Where are the paper plates?
Brad Littlejohn | Lessons from the supply chain disruption
Across the country, store clerks are nervously preparing for the Christmas shopping rush with already half-empty shelves. Parents are pre-ordering presents online weeks in advance without any assurance that those gifts will arrive in time. Restaurant menus are in constant flux as key ingredients run short; construction crews are postponing projects by months since their suppliers can’t tell them when materials might come in; car manufacturers have slashed production amidst a critical shortage of microchips. Even key drugs and critical medical gear are running short at hospitals and pharmacies around the nation. Why does the “land of plenty” seem for once not to have enough of pretty much anything?
The causes are not hard to determine. Thanks to the ever-expanding ripple effects of Covid-19, the U.S. economy has experienced simultaneous demand and supply shocks. As Americans spent more of their time at home for much of 2020, they spent less money on services and more on consumer goods. Thanks to lavish and poorly-targeted stimulus checks, most Americans, despite pandemic job losses, had plenty of money to spend—especially following the largest round of stimulus checks this spring.
At the same time we wanted more stuff, the world found itself less able to meet our demands. East Asia, the workshop of the world, was dealing with major spikes of the Delta variant this past spring and summer, leading to temporary shutdowns of many key factories. China repeatedly shut down some of the world’s largest container terminals to contain any outbreak of the virus. Adding insult to injury, a massive container ship spent twelve days in March blocking the busiest transportation route globally, the Suez Canal. In the vast, interconnected global trade system, each of these shocks rippled back and forth, creating new disruptions at every link of the chain. Labor shortages in U.S. ports and transportation industries have intensified the strain. At last count, a record 111 container ships were waiting offshore Long Beach, Calif., for a chance to unload their goods.
More than anything else, the current crisis is reminiscent of one not so long ago—the 2008 financial crisis. Then, we discovered for the first time how fragile and interconnected the global financial system was—a row of dominos ready to collapse. Now, the same contagion is playing out in the economy of physical goods. And the root cause is remarkably similar.
American companies can’t keep goods on their shelves because they no longer keep goods in their warehouses. Over the past 40 years, in search of greater and greater efficiency, most industries have embraced the model of “just-in-time” manufacturing: timing new orders from their suppliers just right so retailers can restock but without excess inventory tying up capital and dragging down profits. It resembles the reckless behavior of investment banks in the lead-up to 2008: keeping ever-slimmer capital reserves to boost rates of return. It all works great right up until it doesn’t.
Of course, if most goods in American stores were made in American factories, we might be more able to ramp up production to address shortages. Instead, however, having for decades outsourced every kind of manufacturing to East Asia (by 2019, U.S. manufacturing imports were more than double exports) to boost profits, we find ourselves at the mercy of Chinese container ships and Los Angeles dockyards. Increasingly, we have designed our economy to resemble “the butterfly effect”—a man sneezes in Shanghai, and six weeks later, a Best Buy in Cleveland can’t stock laptops.
Some might argue that Covid-19 is a once-in-a-lifetime anomaly, and it won’t be long before our finely honed global trade machine is humming along smoothly again. Historically, though, it is the past three decades that have been the anomaly, and with rising tensions in the Taiwan Strait, we may never witness a return to seamless manufacture-on-demand international trade. Two thousand years ago, the Apostle James warned against the reckless illusion of economic control: “Come now, you who say, ‘Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit’—yet you do not know what tomorrow will bring” (James 4:13-14).
Faced with the rude wake-up call of the past year, it’s time for our business leaders and policymakers to realize that short-term profits aren’t everything; the higher costs of inventory and domestic production may prove a small price to pay for a bit more stability, security, and self-sufficiency.
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