The Solution to this and the Next Economic Crisis
I long meant to do a piece looking at how the Japanese earthquake exposed the problems with our current supply chain. Matt Stoller has taken what happened after the earthquake as an opportunity to reflect on the possibility of systemic failure because our supply chain has been concentrated and outsourced.
In the last few years, economists have spent a lot of time and energy thinking about bank runs. A bank run happens when depositors think a bank is weak and scramble to get their money out before it collapses. “Tight coupling” of financial institutions, like when banks are overly dependent on each other, can create a cascading series of problems for the system itself.
[snip]
Worryingly, there’s been very little consideration of how systemic collapses can happen in another, perhaps more dangerous realm—the industrial supply system that keeps us in everything from medicine to food to cars to, yes, videotape. In 2004, for instance, England closed one single factory, which caused the United States to lose half of its flu vaccine supply.
Barry Lynn of the New America Foundation has been studying industrial supply shocks since 1999, when he noticed that global computer chip production was concentrated in Taiwan. After a severe earthquake in that country, the global computer industry nearly shut down, crashing the stocks of large computer makers. This level of concentration of the production of key components in a globalized economy is a new phenomenon. Lynn’s work points to the highly dangerous side of globalization, the flip side of a hyper-efficient global supply chain. When one link in that chain is broken, there is no fallback.
Lynn has continued to study industrial supply shocks and says, “What I have found most interesting recently is the apparent role supply chain shocks played in triggering a synchronized slowdown of industrial economies in April—production down (in USA, China, Europe, Southeast Asia), jobs down, demand down, GDP numbers down—due almost entirely to the loss of a single factory that makes microcontroller chips for cars.”
Today, the problem manifests as shortages of videotape or auto parts, but the global supply chain is so tangled and fragile that next time it could be electronics, weaponry, or even food or medicine. As Lynn noted in an interview with Dylan Ratigan, China controls 100 percent of the national supply of ascorbic acid, which is a basic food preservative. Leading oncologists are already warning that we are experiencing severe shortages of generic yet pivotal cancer drugs, because there’s no incentive for corporations to make them.
The company Lynn mentions whose chip factories (there were actually 7 originally) went down with the earthquake, Renasas, did a remarkable job both restoring production and sustaining what supply it could.
But it’s telling that a company with just 40% of the market could threaten such a central industry.
Of course, it’s not just in auto manufacturing where chip production has been a critical issue. I’ve bitched before about the concern that “counterfeit” chips have left our military toys susceptible to failure. Or, dispensing with the secrecy, the possibility that specially-engineered chips may have backdoors that hackers are exploiting.
Look at the way our defense establishment proposes dealing with that issue.
In 2010, the US military had a problem. It had bought over 59,000 microchips destined for installation in everything from missile defense systems to gadgets that tell friend from foe. The chips turned out to be counterfeits from China, but it could have been even worse. Instead of crappy Chinese fakes being put into Navy weapons systems, the chips could have been hacked, able to shut off a missile in the event of war or lie around just waiting to malfunction.
[snip]
The US has been worried about its foreign-sourced chips in its supply chain for a while now. In a 2005 report, the Defense Science Board warned that the shift towards greater foreign circuit production posed the risk that “trojan horse” circuits could be unknowingly installed in critical military systems. Foreign adversaries could modify chips to fizzle out early, the report said, or add secret back doors that would place a kill switch in military systems.
[snip]
The Defense Science Board warned in its report that “trust cannot be added to integrated circuits after fabrication.” IARPA disagrees. The agency is looking for ways to check out chips once they’ve been made, asking for ideas on how the US can verify that its foreign chips haven’t been hacked in the production process.
Keep your suggestions original, though. IARPA’s sister-shop, DARPA, has already done some work on chip verification. DARPA’s TRUST program uses advanced imaging and X-rays to search for deviations from chips’ designs. Its IRIS program aims to check out chips when the US doesn’t have the full designs to compare them to.
One way IARPA would like to make chips from foreign foundries safe is by splitting up the manufacturing process. Under this scenario, the front-end-of-line (FEOL) stage of manufacturing would take place at offshore foundries, while the back-end-of-line processing would finish up at a more secure US facility.
That is, either because we no longer have the capacity (true in part) or our capacity has lost the technological edge (true in part), rather than just mandate that chips going into war toys be built in the US, IARPA proposes a two-step manufacture process to ensure our chips are not counterfeit or hacked. We’ll just do the finishing touches to the chips, IARPA suggests, not build the chip from start to finish.
