Marc Levinson

Tag: COVID-19

  • What Caused the Supply Chain “Crisis”?

    Why are container ships queuing by the dozens outside terminals on three continents and retailers apologizing that coveted holiday merchandise may not be on the shelves before Christmas? The ship lines are blaming terminal operators for underinvesting in modern equipment. The terminal operators point the finger at dockworkers’ unions and at land transporters whose failure to move cargo out of the ports is clogging up storage areas. The railroads protest that their own terminals are chock-a-block, knocking cargo owners who postpone collecting their freight because their warehouses are full. Truckers complain about delays at marine terminals and about a shortage of the chassis they need to haul containers, not least because the U.S. government imposed whopping tariffs on Chinese-made chassis after finding that subsidized imports from state-owned manufacturers were harming U.S. chassis makers.

    All these explanations, as one journalist commented to me recently, leave the impression of a circular firing squad at work. None of them do much to get at the causes of logistical overload.

    So what are those causes? Mostly, well-intended government policies meant to mitigate the effects of the COVID-19 pandemic. Across much of the world, governments and central banks have pumped money into their economies to keep the pandemic from turning into a depression. Those measures, in general, have been extremely successful: with ample cash in hand and interest rates at rock bottom — British homebuyers can still get a five-year mortgage for 1.04% — consumers have plenty of spending power. But from March 2020 until the past few months, many of the services that households normally consume, from vacation trips to restaurant meals to late nights at a dance club, have been limited by COVID-related restrictions. Unable to buy services, people gorged on goods.

    A few days ago, the U.S. Bureau of Economic Analysis published new data showing how intense this shift was in the United States. BEA’s quantity indexes don’t normally get much attention, but for this purpose they’re useful: you can think of them as measures of the amount of goods and services people consume, rather than their value. The indexes show a trend change in the first quarter of 2020, when purchases of services collapsed, and again in the second quarter, just after enactment of the Coronavirus Aid, Relief, and Economic Security Act on March 27. That law provided for direct payments to families, unemployed workers, businesses, hospitals, and local governments. Almost immediately, consumers went crazy on the sorts of goods that have global supply chains and move in containers, especially durable goods like furniture and vehicles.

    Note that BEA’s data show that purchases of durables retreated over the summer, even as purchases of services grew. With the Fed starting to raise interest rates, however cautiously, goods spending is likely to weaken further. As it does, those picturesque queues of container ships will soon be getting shorter.

  • The Container Crunch

    When a pandemic is raging, what do you do with your money?

    This is a question which has never much preoccupied economists, but we now know the answer: when you can’t fly off on holiday, take in a concert, go out to dinner, or send your toddler to child care, you spend your money on stuff. Especially in Europe and North America, we’ve seen a surge in spending on consumer goods, many of which are imported from Asia.

    That’s one reason ocean shipping costs are soaring. A year ago, sending a truck-size 40-foot container from Qingdao to Long Beach cost $1,500 or so; these days, unless there’s a long-term contract that locks in a lower rate, the price is three times that. Some shipments from Asia to Europe are said to have cost more than $10,000 per box, four times as much as last summer. On average, ships are much larger than they were just a few years ago, complicating loading and unloading and often leading to delays even on short-haul routes. Many sailings are being cancelled due to ships being out of position, which makes capacity even more scarce and allows carriers to hike prices.

    But that’s not the whole story. The stunning increases in freight rates are the consequence of a prolonged shake-out in container shipping that has left about 85% of global capacity in the hands of three alliances of ship lines. The carriers have scrapped older ships while curbing orders for new ones, so the overcapacity that plagued the industry as recently as last summer, when more than 6% of the global fleet was idle, has pretty much vanished. Although the companies in each alliance remain independent, the alliance structure allows the industry to maintain a certain discipline when it comes to building new ships. There are still 20 or more companies outside the alliance system, but they collectively control so little capacity that they don’t much interfere with the dominant players.

    For the moment, everybody in the industry is making real money for the first time in a dozen years. Once the pandemic-driven boom is over, though, the growth of international trade will likely turn sluggish as consumers in upper-income and middle-income countries up their outlays on services, including education and healthcare. If the world economy grows 4% to 5% per year, as the International Monetary Fund expects, the number of containers moved by sea might rise 2% to 3% annually, on average. That is well below what shipowners were expecting when, a decade ago, they started ordering vessels each able to carry more cargo than 10,000 trucks.

    Equally problematic, most of the growth in container shipments will come on routes from East Asia’s factory hubs to South Asia and Africa. These routes are relatively short, which means that over the course of a year, a vessel can carry twice as many containers between Shanghai and Mumbai as between Shanghai and Rotterdam. The industry will probably require less tonnage as trade patterns shift. My guess is that profits will be harder for ship lines to come by, and old timers will fondly recall the days when it unexpectedly cost more to ship a metal box from East Asia to Europe than to fly there first class.

