Marc Levinson

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  • The Great A&P Revisited

    When it was published back in 2011, many readers took my book The Great A&P and the Struggle for Small Business in America as an allegory about Walmart: the battle between a highly efficient, vertically integrated grocery chain and the mom-and-pop grocers it was driving out of business seemed to parallel the modern conflict between the giant discounter and the locally owned retailers who could not match up. But things change: now, as I publish a second edition of The Great A&P, Walmart has almost ceased to be regarded as a villain, and the merchant most widely blamed for destroying brick-and-mortar retailers is Amazon.

    Walmart is, in many ways, similar to A&P. Its sheer size enables it to bargain low prices for merchandise, it runs a highly efficient logistics operation, and it aims to build local market share, especially in food retailing, to gain efficiencies in distribution and advertising. In recent years, it has even followed A&P’s lead by integrating vertically: Walmart now bottles milk in its own plant, contracts with ranchers to raise Angus beef cattle to Walmart’s standards, and last month opened its first beef processing plant .

    Amazon, on the other hand, is quite unlike A&P. The brothers who controlled A&P, George L. and John A. Hartford, stubbornly insisted on earning a profit; Amazon founder Jeff Bezos was willing to tolerate losses for years in order to build the business. For all Bezos’s ambition and imagination, Amazon’s rapid rise owed much to the federal government: in 1992, the U.S. Supreme Court ruled unanimously that a state could not collect sales taxes on goods sold to its residents unless the seller had physical presence in the state, which gave Amazon a huge advantage. By the time the Supreme Court unanimously reversed itself in 2018, declaring that its 1992 decision “creates rather than resolves market distortions,” Amazon was well established and hundred of thousands of retail establishments had closed their doors. Amazon also benefits immensely from its ability to capture and use more customer data than its competitors, allowing it to control pricing and product selection in a way that A&P could not. In the twenty-first century, information technology creates economies of scale in ways that were impossible in the Hartfords’ day.

    These differences point to the need for fresh thinking about competition. Those who argue that the only test of excessive market power is whether a firm can raise prices to consumers did not foresee that consumers might be asked to pay by surrendering personal information rather than dollars and cents, or that a seller can change prices instantaneously based on an individual consumer’s behavior, or that its trove of information about customers might give an established company an unsurmountable advantage over potential challengers. Unfortunately, the dusty volumes of court rulings about monopoly dating back to the 1890s provide only limited guidance for measuring market power in the digital age.

  • On Paul Volcker

    A dozen years after anyone in the United States last got worked up about inflation, it’s hard to remind people what it is that made Paul Volcker so important. The best I can do is repeat an anecdote reported by William Silber in his 2012 biography of Volcker. The Fed chairman was on a fly fishing trip in Montana in 1982 when he stopped at a restaurant off in the woods, the parking lot filled with motorcycles and pick-up trucks. Three large men stood up at nearby tables and approached Volcker. One pulled a ten-dollar bill from his pocket, extended it towards Volcker, and said, “Excuse me, sir, but I was wondering whether you could sign this…considering that it’s still worth something only because of you.”

    That anecdote captures much about those times. Prices were rising at double-digit rates: consumer prices in the United States more than doubled during the 1970s, spreading panic as inflation destroyed the value of retirees’ savings, ate away at wage increases, and made car loans unaffordable. I recall a real estate agent telling me that houses would sell only if the seller provided financing — indeed, that’s how I bought my first home. And this wasn’t merely an economic matter. Serious people had serious concerns that inflation was destabilizing society. Talk of hyperinflation was not unusual.

    As I relate in An Extraordinary Time, central bankers, not least Volcker’s predecessors as Federal Reserve chairman, believed there wasn’t much to be done about it. Arthur Burns, Fed chairman from 1970 to 1978, went so far as to say in 1978 that inflation had nothing to do with the central bank. Many economic experts of the day shared that view, losing sleep over whether the country faced “cost-push” inflation or “demand-pull” inflation or monetary inflation or some other variety. “Jawboning” — attempting to talk inflation down — was a favorite remedy, along with price controls, credit controls, and other measures premised on the hope that the government could simply order inflation to stop. The record of success was abysmal.