Is it so unreasonable to instead suggest that chip manufacture is something our country needs to invest in, both to ensure the diversity of the supply chain globally but also to provide supplies to the Military Industrial Complex?
Apparently, that is paradigmatically unthinkable.
At least in DC.
Meanwhile, the Alliance for American Manufacturing has a poll out that shows the US is as close to unanimous as you can get that it needs to invest more in manufacturing. Some of the results:
- 90% have a favorable view of American manufacturing companies – up 22 points from 2010.
- 97% have a favorable view of U.S.-made goods – up 5 points from 2010.
- 94% of voters say creating manufacturing jobs is either “one of the most important” things government can do or “very important.”
- 90% support Buy American policies “to ensure that taxpayer funded government projects use only U.S.-made goods and supplies wherever possible.”
- 95% favor keeping “America’s trade laws strong and strictly enforced to provide a level playing field for our workers and businesses.”
Now, even polls on Medicare and Social Security–for which there is overwhelming support–poll closer to 70%. That says either this poll is skewed, or that the one thing Americans agree upon is that we need to start making things in this country again.
That may not bode well for Obama’s reelection, given that after this debt ceiling gets resolved, he and the Republicans are going to try to rush through three trade deals.
On the economy, generally, there’s a surprising disjunction between what the country believes and what DC espouses. But on jobs and manufacturing, the split is even more stark (well, except for exceptions like Jared Bernstein, who is incredulous at the direction this is heading).
I realize that the government–Obama and the Republicans–have created their own crisis that makes the debt an issue of national importance. But even while they do that, they’re ignoring equally looming threats. And, at the same time, the concerns of 90% of the country.
Chips?
Off the old blockheads?
Make our own “things”?
“… a surprising disjuction”?
Perhaps, an unsurprising disFUNCTION?
“…paradigmatically unthinkable.”!!!
I’d say you’ve got your finger on the heart-beat, the pulse of America, EW.
It appears rather “thready” and “unsteady” and terribly weak, at the “top” and “confused” and “bumpy”, “lumpy” and “jumpy”, fearfully so, down toward the middle and the lower extremities.
Quite a sobering number of “equally looming threats” of many different sorts and kinds, not the least being the growing recognition of class war being waged …
DW
Very timely post. May I suggest this excellent look at this subject by John Michael Greer. “Salvaging Resilience” shows the rather counterintuitive deficiency of efficiency (particularly in just-in-time supply-chains.)
http://thearchdruidreport.blogspot.com/2011/07/salvaging-resilience.html
Three new trade deals?
We don’t need new trade deals we need TARIFFS. Big TARIFFS. If you look at U6 we’ve got almost 20% of our workforce under or unemployed. What’s the value of all that lost production? A country that leaves that much of its citizenry nonproductive is doomed to disaster.
Good to see a focus on this issue.
I was hoping the effect of the Japan earthquake on US mfg would get some attention; followed, one would hope, by some kind of action to change the way this works. It is surely a “national security” issue, in both the traditional sense and the broader meaning of economic security.
I mean, you can see it in trivial things like toys and garments, nearly manufactured overseas. Every Christmas, demand for certain toys is so huge you see parents lining up to buy the hot toy or toys. When the stores run out, that’s it, no more. Why? Because the toy is made in China and by the time a new shipment could arrive Christmas would long be over.
The same with many items of clothing; stores find great demand for certain items, maybe more in certain sizes than they’ve bought. But again, when they’re gone, they’re gone, because the shipping chain would take too long to order more based on unexpected demand.
It seems to me (yes, anecdotal, obviously) that it flips the classic law of economics, of supply and demand, on its head. Demand has no effect on supply because the supply chain is…umm, crazy? Why wouldn’t companies want to make more income by meeting demand?
Your comment that bringing chip manufacturer entirely back to the U.S. illustrates the straitjacket of assumptions keeping us in this crazy version of capitalism.
I’m afraid my mental refrain is becoming “we’re doomed,” on all sorts of subjects.
oops – if edit: “nearly ALL toys and garments manufactured overseas.”
Sorry about that.
Not sure exactly how this fits (perhaps under America’s trade laws) but this business of allowing so many foreign nationals into the country to take American jobs is absurd!
Major corporations with critical infrastructures (utilities, etc.) are allowed to “offshore” jobs because of supposedly cheap labor, but there are major security risks in doing so. And that “cheap” labor is more than paid for in terms of language barriers, mistakes, and other issues. I worked at a firm a couple of years ago doing contract technical writing. Some idiot higher up decided to send some of the work to India because it would save money. I spent more time trying to repair the damage that was done than getting my own work done.