  • Productivity and the Pandemic

    Across from my apartment, there’s a new restaurant with a new way of doing business. No one hands you a menu or takes your order; instead, you use the QR code taped to the table to see what’s available and choose what you want to eat. There’s a carafe of tap water on the table, along with four glasses; if you want to fill a glass, you do it yourself. To settle your bill, you can put your credit card details into the restaurant’s app — or, better yet from the restaurant’s point of view, you can use the app to establish an account, so on your next visit the bill will be handled automatically.

    A year ago, before the COVID-19 pandemic, none of these practices was common in the United States. In most restaurants, collecting a customer’s payment required the server to make four separate visits to the table: once to present the bill; another to pick up cash or card and take it to the cash register; a third to bring the patron change or a credit card voucher; and then once more to collect the cash tip or the signed voucher. With fewer steps in the payment process, each server can handle more tables, allowing a restaurant to operate with less staff than before.

    Something similar is happening in many different industries, raising the prospect of faster productivity growth economy-wide. This matters: in the long run, higher productivity — that is, using fewer workers and resources to create a given amount of output — is what makes economies grow. Some of the best-known scholars of productivity, such as Robert Gordon, have argued that there are no great innovations on the horizon that are likely to boost productivity growth like railroads, electricity, and expressways all did at various times in the past. This, obviously, would not bode well for raising living standards. My own view has been less pessimistic. As I pointed out in An Extraordinary Time, economists have a terrible track record when it comes to forecasting productivity improvements, which often arise unexpectedly: just because artificial intelligence and virtual reality haven’t moved the productivity numbers so far doesn’t mean they won’t revolutionize entire industries very soon.

    Changes like those evident in my neighborhood restaurant are leading to speculation that the pandemic will bring a productivity revival. The Economist recently hypothesized that “The pandemic could give way to an era of rapid productivity growth,” and Greg Ip of the Wall Street Journal asserts that “much of what started out as a temporary expedient is likely to become permanent.” If they are right, we could be in for an odd sort of boom coming out of the pandemic, in which the economy grows smartly but unemployment remains high until workers find not just new jobs but new occupations that are in demand because of new ways of doing business.

    Yet it’s also possible that the productivity gains from the pandemic turn out to be modest. While the server at my neighborhood restaurant saves time by skipping repeated visits to my table, she also misses out on the opportunity to describe the wonderful tiramisu or ask if I’d like an espresso to top off my meal. The QR code taped to the table may be efficient when it comes to taking my order, but it’s not an efficient way of maximizing my bill. That’s probably not good for the economy, although it may be good for me as a diner. I didn’t really need that dessert anyhow.

  • Why Cities Aren’t Dying

    It’s a bit spooky to cycle around downtown Washington these days, for reasons having nothing to do with campaigns and elections. Most offices are closed, most hotels are nearly empty or locked up entirely, the theaters have offered no shows since March, and the coffee shops, restaurants, and retailers that catered to a bustling city are either out of business or struggling to survive. If you believe what’s in the papers, city dwellers who can afford to do so are fleeing for the hills (or beaches) and plan to live there permanently. Their employers, having learned to function virtually during the pandemic, will slim down their offices and make telework permanent for most of their employees. The city will wither.

    This “trend” is usually illustrated with anecdotes about families who have forsaken their Brooklyn brownstones for five acres with pool in Woodstock or the Hamptons, coupled with a mention of some company that says it will henceforth allow employees to live and work wherever they wish. But this is one of those “forever” trends that will burn itself out fairly soon. As I argue in Outside the Box, globalization will increasingly have more to do with spreading ideas than with moving goods, and urban centers will be at the heart of that process.

    Companies and non-profit organizations choose to locate in dense cities for good reasons. One of the main ones, obviously, is access to a large pool of workers with needed skills — and while some of those workers will undoubtedly be happy to work remotely so they can go fishing on their lunch hour, the most ambitious will want to be in the middle of the action, whether in a research center, a newsroom, or a corporate headquarters. That’s why, within just the past couple years, companies such as Caterpillar and General Electric moved their headquarters from small towns or suburbs to city centers: the workers they most coveted didn’t want to be in the boonies.

    A second reason companies want to bring their office workers together is to make them feel part of an organization. People get satisfaction from working and sharing ideas with other people. When employees leave, hiring replacements is expensive and time-consuming. If bringing workers to a downtown office makes them more engaged, increases tenure, and reduces the need for recruiting, it’s a good investment.

    The third reason the urban office won’t go away — perhaps related to the other two — is that firms in big cities have higher productivity than those elsewhere. Wages, rents, lunch dates, and construction have always been far more expensive in London, San Francisco, and Shanghai than in exurban business parks or smaller towns. The only reason employers accept that burden is that the benefits of locating in a dense city more than make up for the costs. Video calls may work fine for handling routine business, but they don’t seem so effective in coming up with ideas for the sorts of new products and new processes that boost profits. Having people together, in one place, makes a difference.

