Supply chain lessons from Long Beach

What port delays tell us about the pre-pandemic problems of the global economy

Rana Foroohar 

© Matt Kenyon

I know you’re hearing a lot about something called ‘supply chains’,” said US president Joe Biden last week, in a speech explaining to Americans why their sneakers, toasters, bicycles and bedroom furniture were taking so much longer to get to them these days.

It is highly unusual for the leader of the free world to spend so much time talking about logistics and value chains to the general public. 

But this is an unusual moment, in which supply-chain snags and labour squeezes have resulted in port backups for weeks or even months not only in the US, but the UK, Europe and many other places around the world.

Much of it is down to the Covid-19 pandemic, of course, and the asynchronous national recovery cycles that have led to a mismatch between supply and demand for various products. 

Those cycles should eventually smooth out as the virus abates. 

But port disruptions have shed light on bigger problems in the global economy, from incompatibilities of skills and jobs, to an over-reliance on China as the provider of any number of crucial goods.

The Los Angeles and Long Beach port backups have quickly become a major political issue in the US, given that they represent 40 per cent of the country’s entire cargo shipping imports. 

But many people are taking the wrong lessons — that dock workers cannot be found because of government stimulus cheques providing a disincentive to work, or that we are headed back to a decade of stagflation, or that the trade landscape will end up looking either like the laissez-faire 1990s or the beggar-thy-neighbour 1930s. 

I doubt any of that will turn out to be true, but there are several different, better lessons to be learnt from the current troubles.

First, supply-chain glitches are not solely responsible for the problems finding labour in some sectors. 

Technology disruption and policy choices have also played a role. 

Jobs such as dock work and truck driving, for example, were in short supply in the US well before Covid, in part because many training programmes had been shuttered in recent years, and people were moving away from these positions after being long warned that automation and self-driving cars would take their jobs.

Despite the slower-than-expected rollout of autonomous vehicles, they are right to think that their jobs will be disrupted by technology. 

Many tough, physical jobs have been filled by machines and robots in recent years, and many more still will be. 

The economic and political fallout of the pandemic only fuels the trend. 

Witness Italian winemakers, who can no longer find immigrants to work their fields, buying automated grape pickers, or French farmers investing in agri-bots to harvest crops. 

Other white-collar work won’t be immune from automation either, as countries and companies hit by the pandemic look for ways to save costs.

Indeed, with the exception of very high-end knowledge work and lower-end, close-contact care work, it’s hard to see where long-lasting labour leverage lies unless there are bigger structural shifts in the US economy.

While some market watchers fret about a small amount of wage inflation, a new Cornell study argues that, in the US, underemployment is likely to continue to pose challenges in years to come. 

Its author, Daniel Alpert, reasons that unless more goods production for the country is done locally, having humans at the high and low end of the market, and software in between, is the new normal.

Of course, if US policymakers and businesses had been smarter, they’d have set up German-style work councils and a furlough system so the public and private sectors and labour could work together to share the benefits of the recovery, but also to deal more quickly with the downside risks of Covid-related disruptions. 

Germany hasn’t been immune to port disruption, but its Kurzarbeit short-time working scheme has done better at smoothing the ups and downs of recession and recovery over the past couple of decades than the US model. 

As it is, the Anglo-American labour model of quick hiring and firing has led to a situation in which the president has to mitigate fights between business and unions to get ports running 24/7. 

This model clearly fails the post-pandemic resiliency test.

So do highly complex global supply chains, which had been pushed to their obvious limits even before Covid. 

Years before Biden’s “Buy America” or Donald Trump’s tariff wars, a number of big multinationals were scaling down complex global supply chains and restructuring production to be “increasingly concentrated in regional and local hubs closer to end markets”, as a 2016 OECD report put it. 

This was for many reasons, from changing emerging-market cost structures, to the growing digitalisation of manufacturing to the innovation benefits found in co-locating research and development within factories, and a realisation of the former underestimation of the costs of globalisation.

One of those costs stems, of course, from too few countries and companies controlling too much value. 

One of the best things that we could do to avoid port pile-ups in the future is to institute what anti-monopoly advocate and Open Markets Institute founder Barry Lynn has dubbed a “rule of four” — that no more than 25 per cent of any crucial supply should be sourced from one place, or come into one port.

It’s an easy-to-understand rule free from any nationalism. 

And it might help us get our Christmas presents on time in the future. 