    When Volcker was first suggested to Jimmy Carter as a potential Fed chairman in 1979, Carter’s response was, “Who’s Paul Volcker?” In their first meeting, Volcker made clear that if he took the job, he would act against inflation. Carter, alarmed at an inflation rate headed towards 13 percent, nominated him anyhow. Volcker was true to his word. Carefully navigating the politics, he pushed interest rates sky high. Businesses closed. Auto sales collapsed. The housing market died in the deepest recession since World War II, as millions of people lost their jobs.

    The price was high, but inflation broke. Only once since 1982 have consumer prices increased more than 5 percent in a single year. Mortgage interest rates of four percent — unimaginable back then — seem normal. Prices don’t seem higher every time we go to the store. Americans plan their lives without assuming that rampant inflation will destroy their dreams. Those too young to have lived through the 1970s do not realize what a luxury that assumption is.

    Paul Volcker did much else before he died on December 8. We owe him an enormous debt of gratitude.

  • Too Damn Big

    Not too long ago, I had a chat with a high-ranking executive at a major container shipping line. The subject was new ships. “Those guys on the operating side always talk about how the bigger ships have lower costs,” he said, shaking his head. “They don’t see the bigger picture.”

    The bigger picture is that the container shipping industry’s enthusiasm for size has brought it nothing but headaches. Changes in trade patterns, still in their early stages, are likely to make the problems worse. And yet most of the major ship lines can’t help themselves. In October, Mediterranean Shipping Company, the Switzerland-based company that is the world’s second-biggest container carrier, said it would acquire five megaships, each able to carry 23,000 20-foot containers — equal to 11,500 truckloads. Evergreen Marine, a Taiwanese line, just ordered six ships of the same size. Hyundai Merchant Marine has a dozen ships of that size on order, with deliveries to begin next year. CMA CGM of France, the fourth-largest container line, has several on the way. All of these vessels, it is worth noting, are larger than any containership now in commercial service.

    The attraction of megaships is clear enough: if it is filled to capacity, a ship able to carry 23,000 twenty-foot-equivalent units — TEUs, as they’re called — has much lower operating costs per container than a tiddler carrying, say, 15,000 TEUs. But that is a very big “if.” With international trade growing slowly, there’s a lot of unused capacity on voyages from Asia to Europe, and on the reverse voyage from Europe to Asia empty containers, which travel at very low rates, are often the main cargo. The ships are too big to call at many ports and to fit through the recently enlarged Panama Canal, so they don’t serve North America. While a fully loaded megaship is highly efficient at sea, it can cause chaos in port by discharging or loading thousands of containers at a time, delaying customers’ deliveries and erasing many of the putative benefits of large vessels.

    Recent economic trends pose an additional challenge. The world’s ten largest container ports all are located in Asia, seven of them in China. This is important for containership economics, because only a very large port is likely to amass enough outbound cargo to justify frequent calls by very large ships. But due to rising wages in China, trade sanctions in the United States, and businesses’ increased attention to risk, manufacturing of many widely traded goods — clothing, footwear, consumer electronics, toys — is shifting from China to such countries as Vietnam, Bangladesh, and even Ethiopia. This shift is visible in the fact that Chinese ports such as Hong Kong, Qingdao, Xiamen, and Dalian, all of them larger than any port in North America, have seen traffic flatten out or decline. Few of the new manufacturing hotbeds, though, export enough to Europe to justify a 23,000-TEU ship dropping by.

    A few people in the shipping industry appear to recognize the insanity of the race for size. The chief financial officer of Maersk, the largest container line, said in November that “there are no intentions now to invest in any large vessels.” Cosco, the state-owned Chinese ship line, seems to have retreated from rumored plans to order 25,000-TEU vessels. No doubt, operating such vessels would bring prestige. But when it comes to making a profit, they’re too damn big.