Marc Levinson

Category: Uncategorized

  • Fifty Years After Car-Free Sundays

    Some events from your youth stick with you. For me, one such memorable event occurred 50 years ago, on November 4, 1973, when the Dutch government responded to the OPEC oil embargo that arose from the Yom Kippur war by banning driving one day a week. As I write in An Extraordinary Time, “University students spread blankets on the motorway and picnicked to the sounds of a flute. Young children raced through stoplights on their roller skates. From Eindhoven in the south to Groningen in the north, the streets of the Netherlands were nearly free of cars — aside from those of German tourists and of clergy who, by special dispensation, were allowed to drive to church.” Car-free Sundays soon spread across Europe. Sporting events were cancelled. Indoor swimming pools were closed. It was the start of a bleak era.

    In 1973, no one realized just how bleak that era would be. The general diagnosis was that taming inflation or stabilizing exchange rates would make the world economy boom again. Policies involving generous social spending and heavy government intervention in the economy, which had been employed around the world since the 1940s, no longer assured full employment and higher living standards. A backlash drove politics to the right, where leaders like Margaret Thatcher and Ronald Reagan promised that smaller government, deregulation, and a clampdown on inflation would get economies moving. But that didn’t work out so well either.

    The reason? An economy’s long-run growth depends mainly on higher productivity, and this isn’t something politicians can simply order up. Productivity growth relies heavily on innovation and business investment, but investment in the wealthy economies slumped for two decades after 1973, while innovations such as microprocessors had little economic impact until the internet age began in the 1990s. Workers’ productivity improved less than half as fast after 1973 as in the decades before, which is why families in much of the world no longer sensed that their lives were getting better.

    Half a century after the year of car-free Sundays, the world seems to be mired in a productivity slump once again. The stagnation of living standards plays out in anger and unrest in many places. Perhaps stagnation will drag on — but then again, perhaps innovations such as clean energy and artificial intelligence will bring prosperity anew. Golden ages usually end unexpectedly, but they often arise unexpectedly as well.

  • Reality Sets In

    Despite ample signs to the contrary, global economic institutions have remained remarkably optimistic about the state of the world economy. This week, that suddenly changed. The World Bank and the World Trade Organization both downgraded their economic outlooks. Even more significant, both finally acknowledged that we are experiencing not just a cyclical downturn, but a long-term decline in the rate of economic growth.

    “Across the world, a structural growth slowdown is underway,” according to the World Bank. “[A]t current trends, global potential growth—the maximum growth the global economy can sustain over the longer term without igniting inflation—is expected to fall to a three-decade low over the remainder of the 2020s.” Meanwhile, the WTO cut its forecast for international trade in 2023 by more than half, to a scant 0.8%.

    The WTO still forecasts trade to grow by 3.3% in 2024. I expect that forecast to be revised downward as well — particularly because the organization also acknowledges that the share of intermediate goods in international trade has tumbled. If fewer intermediate goods are moving through supply chains, neither the volume nor the value of goods trade is likely to expand very much.

    Both reports attribute much of the slowdown they now forecast to geopolitical events, such as the war in Ukraine and increased tensions between China and some of its major trading partners. That is not incorrect. But as I argue in Outside the Box, slowing population growth and aging populations are likely to be long-term drags on consumer spending on goods, while technological changes will reduce the need for widely traded goods such as auto parts and components for industrial machinery.

    Meanwhile, deliveries of new container ships are at a record high, and container terminals around the world are racing to add new capacity. I’d be interested to understand why.

  • Notes on a Visit to Korea

    I’ve been lucky enough to visit South Korea twice over the past year, and unlucky enough to encounter extreme weather both times: bone-chilling cold in December and a late-August heat wave so intense that I was drenched in sweat after walking three blocks. These days, the mood is as uncomfortable as the weather.

    As the country’s two largest trading partners, the United States and China, heave thunderbolts across the Pacific, the chaebol, the giant conglomerates that dominate Korea’s economy, feel caught in the middle. They want to keep their customers in China, but they don’t want to antagonize the United States. U.S. industrial policies have been particularly disconcerting to the chaebol, which fear being excluded from the U.S. market or from the subsidies Washington is handing out to makers of semiconductors and electric vehicles.

    That’s not the only depressing news. Korea’s population is falling—2020 was the peak year—and its fertility rate is the lowest in the world. Despite an official unemployment rate of only 2.8%, young people struggle to find jobs that pay a living wage in a country where incomes and wealth have become far more skewed than just a few years ago. Economic growth is running at a barely perceptible 1.5%, and shipments through the vast container port at Busan, one of the country’s main economic engines, have been flat for five years.