China’s Economy Rests on Three Shaky Legs

There is little sign so far of a major shift to support growth, but that may reflect overconfidence on Beijing’s part

By Nathaniel Taplin

Coaxing buyers back into the property market may be tough without a more decisive resolution to the problems with Evergrande. The company’s headquarters in Shenzhen. / PHOTO: NOEL CELIS/AGENCE FRANCE-PRESSE/GETTY IMAGES

China’s economy has been taking it from all sides: power outages, the property debt fiasco, snarled shipping lanes and, a bit further back, a brief but damaging Delta variant outbreak. 

Sharply weaker growth last quarter at 4.9% from a year earlier was expected. 

And given how modest countercyclical support has been so far, next quarter will almost certainly be worse.

What happens in 2022 remains uncertain but appears to depend primarily on three things: how fast Beijing dials back its squeeze on the property sector, whether consumers finally perk up again, and whether exporters can hang on to recent market-share gains. 

Power outages remain a drag, but efforts to restart shuttered coal mines and raise power prices will help significantly.

On property, there have been inklings recently of a more permissive stance—some large banks have been ordered to accelerate mortgage approvals, according to Bloomberg. 

But credit growth was still tepid in September, and the sharp downtrends in property investment, sales and starts remain intact. 

Since developers’ other financing channels have constricted so sharply, the key to turning things around is sales—but coaxing skittish buyers back into the market may be tough without a more decisive resolution to Evergrande’s woes. 

Sales of residential floor space were down 16% from a year earlier in September.

The news on consumers and trade looks better. Chinese exports remain robust, and retail sales bounced back in September to 4.4% growth year-over-year, up from 2.5% in August. 

The real risk for 2022 may therefore be that Beijing concludes that its strategy of doubling down on exports and high-tech industry, while mercilessly squeezing property and high-value service sectors like internet technology, is working well enough—and then finds itself overtaken by events.

One possible threat is an export reversal. 

Chinese exporters, despite rising costs, remain very competitive. 

But they have also benefited from the Delta wave that closed many other Asian factories and prolonged the shift in wealthy economies away from spending on services and toward goods. 

In 2020, net employment gains in Chinese industry outpaced those in services for the first time since 2012, a pattern that may very well have been repeated this year. 

Some of that shift is destined to be transient, however, as wealthy economies finally reach vaccination thresholds high enough for service spending to really recover, and overseas competitors ramp back up manufacturing.

In theory consumers still have significant scope to increase spending: on a per capita basis, Chinese residents saved about 34% of their disposable income in the first nine months of 2021, up from an average of about 32% from 2017 to 2019. 

But if the property market remains in the doldrums or other sources of jobs growth like exports fade, consumers may remain cautious, too.

So far Beijing has managed to avoid major turbulence from the property downturn, but it is early days yet. 

If more significant policy easing doesn’t arrive soon, there is a serious risk that most of the major drivers of Chinese growth—property investment, consumption and exports—all find themselves pointing downward together by mid-2022.

A New Global Economic Consensus

Now that the COVID-19 pandemic has highlighted the deficiencies of economic deregulation and market liberalization, a new policymaking paradigm is emerging. But its success depends on concrete reforms and the creation of new mission-driven institutions.

Mariana Mazzucato

LONDON – The Washington Consensus is on its way out. 

In a report released this week, the G7 Economic Resilience Panel (where I represent Italy) demands a radically different relationship between the public and private sectors to create a sustainable, equitable, and resilient economy. 

When G20 leaders gather on October 30-31 to discuss how to “overcome the great challenges of today” – including the pandemic, climate change, rising inequality, and economic fragility – they must avoid falling back on the outdated assumptions that landed us in our current mess.

The Washington Consensus defined the rules of the game for the global economy for almost a half-century. 

The term came into vogue in 1989 – the year that Western-style capitalism consolidated its global reach – to describe the battery of fiscal, tax, and trade policies being promoted by the International Monetary Fund and the World Bank. 

It became a catchphrase for neoliberal globalization, and thus came under fire – even from its core institutions’ leading lights – for exacerbating inequalities and perpetuating the Global South’s subordination to the North.

Having narrowly avoided a global economic collapse twice – first in 2008 and then in 2020, when the coronavirus crisis nearly brought down the financial system – the world now confronts a future of unprecedented risk, uncertainty, turmoil, and climate breakdown. 

World leaders have a simple choice: continue supporting a failed economic system, or jettison the Washington Consensus for a new international social contract.

The alternative is the recently proposed “Cornwall Consensus.” 

