spending balances in relation to trucking, copper and the US dollar could be consequential.
I supervise a number of businesses in the retail industry, and the wages we pay our workers have increased over the last year by at least 50%. This is one principal reason driving our price increases. Your analysis, though insightful and informative, completely overlooks this factor, and puts the blame on logistical transportation difficulties.
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Some extraordinary economists aim to economize knowledge, while others – including Thorstein Veblen, John Maynard Keynes, and Albert O. Hirschman – have sought to broaden it. But as three biographies show, the latter group’s efforts have been largely written out of the economics discipline.
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