    One of the things that may be holding Korea back is overreliance on manufacturing. Factories and shipyards made Korea rich, and they generate more than a quarter of its output—about the same share as in China and more than twice the proportion as in the United States. But factories aren’t likely to provide a prosperous future, especially when they must bring in workers from China, Vietnam, and Thailand to take jobs Koreans don’t want. In a world where intangibles are becoming more important than goods, Korea lags even such industrial powerhouses as Japan and Germany in developing high-value services. My guess is that taking better advantage of its highly educated workforce to strengthen its service sector could do a lot to help Korea revive its economy.

  • Greenhouse Gases and Open Registries

    The International Maritime Organization (IMO) doesn’t normally make headlines, but its new strategy to reduce greenhouse-gas emissions from shipping is a considerable accomplishment. If it succeeds, emissions from international shipping will be 20 percent below the 2008 level by 2030, and 70 percent below by 2040. “By or around, i.e. close to” 2050, the industry is supposed to have net zero emissions.

    That last commitment, which contains an escape clause allowing for “different national circumstances,” has drawn both praise and criticism around the world. Puzzlingly, though, there has been almost no attention to the specific measures required to achieve the IMO goals.

    This is not a minor issue. Some 105,395 ships of 100 gross tons and above are now on the seas, not counting fishing or military vessels, according to the United Nations Conference on Trade and Development (UNCTAD). The IMO itself doesn’t oversee them. Meeting the IMO’s targets will require action by national governments, which regulate the individual ships that fly their countries’ flags.

    But this regulation is often nominal. UNCTAD estimates that ships registered in Panama, Liberia, the Marshall Islands, Malta, and the Bahamas are responsible for 43 percent of maritime greenhouse-gas emissions. All these countries operate open registries, offering favorable taxes and light regulation to shipowners based elsewhere in return for vessel registration fees. All of them rightly fear that if they make it more costly to operate ships, shipowners will decamp to a more tolerant registry. In any case, most of them lack the bureaucratic apparatus and professional expertise needed to monitor the greenhouse-gas emissions of hundreds or even thousands of ships.

    Open registries, sometimes referred to as “flags of convenience,” have been controversial for decades. They have been blamed for the low wages and poor working conditions endured by many seafarers, the evasion of anti-pollution rules, and the use of unsafe vessels that are overdue for scrapping. Shipowners have successfully blocked efforts to limit their use. If the IMO’s emissions-reduction targets are to be met, countries with open registries will need to become enforcers.

  • Sustainability and Trade

    The cost of mitigating climate change is hard to put a finger on. That’s one conclusion from a recent conference on climate change and macroeconomics at the Peterson Institute for International Economics in Washington. Many of the economists who spoke argued that there is no conflict between sustainability and prosperity; in their view, keeping global temperatures at 1.5 degrees Celsius above pre-industrial levels, as urged by the Intergovernmental Panel on Climate Change, will require minimal economic sacrifice, at least in most countries. Others forecast that higher temperatures and more frequent severe weather events will make output and prices more volatile, or that the cost of renewable energy will retard economic growth. At this point, you can pick whichever conclusion you prefer.

    What I found most notable about this meeting was that international trade wasn’t on the table. To me, it seems likely that concerns about climate change will depress trade. Measures like the European Union’s Carbon Border Adjustment Mechanism and proposed U.S. legislation requiring studies of the emissions intensity of many imports will erode some of the cost advantage of foreign products. In addition, shipping powered by sustainable fuels may be far more expensive than shipping is today. For trade in liquor and tablet computers, higher freight costs may not matter, but shipping low-value goods long distances — the United States exported 4 million metric tons of hay last year — may become prohibitively costly.

    The importance of international trade in stimulating innovation, increasing competition, and making economies more dynamic is no secret. If measures to control climate change prove to be a drag on trade, they are likely to be a macroeconomic drag as well. That’s a possibility economists concerned with sustainability should not ignore.

  • The FTC Seeks to Shelter Mom & Pop, Again

    In 1909, the Kellogg Toasted Corn Flake Company offered a “Square Deal.” Hoping to get its flakes on more grocers’ shelves, Kellogg set the cash price for wholesalers at 6.8 cents per box. Wholesalers were required to charge retailers 7.8 cents. Kellogg permitted no volume discounts, placing the neighborhood grocery store “on an equal footing with every other retailer, great or small.” Consumers paid 10 cents a box, a 47 percent markup over the factory-gate price, no matter where they purchased their corn flakes. This price-fixing pleased mom-and-pop grocers, but shoppers didn’t buy it: as bargain-hunters sought out cheaper cereals, Kellogg quietly cut prices for its largest customers, and the Square Deal faded away.