Whereas the Washington Consensus minimized the state’s role in the economy and pushed an aggressive free-market agenda of deregulation, privatization, and trade liberalization, the Cornwall Consensus (reflecting commitments voiced at the G7 summit in Cornwall last June) would invert these imperatives. 

By revitalizing the state’s economic role, it would allow us to pursue societal goals, build international solidarity, and reform global governance in the interest of the common good.

This means that grants and investments from state and multilateral organizations would require recipients to pursue rapid decarbonization (rather than rapid market liberalization, as required by IMF lending for structural adjustment programs). 

It means that governments would pivot from repairing – intervening only after the damage is done – to preparing: taking steps in advance to protect us from future risks and shocks.

The Cornwall Consensus also would have us move from reactively fixing market failures to proactively shaping and making the kinds of markets we need to nurture in a green economy. 

It would have us replace redistribution with pre-distribution. 

The state would coordinate mission-oriented public-private partnerships aimed at creating a resilient, sustainable, and equitable economy.

Why is a new consensus needed? 

The most obvious answer is that the old model is no longer producing widely distributed benefits – if it ever did. 

It has proven to be disastrously incapable of responding effectively to massive economic, ecological, and epidemiological shocks.

Achieving the United Nations Sustainable Development Goals, adopted in 2015, was always going to be difficult under the prevailing global governance arrangements. 

But now, in the wake of a pandemic that pushed state and market capacities beyond the breaking point, the task has become impossible. 

Today’s crisis conditions make a new global consensus essential for humanity’s survival on this planet.

We are on the cusp of a long-overdue paradigm shift. 

But this progress could easily be reversed. 

Most economic institutions are still governed by outdated rules that render them unable to marshal the responses needed to end the pandemic, let alone achieve the Paris climate agreement’s goal of limiting global warming to 1.5° Celsius, relative to pre-industrial levels.

Our report highlights the urgent need to strengthen the global economy’s resilience against future risks and shocks, whether acute (such as pandemics) or chronic (like extreme wealth and income polarization). 

We argue for a radical reorientation in how we think about economic development – moving from measuring growth in terms of GDP, GVA (gross value added), or financial returns to assessing success on the basis of whether we achieve ambitious common goals.

Three of the report’s most salient recommendations concern COVID-19, the post-pandemic economic recovery, and climate breakdown. 

First, we call on the G7 to ensure vaccine equity globally, and to invest substantially in pandemic preparedness and mission-oriented health financing. 

We must make equitable access, particularly to innovations that benefit from large public investments and advance purchase commitments, a top priority.

We recognize that this will require a new approach to governing intellectual-property rights. 

Similarly, the World Health Organization’s Council on the Economics of Health for All (which I chair) stresses that IP governance should be reformed to recognize that knowledge is the result of a collective value-creation process.

Second, we argue for increased state investment in the post-pandemic economic recovery, and we endorse the recommendation by the economist Nicholas Stern that this spending be increased to 2% of GDP per year, thereby raising $1 trillion annually from now until 2030. 

But marshaling more money is not enough; how that money is spent is equally important. 

Public investment must be channeled through new contractual and institutional mechanisms that measure and incentivize the creation of long-term public value rather than short-term private profit.

And in response to the biggest challenge of all – the climate crisis – we call for a “CERN for climate technology.” 

Inspired by the European Organization for Nuclear Research, a mission-oriented research center focused on decarbonizing the economy would pool public and private investment into ambitious projects, including removing carbon dioxide from the atmosphere and creating zero-carbon solutions for “hard-to-abate” industries like shipping, aviation, steel, and cement. 

This new multilateral and interdisciplinary institution would act as a catalyst for making and shaping new markets in renewable energy and circular production.

These are just three of seven recommendations we have made for the years ahead. 

Together, they provide the scaffolding for building a new global consensus – a policy agenda for governing the new economic paradigm that already is beginning to take shape.

Whether the Cornwall Consensus sticks remains to be seen. 

But something must replace the Washington Consensus if we are to flourish, rather than simply survive, on this planet. 

COVID-19 provides a glimpse of the momentous collective-action problems confronting us. 

Only renewed international cooperation and coordination of enhanced state capacities – a new social contract underwritten by a new global consensus – can prepare us for tackling the escalating, interlocking crises ahead.

Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London, is Founding Director of the UCL Institute for Innovation and Public Purpose. She is the author of The Value of Everything: Making and Taking in the Global Economy, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, and, most recently, Mission Economy: A Moonshot Guide to Changing Capitalism.