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.