    This history is worth keeping in mind as the Federal Trade Commission tries to revive the Robinson-Patman Act, an 83-year-old law against price discrimination. According to press reports, the commission is investigating whether soft drink bottlers and an alcohol distributor violated that law by selling to big retailers on better terms than small ones. On March 27, Lina Kahn, the FTC’s chair, said the commission will move to enforce Robinson-Patman “in short order,” and her fellow commissioners have also called for reviving enforcement of the law. If the FTC does so, it will wade into a dispute that has pitted advocates of efficiency and low prices against supporters of small, independent businesses for well over a century.

    As chain food stores first emerged in the early 1900s, complaints spread that suppliers unfairly favored chains with discounts and inducements not available to smaller wholesalers and retailers. “The general working rules should be, ‘A fair price and the same to everybody,’” an official of the National Association of Retail Grocers demanded in 1914. Just as federal regulations kept railroads from favoring one shipper over another, the reasoning went, the law should require manufacturers and growers to charge all buyers the same price for the identical product. The Clayton Antitrust Act, passed that same year, gave small businesses half a loaf, prohibiting price discrimination when the effect “may be to substantially lessen competition or tend to create a monopoly.”

    And what of consumers? The leading consumer advocate of the day, Louis Brandeis, insisted they would barely be affected by a crack-down on price competition. He envisioned a marketplace where a consumer would not be confused by the possibility that “at some other store he could get that same article for less money.” In 1916, President Woodrow Wilson, an unabashed critic of price discrimination, named the Boston attorney to the Supreme Court.

    Shoppers plainly rejected Brandeis’s view, flocking to chain merchants. The most powerful was the Great Atlantic & Pacific Tea Company. A&P had 4,588 stores when it became the largest retailer in the world in 1920. By 1929, it owned nearly 16,000, along with a produce wholesaler, fish canneries and even a macaroni plant. It flourished because it underpriced competitors. To hold costs down, it demanded that suppliers offer volume discounts, give it rebates for advertising their goods and sell to it directly without paying commissions to wholesalers.

    Wholesalers and independent grocers complained bitterly. They were supported by small-town politicians and business groups, who feared that economic opportunity would be suppressed by “foreign” companies based in New York or Chicago. Chain store employees, advertisements in Springfield, Missouri proclaimed, were “‘mechanical operators’ controlled entirely by a set formula.” From Washington, the U.S. Chamber of Commerce warned that “the death knell has been sounded” for hundreds of thousands of small retailers.

    With early radio talk-show hosts fueling the uproar, governments raced to aid mom and pop. By 1933, 17 states hit chain stores with punishing taxes. State “fair trade” laws regulated mark-ups and required chains to maintain identical prices in every store. Officials in Kansas attacked A&P for charging more for coffee in Kansas City than in Topeka. A&P could sell five boxes of Waldorf tissue for 19 cents in Indiana, but across the state line in Ohio, that price was illegally low.

    The federal government joined in. To stem the spiral of wage and price cuts amid the Great Depression, Congress enacted the National Industrial Recovery Act of 1933, which authorized private industries to adopt binding codes of conduct. The code for the grocery trade mandated a specified percentage mark-up on each item, putting an end to loss leaders and two-for-one sales. This was intended to protect the small shops that provided livelihoods for hundreds of thousand of families, and it worked: with price discounting prohibited, chains rapidly lost market share.

    In May 1935, the codes were overturned by a unanimous Supreme Court, freeing chain retailers to demand better deals from suppliers and pass the savings on to customers. Within days, H. B. Teegarden, the general counsel of the Wholesale Grocers Association, drafted legislation to limit the impact of the court’s ruling by making it illegal, in most circumstances, for manufacturers to offer volume discounts. The bill barred lower prices for direct purchasers such as A&P than for retailers that purchased through wholesalers. A manufacturer paying a giant customer for advertising its product had to offer a proportionate allowance to the tiniest business.

    Manufacturers generally opposed this legislation: it cost them far less to sell by the boxcar than by the case, and they worried that higher prices might drive more retailers into manufacturing. Nonetheless, Congress enacted Teegarden’s bill as the Robinson-Patman Act in 1936. President Franklin Roosevelt apparently approved it reluctantly, for there are no known photographs of him signing it.

