1. I, Supply Chain
  2. Supply Chains Are Suffering From a Demand Shock
  3. To Explain What’s Wrong with the Supply Chain, Start with the Labor Shortage

The entire global economy is being roiled right now by what one industry expert calls “shipping Armageddon.” The ocean off the coast of Los Angeles looks a bit like Normandy on D-Day, as container ships wait to be unloaded in a post-pandemic surge that is overwhelming one of America’s largest ports, as well as the network of trucks and drivers necessary to bring goods inland.

In related news, there is such a thing as a global supply chain. As we’ve been finding out, such supply chains are intimately involved in the production and distribution of many, if not most, of the everyday goods we rely on. The current crisis is what they call a “teachable moment,” revealing to the average person the vast but normally hidden network of commerce that makes the modern world work.

None of this is new. In 1958, the economist Leonard Read published his classic pamphlet, “I, Pencil,” detailing the network of global trade, from Oregon and Mississippi to Sri Lanka and Indonesia, involved in the production of all the parts of an ordinary pencil: the wood, the graphite for the lead, the lacquer in its paint, the metal of the ferrule, the rubber-like factice of the eraser.

What we’re living through right now is like “I, Pencil,” but for everything. It is only when the system is shocked out of its normal functioning that the general public gets a glimpse of the overwhelming complexity of the economic network of global capitalism, including much that is usually hidden behind the scenes in business-to-business relationships and thus not visible to the consumer. The current situation has also revealed various ways in which government gums up the works of the supply chain, erecting unnecessary barriers and making it harder for us to recover from a disruption.

The Invisible Hand

Much of the current disruption is an unavoidable consequence of the pandemic. Part of the point of “I, Pencil” is that the whole global network of trade is coordinated by a network of business relationships, profit incentives and market trades so complex that no one person or institution could plan it all out or even grasp the whole. It is coordinated instead by the “invisible hand” of the market.

In the wake of a large and sudden disruption, that hand becomes a little more visible. The global network of trade has been fine-tuned over decades to a high level of efficiency, in ordinary times. But when patterns of production and consumption change suddenly, drastically and unexpectedly, it takes time for supply chains to adjust.

I think we all still remember the Great Toilet Paper Shortage of 2020. It happened because consumer demand for toilet paper is usually so consistent that there is no economic justification for manufacturers to build excess capacity. But when a large portion of the demand suddenly shifts from businesses and hotels to individual consumers, and when everybody tries to stock up at the exact same time, the extra production capacity cannot be built right away.

We are seeing something similar now with everything else, as demand for many products surges and it takes time for manufacturers and shippers to adjust back to normal—and to figure out what the new “normal” is even going to be.

Take the much-discussed chip shortage. The pandemic caused a surge in demand for home electronics, from laptop computers to video game consoles, while also causing temporary shutdowns in some of the factories that produce the microchips that run these machines. The key bottleneck is the production of the machines that make the chips, which are expensive and can take years to bring up to speed, along with the factories, infrastructure and skilled workers needed to run them.

The chip shortage has in turn caused a backlog for production of myriad products, from those you would expect—such as smartphones—to those that might seem less high-tech, such as automobiles. In my case, it means I’m going to have to limp on for a little longer with a slow internet connection. Even though I’m one of the 600,000 pre-orders for the much faster Starlink satellite service, they can only get enough chips to make 5,000 dishes per week.

The Law of Intended Consequences

But the disruption caused by the pandemic is not the whole story. The other part of this tale is about the various ways the government makes that process of adjustment more difficult through intrusive rules and regulations. Cato Institute senior fellow Scott Lincicome provides a great overview of this aspect of the story:

[M]any of the problems at U.S. ports today result from intentional decisions made years ago—decisions that have caused our port system to badly lag much of the world. . . . Perhaps most notable is the extreme influence that U.S. longshoreman unions—the International Longshore and Warehouse Union (ILWU) out West and the International Longshoremen’s Association (ILA) basically everywhere else—have on port operations. The ILWU’s impact is particularly strong because it controls essentially all longshore labor for all West Coast ports (thus giving the union extreme leverage—strikes or slowdowns affect every port on the West Coast). . . .

U.S. ports are open for fewer hours per week than many other ports around the world: “[B]erths in Asia work ships 24/7, or 168 total hours per week. Ships are worked 16 hours per day or only 112 hours per week at LA-Long Beach, and terminal gates only operate 88 hours per week versus 24/7 operations in Asia.” . . .