    My guess is that the pandemic will lead to some changes on the margin. Before COVID-19 arrived, only one U.S. worker in ten teleworked. Less than half of all workers thought that remote work might be feasible in their jobs, and among that minority, only one-fourth, mainly college-educated workers in managerial or professional jobs, regularly worked from home. The experience of the pandemic may encourage employers to permit occasional telework among other groups of workers. But as vaccines come into use, most of us will be told to head back to the office, and as we do, cities will bustle once again.

  • The Post-Zoom World

    In March, as much of the country was shutting down to slow the spread of COVID-19, I attended an annual conference. Instead of meeting in Charlotte, our association convened on Zoom. The president’s thoughtful address came off flawlessly. I delivered a paper, moderated a session, and saw a dozen interesting presentations, each followed by animated discussion. By workaday measures, our conference was a great success.

    Yet for me, it wasn’t successful at all. I ran into no one in the hallway and met no one for a drink. I had none of the unexpected encounters that make academic conferences worthwhile, and came away with no great inspirations for new projects. And I had very little opportunity to renew ties with friends and colleagues, some of whom I routinely encounter at conclaves such as this. Our conference was less a gathering than a business meeting that just happened to be online. I promise that if we can manage to pull off our next one in person, I will never complain about hotel coffee again.

    So when I hear the claim that COVID-19 will change something or other forever, I’m skeptical. Yes, plenty has changed for the time being: road warriors and bucket-list travelers are stuck at home; shopping malls are silent; fine restaurants are reduced to serving take-out; most people are working remotely if they’re lucky enough to be working at all. Some airlines and department stores may die, the gig economy doesn’t seem so cool, and would-be hoteliers have learned that buying a house to rent out on Airbnb isn’t a sure-fire bet.

    Yet the fact that we’ve learned new ways of living doesn’t mean we won’t go back to the old ones. Watching travel videos isn’t much of a substitute for being there. While shopping malls were in trouble long before COVID-19, Amazon.com, for all its brilliance, has not figured out how to turn online shopping into a fun social experience. Spending big bucks to carry out a meal in a plastic bag provides the same calories and taste sensations as dining in the restaurant, but it doesn’t provide the same pleasure. After years of complaining about their long commutes, many teleworkers are champing at the bit to return to the office because, well, working alone at home leaves them no office mates to complain to.

    My bet is that after we eventually ease out of social distancing, the post-Zoom world will be a lot less different than we might expect. Yes, some of our familiar shops and eateries will have vanished, but the empty spaces they will leave behind will rent for less, offering opportunities for entrepreneurs. Yes, we’ll be wearing face masks on planes for a while, but competitive pressures will drive airlines to offer low fares, and many of us will choose a middle seat in sardine class to save a few bucks. Some big banks will take a beating, but then they’ll go back to packaging speculative loans into incomprehensible securities, because that’s what big banks do. And yes, firms will pay a bit more attention to the resilience of their supply chains, but globalization won’t be put back in a bottle. If anything, COVID-19 has reminded us that much of what matters is indifferent to borders and to national identify, whether we like it or not.

  • No, the Coronavirus Won’t Kill Off Globalization

    The spread of COVID-19 has brought much commentary about the impending end of globalization. While the virus has indisputably disrupted the world economy, I think that many of the claims about its impact on international trade are overblown. Globalization is far from dead. Rather, it is changing in ways that were already apparent well before COVID-19 appeared in Wuhan last December.

    When people talk about globalization, they often have something specific in mind — the long value chains that have reshaped the manufacturing sector since the late 1980s. These chains emerged after the development of container shipping, falling communications costs, and more powerful computers made it practical to divide a complex production process among widely dispersed locations, performing each task wherever it is most cost-effective to do so.

    Value chains underlay the torrid growth of international trade in the final years of the twentieth century and the early years of the twenty-first. During those years, trade grew two or even three times as fast as the world economy, mainly because of increased shipments of what economists call “intermediate goods,” items made in one place that are being sent elsewhere for further processing. I refer to this period as the Third Globalization, because it was distinctly different from other periods — the decades before World War One, the years between 1948 and the mid-1980s — when international trade and investment grew rapidly, but international value chains were uncommon.

    Many companies decided where to locate various parts of their value chains based on production and transportation costs. But over time, complicated long-distance value chains often proved to be less profitable than they had imagined. As freight transportation became slower and less reliable, and as earthquakes and labor disputes resulted in goods not arriving on time, executives and their shareholders became more attuned to the vulnerabilities. Minimizing production costs ceased to be the sole priority. 

    Companies have taken a variety of measures to reduce risks in their value chains. They are keeping larger inventories in their warehouses, producing critical components at multiple locations rather than in a single large plant, and dividing exports among several ship lines and sending them through different ports. All of these measures help limit losses when value chains malfunction. But all of them make international sourcing more expensive.

    For most of the past decade, international trade has grown more slowly than the world economy, reversing the trend of the previous sixty years. Greater care when it comes to arranging value chains is one reason why. COVID-19 offers further reason to be careful. But it is not likely to cause manufacturers, wholesalers, and retailers to give up on globalization. The alternative, relying on a purely domestic value chain that can be interrupted by a flood or a fire, might create risks rather than contain them.