    The two main antitrust agencies responded in very different ways. The Department of Justice, which handles most industrial competition matters, generally ignored Robinson-Patman, while the FTC, which oversees competition in retailing, enforced the law aggressively. In 1938, it required A&P to pay for brokerage commissions on purchases involving no brokers. A decade later, it restrained the Morton Salt Company from selling small quantities of table salt at $1.60 per case while charging less to customers buying by the rail carload. These sorts of orders, repeatedly upheld by the courts, forced chain stores to raise prices. The discount revolution would be postponed by several decades, to help keep small businesses alive.

    By the 1960s, though, competition was driving manufacturers and retailers to find ways to work around Robinson-Patman. Can’t offer a volume discount to a big retailer? No problem: tinker with the product, so a giant chain can order a customized version, perhaps with a unique brand name, at a lower price. Want to grant a big buyer a discount for purchasing directly, without going through a wholesaler? Permit a discount for small customers, too—if they can master the technical demands for ordering, paying and taking delivery on the same terms as their larger competitors. With such circumventions, discount chains gained market share as Robinson-Patman fell into disuse.

    Global supply chains have made Robinson-Patman even less relevant. Large retailers and manufacturers commonly deal directly with foreign suppliers. Whether they are selling fuel injectors, frozen fish fillets or jars of artichoke hearts, those suppliers have no obligation to offer their goods at the same price to all U.S. customers. Despite all the talk about “reshoring” manufacturing, if the FTC tightens enforcement of Robinson-Patman, you can expect to find even more imported merchandise at the store, because shoppers’ interest in saving money is unlikely to go away.  

  • Nearshoring Is Hard to See

    Last week I was in Mexico City to speak at the Logistics World Summit, an annual event that draws thousands of truckers, freight forwarders, manufacturers, and software vendors to the soon-to-be-renamed Citibanamex Center. The topic on everyone’s mind was “nearshoring,” the much-touted shift of manufacturing from Asia to Mexico so as to reduce supply-chain risk. Real estate experts insist there’s a mass movement underway as foreign manufacturers seek factory sites convenient to the U.S. border. Trade and transportation data, however, paint a different picture. If nearshoring is underway, it is not yet visible in the numbers.

    In my talk, I pointed out that increased concern about supply-chain interruptions plays to Mexico’s advantage as a location for manufacturers targeting the North American market. But for all the talk of nearshoring, manufacturers seem reluctant to plunge in. This hesitation, I think, has to do with some real-world problems that have grown worse in recent years. Concerns about security are mounting all over the country. Electricity prices are high, despite government subsidies. Renewable energy is in short supply, deterring investment in factories to serve companies that face pressure from customers or regulators to reduce greenhouse-gas emissions in their supply chains.

    Moreover, Mexico seems unprepared for things to come. Factories in Mexico have increasingly used inputs from China to assemble goods for the U.S. market; given geopolitical tensions, it’s a good bet that Washington will crack down on imports of such products. And in the automotive sector, where Mexico’s role in international supply chains is most prominent, exports of auto parts are under threat as electric vehicles capture a larger share of the vehicle market in the United States and Canada. Recent announcements of a new Tesla assembly plant near Monterrey and a BMW battery plant in San Luis Potosí have obscured the fact that an electric vehicle contains thousands fewer parts than an internal combustion vehicle of similar size. The supply chains that funnel Mexican-made pistons, fuel injectors, catalytic converters, and other parts to points north are likely to decline rapidly over the next few years.

    Geography offers Mexico great opportunities as manufacturers and retailers rethink their supply chains. So far, though, it isn’t taking much advantage of them. Unless the Mexican government makes some big changes, nearshoring may be slow to develop.

  • The Bizarre Assault on ESG

    I confess to bewilderment at some U.S. conservatives’ assault on the use of environmental, social, and governance (ESG) criteria in investing. Conservatives in Congress, including a few Democrats as well as Republicans, tried to overturn a Biden Administration rule allowing asset managers for retirement plans to consider firms’ ESG performance in making investment decisions. Politicians in several states have sought to bar banks that employ ESG considerations from state-government business. Most recently and most bizarrely, some have blamed the abrupt collapse of Silicon Valley Bank on its commitment to ESG, despite very clear evidence that the bank was done in by turbocharged deposit growth and excessive investment in long-term securities.

    I know a bit about this. Two decades ago, when I worked at JPMorgan Chase, I developed the bank’s first ESG research products for institutional investors in stocks and bonds. Our research examined such topics as how regulations targeting plastic shopping bags and beverage containers would affect major plastics producers (not much) and whether water scarcity threatened the viability of certain industries in various countries (in come cases, yes). We weighed the investment potential of companies that manufactured solar, wind, and water-conservation products (generally with skepticism), and also urged corporate boards of directors to assign a committee to oversee management of ESG risks and opportunities within the firm.

