Why the Shortages??

There’s a lot of nonsense (understandably) being talked about the shortages being experienced at the moment in the developed world – in the UK, Europe and America alike. Initially, I assumed it was an obvious result of Brexit – with Britain famously relying on Russian and Ukrainian long-distance lorry drivers and treating them like shit. It’s only on the continent that decent facilities for truckers are available.

But it seems that things are more complicated – and much more to do with food prices and climate, globalisation and “just-in-time delivery”

By far and away the best article on the crisis is this one on the situation in America

There’s a quiet panic happening in the US economy. Medical labs are running out of supplies, restaurants are having trouble getting food, and automobile, paint, and electronics firms are curtailing production because they can’t get semiconductors.

The problem seems to be getting worse, as the shortages pile on top of each other like a snake eating its tail. For instance, the inability to fix trucks means that truck drivers can’t haul boxes of goods, which might actually contain the parts needed to fix the trucks, and so forth.

 

There are multiple arguments about why the problem is as bad as it is. Everyone agrees that the Covid pandemic and chaotic changes in consumption habits have caused inevitable short-term price hikes and shortages.

But what we’re experiencing is also the net result of decades of policy choices starting in the 1970s that emphasized consumer sovereignty over citizenship. The consolidation of power into the hands of private equity financiers and monopolists over the last four decades has left us uniquely unprepared to manage a supply shock. Our hyper-efficient globalized supply chain, once romanticized by men like Tom Friedman in The World Is Flat, is the problem. Like the financial system before the 2008 crash, this kind of economic order hides its fragility. It seems to work quite well, until it doesn’t.

 

The specific policies that led to our supply constrained world are lax antitrust, deregulation of basic infrastructure industries like shipping, railroads, and trucking, disinvestment in domestic production, and trade policy emphasizing finance over manufacturing.

 

Take biopharmaceutical equipment necessary to make vaccines. There’s a shortage of fancy plastic bags that you mix chemicals in to make medicine, which isn’t surprising in a pandemic. But the reason for the shortage isn’t just Covid but a merger wave; over the last 15 years, four firms bought up the biopharmaceutical equipment industry, without any antitrust agency taking meaningful action. These firms now have market power, and dominate their competitors, by ensuring their bags can only interoperate with their specific mixing machines. It’s like not having enough Keurig coffee machine pods; the shortage isn’t the coffee, it’s the artificial bottleneck used to lock in customers.

 

Another example is railroads. Since deregulation in 1980, Wall Street consolidated 33 firms into just seven. And because the Surface Transportation Board lacks authority, Wall Street-owned railroads cut their workforce by 33% over the last six years, degrading our public shipping capacity. The Union Pacific closed a giant Chicago sorting facility in 2019; it now has so much backed up traffic that it suspended traffic from west coast ports.

 

Ocean shipping is the same. The 1997 Ocean Shipping Reform Act legalized secret rebates and led to a merger wave. The entire industry has now consolidated globally into three giant alliances that occasionally crash their too-big-to-sail ships into the side of the Suez canal.

 

Then there’s trucking. Talk to most businesspeople who make or move things and they will complain about the driver shortage. This too is a story of deregulation. In the 1970s, the end of public rate-setting forced trucking firms to compete against each other to offer lower shipping prices. The way they did this was by lowering pay to their drivers. Trucking on a firm-level became unpredictable and financially fragile, so for drivers schedules became unsustainable, even if the pay during boom times could be high. Today, even though pay is going up, the scheduling is crushing drivers. The result is a shortage of truckers.

There are more problems that strike at the heart of our economy. The most obvious is semiconductors. Production of high-end chips has gone offshore to East Asia because of deliberate policy to disinvest in the hard process of making things. In addition, the firm that now controls the industry, Taiwan Semiconductor, holds a near monopoly position with a substantial technological lead and a track record in the 1990s and early 2000s of dumping chips at below cost.

 

Fortunately, policymakers have noticed. The Federal Reserve’s most recent Beige Book, a report on the economy that is published eight times a year, mentions “shortage” 80 times, and FTC commissioner Rohit Chopra recently pointed out that shortages are slowing the economic recovery. Surface Transportation Board Chair Martin Oberman noted that railroads stripping down their operations to please Wall Street resulted in container congestions at US ports, a significant chokepoint for imports. And Congress is on the verge of funding tens of billions of dollars to boost domestic semiconductor manufacturing.

Even business leaders are getting it. Chemical firms are asking regulators to act. And at last week’s Intermodal Association of North America’s Intermodal Expo, where representatives from the shipping, rail, ports and drayage industries spoke, one executive said, “Without fear of regulation, I don’t know what will motivate all stakeholders to be at the table.” Fundamentally, America – and the world - has to move away from the goal of seeking cheap stuff made abroad for consumers in a low-wage economy. That means rearranging our hierarchies of power so finance, consulting and capital-light tech leaders became less important than people who know how to make things. The problem we have is shortages, so it’s time to put people in charge who value production. 

In the UK, gas prices are increasing by no less than 70%. And this article certainly suggests that (although there is pressure on global prices) the culprit is privatisation – with few companies providing reserves and therefore being caught short when demand increases. No fewer than 8 suppliers have gone bankrupt.

There is also the little factor of Covid19 which caused first lockdown and a huge slowdown in production followed by massive "injections" of government cash to both workers and companies. Containers may have kept most global goods flowing - but the uncertainty combined with initial reduction of supplies and then renewed demand has completely upset the balance of demand and supply in many commodities as Boffy's comment emphasises.   

update; When you have a British Prime Minister actually saying that the 

Queues for petrol and mass culls of pigs at farms because of a lack of abattoir workers are part of a necessary transition for Britain to emerge from a broken economic model based on low wages 

then it’s clear I have to walk back a bit my suggestion that the current British crisis is simply part of a wider global phenomenon.  Now I see that it’s part of a Johnson “cunning plan”!! It remains, however, too easy to blame Brexit completely. Things, as always, are more complicated.  

update; an interesting German take on the issue

and one of the best explanations - courtesy of Dave Pollard's fantastic monthly roundup

an even better https://ourfiniteworld.com/wp-content/uploads/2021/11/Gail-Tverberg-Our-Fossil-Fuel-Energy-Predicament-Nov-9.pdf

Am I the only person in the world finding Adam Tooze's regular bulletins totally incoherent? eg https://adamtooze.substack.com/p/chartbook-51-explaining-the-energy