[P]erhaps worst of all, the unions have for years fought efforts to automate ports on both the West and East coasts—just as they fought containerized shipping and computers decades before that. . . . The widespread failure to fully automate major U.S. ports has inevitably hurt their efficiency. One analysis found, for example, that automated cranes in Rotterdam were almost twice as productive as the stone-aged ones in Oakland.

This looks like a case of the Law of Intended Consequences, the lesser-known inverse of the Law of Unintended Consequences. Sometimes a government intervention leads to higher costs and cumbersome delays because nobody foresaw its negative consequences. But sometimes this happens because higher costs—and the benefits to the faction that collects those costs—were the point from the very beginning. For years, we have pursued policies that were designed to drive up costs at the port and create a bottleneck controlled by the unions, and we are simply getting what we asked for.

Or consider a rare case in which Twitter actually had a positive impact on the real world. A recent Twitter thread by a shipping executive prompted the city of Long Beach to suspend regulations that prevent the stacking of shipping containers more than two high. According to an article in the Long Beach Business Journal:

Ryan Petersen, CEO of freight forwarding and customs brokerage company Flexport, told the Business Journal, “If we can get the same policy implemented in the rest of the country, we can clear the container backlog in time for those of us in the logistics industry to save Christmas.”

Petersen took to Twitter early Friday to recount a trip through the San Pedro Bay port complex he had taken the day before. Petersen outlined how container stacking limitations are exacerbating the supply chain crisis; the rules are currently preventing trucks from being able to offload empty containers, which then prevents them from being able to pick up more cargo, Petersen said.

If temporarily suspending pettifogging regulations can make such a big difference, imagine what could be accomplished by permanently eliminating them.

Burning Down the Supply Chain in Order To Save It

A big disruption that draws attention to the role of the global supply chain can be a teachable moment that makes us appreciate this network. Or by drawing these usually invisible relationships to the attention of ambitious politicians, it can give them an opportunity to grandstand by imagining they can just reorder all these arrangements to suit their fancy.

The Biden administration recently got the genius idea that we can get all the shipping containers moved out of port if we just fine shippers for not moving them fast enough—as if they were just leaving these containers sitting around for fun and had no other incentive to move their goods. It is the most absurd, blunt-instrument, command-economy solution you could think of, and it only serves to compound the economic damage to shippers and suppliers, who were already desperately struggling to get their goods moving.

But at least this damage would only be temporary. By contrast, Republican Sen. Josh Hawley’s solution to the “supply chain crisis” is to dismantle much of the supply chain. Says Hawley:

While distribution problems are a factor right now in the crisis, structural reforms are imperative to reassert our economic independence. We need to fundamentally restructure our country’s trade policy and decouple our security and safety from the profit-seeking of multinational corporations. I’m proposing new legislation to take a big first step: the Make in America to Sell in America Act.

Under this plan, officials at the Department of Commerce and the Department of Defense will identify goods and inputs they determine to be critical for our national security and essential for the protection of our industrial base. These goods would then become subject to a new local content requirement: If companies want access to the American market for these critical and essential goods, then over 50 percent of the value of those goods they sell in America must be made in America. Companies will have three years to comply, and can receive targeted, temporary waivers if they need more time to reshore production. In effect, the legislation applies the domestic sourcing principles of the Buy American Act—a law that governs federal government procurement—to the entire commercial market.

This is a fantasy. If in 1958, the year of “Ozzie and Harriet” and “Leave It to Beaver,” you couldn’t make a simple No. 2 pencil without input from Sri Lanka and Indonesia, how does Hawley imagine this is going to be possible for the “entire commercial market” of the 2020s?

Talk about burning down the village in order to save it. Hawley’s solution to a temporary disruption in the global supply chain is to impose a disruption that would be at least 10 times larger and would take decades to unravel. And rather than relying on the market to heal this damage, he would potentially subject every single supply chain decision to the approval of a government bureaucrat.

So much, incidentally, for Republicans being opponents of socialism. Hawley talks repeatedly about “America’s industrial commons,” asserting a kind of de facto collective ownership of factories and shipping carriers.

All of this is missing the point Leonard Read tried to get us to understand all those years ago in his essay about the humble pencil. Our newly heightened awareness of the global supply chain should make us appreciate not just its scale and complexity, but the extent to which its elements will “naturally . . . arrange themselves into creative and productive patterns in response to human necessity and demand . . . in the absence of governmental or any other coercive master-minding.” They did it before, and they will do it again.

The global supply chain network is capable of coordinating itself and will reorder itself after a disruption. All we need to do is to reduce the artificial barriers that make this more difficult—instead of putting up new ones.

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