    The risks we identified were real, and our contention that investing in solar cell manufacturing and wind turbines was a bet on government policy rather than on technology saved our clients from serious missteps. Unfortunately, in part because of our well-founded doubts about the profit potential of alternative-energy firms, our work didn’t lead to much stock or bond trading, which is why all of us involved in ESG research were let go in 2009.

    But that doesn’t change the fact that ESG factors pose real risks to the profits of corporations and to the ability of bond issuers, both government agencies and private-sector companies, to service their long-term debts. Investors in port authority bonds and the shares of real estate investment trusts need to understand the potential business impact of rising sea levels. Lenders to coal companies need to assess how many power plants will buy that coal a decade from now. For any bank or asset manager to ignore such risks because politicians think they should is the sort of state-managed capitalism conservatives used to be against.

  • Should Ports Get Smart?

    Ports are trying to become smarter. At least, that’s what I took away from a recent conference in Seoul, where I spoke at a government-sponsored forum on smart ports.

    Smartness involves linking cranes, guided vehicles, straddle carriers, and perhaps even ships and drayage trucks with 5G communications and then employing artificial intelligence to coordinate their work. Smartness could potentially extend into other areas as well, such monitoring the weather to revamp terminal operations as a storm approaches.

    These technological advances are supposed to improve productivity and worker safety, make better use of terminal space and equipment, and reduce energy consumption and greenhouse-gas emissions. All of these goals are desirable. But in the haste to make ports smarter, a few things may not be receiving the attention they should.

    One is that smartness isn’t a sure-fire moneysaver. While a terminal may save by hiring fewer dock workers and making better use of assets, paying consultants to develop and maintain the smart system involves both large front-end outlays and ongoing costs. Extending the system to ships in port could dramatically increase complexity, but excluding ships may limit effectiveness. Cybersecurity will be a constant issue; already, the U.S. Maritime Administration is studying whether the Chinese government has hidden control over the thousands of Chinese-made ship-to-shore cranes in use around the world, and the possibility that a single hack into a smart network could cripple every crane in an entire container terminal is enough to keep terminal managers up at night.

    But perhaps the most important question about smart ports is rarely asked: how will shippers be better off? Terminals will try to recover the cost of smart systems from vessel operators, who will pass it along to exporters and importers. Some shippers may benefit if the system moves their cargo through the terminal more quickly, but those shipping low-value goods may not care about speed while being very sensitive to additional costs. If making ports smarter doesn’t save them money, it won’t look so smart.

  • Taking Taxpayers for a Ride

    Even if you don’t ride the subway, a startling new report on the cost of building transit systems deserves the attention of anyone interested in infrastructure. This report, the result of a five-year project by the Transit Costs Project at New York University, digs deeply to explore why the United States has among the highest transit construction costs in the world — more than twice as high, per kilometer, as France, Japan, Canada, and Sweden. Among the causes it identifies:

    • Political meddling. In the United States, the political decision to go forward with a project typically comes early in the design process, making it hard to abandon part or all of the project if more detailed engineering identifies construction challenges or less costly alternatives. “In 2016, Seattle voters approved a slate of projects that were based on 1-2% design, which one former official described as ‘a drawing on a napkin,’” the study reports. In low- and medium-cost countries, professionals plan and design projects, and politicians tend to get involved only later, when spending decisions are required.
    • Public agencies’ lack of in-house expertise, which leads them to turn too much control over to consultants. This is a big deal. There’s been a big push to turn transit design, construction, and operation over to the private sector, but this can prove costly if the government agency doesn’t have staff with the skills to oversee its consultants and contractors.
    • Seeking construction bids when design is still in an early phase, which means contractors must incorporate design risks into their bids. Fixed-price contracts can ultimately increase costs if the contractors must go through a complicated administrative process to make small design changes once construction is underway.
    • Obscuring costs. In the United States, itemized costs are often kept secret. Low-cost countries do the opposite, disclosing costs for individual items to increase transparency and to allow the public agency to built up its internal expertise in cost estimation.

    While this exhaustive study focuses on transit, its findings are relevant to construction of rail lines, highway tunnels, air terminals, and port infrastructure, as well as harbor dredging. Thanks to the Infrastructure Investment and Jobs Act, enacted in November 2021, hundreds of billions of federal dollars are starting to flow to infrastructure projects around the country. If we can spend those dollars more wisely, taxpayers are less likely to be taken for a ride.