Current accounting rules provide a means for corporations to classify the cost of contract labor as “resources.” That is a great incentive not to hire direct employees.
I am tired of living at the whim of, and being governed by, corporations.
@tejanarusa: I keep hearing that same refrain!
Speaking of supply chains, I own a 2003 Saturn Vue that has required some major work in the last two months (mostly due to poor engineering work). Since GM did away with Saturn, and then declared bankruptcy, OEM parts are extremely scarce. I might add that I suspect a bit of price gouging on the part of GM… for some reason, it seemed to me that the parts required were considerably more expensive than comparable parts for other cars.
Not-so-OT: The Chinese government organized and funded the r&d that has produced this cute little robot that walks on water — isn’t he sweet? Here is more on the Harbin Institute of Technology.
Why can’t people figure out that long supply lines that depend on oil-powered ships (or nuclear or wind, come to that) are *fragile*.
I can buy Chinese garlic here in Toronto that is half the price of garlic produced here in Ontario. How can that possibly be so? Is it like WalMart, they low-ball until the little local stores are killed? Is it like Russia, where the economists decided what the prices were, with no mechanism to tie prices to actual costs? Or what?
Once our mfg capacity is lost, it will be nearly impossible to regain it. My take is that it is already too late for the US to save its mfg base, and we in Canada are under siege. They are coming for our libraries, municipal pools and zoos, too.
(hope my formatting works)
“The one factory burned down” was a big problem in the old Soviet Union, too. That was the first reason given when this or that product was unavailable.
It seems that, when they collapsed, the rest of the world caught up with them.
But, seriously, one should also remember that about the time the Japanese reactors were blowing up their containment buildings, there was some discussion that Texas had been negotiating to build some nuclear power plants in Texas and those plans were on hold. The reasons (beyond the bad publicity of nuke plants melting down and blowing up) were that the furriners they were working with – TEPCO (Tokyo Electric Power Company)- were busy with their melting and exploding plants at home and couldn’t spare anyone. The other reason was that we, here in the USofA (who invented nuclear power plants), cannot make domestically the steel forgings necessary to build nuclear power plants.
I just returned from a month out west, where I spent fairly significant time with members of the gooper landlord/proprietor/small business segment – and they are tottering on the edge of disaster.
This debt/deficit deal does nothing to get money circulating in the economy – which will take jobs – and they see no hope ahead.
When I pitched this deal to them:
“What if I could make All Social Security/Medicare/Medicade issues go away *forever* by removing the SSN max salary deduction cap, currently set at $106,500, and…
…what if I shaved $4T off the debt by letting the Bush Tax Cuts expire and running the economy for ten years on the Clinton Tax Rates?”
Every single one of them said they’d take the deal if it opened the dcoor to jobs creation.
Once again it is obviously impossible to overestimate the greed and stupidity of the ‘powers that be’. I wish I could make a good worthwhile comment here about the stupidity of those that outsourced the US industrial base over the last 50 years but that stupidity is overwhelming. I have an aunt who commented that my lost pwb layout job (& career) was ‘buggy whip’ technology – can you guess that she is quite wealthy? (My uncle was an accountant who got his firm from my grandfather for whom he worked his entire career, in other words a ‘self made man’ koff koff) I won’t speak to her ever again as I cannot hold my tongue. Moron.
Great follow up on
the supply chain mess. Also.
The demand chain mess.
Two lovers frolic.
Peak civilization seen
in the rear view mirror.
@GulfCoastPirate: Yeah exactly. If Thad McCotter wasn’t such a Skeletor, I’d think it’d actually become an issue. That said, I don’t entirely rule out a challenge from the left.
@tejanarusa: Given teh poll numbers here, though, and the degree to which wages have fallen, I actually think you might see more branding “Made in America.”
The local food movement is very vibrant and joins lefties and righties. The “Local First” movement also works in many different cultures. Add a “Made in America” branding on top of that, and you might find some consensus to rebuild that had nothing to do w/DC.
I’ve always been concerned about the fact that the USA doesn’t manufacture/prepare many of the most commonly used drugs (if you take any medications, you might be surprised to see where your meds are made.) I’m certain, though I never saw anything written about it, that many of the elderly in New Orleans died for lack of diabetes medicines during the deluge. Now imagine if a worldwide transportation disruption came along. Very disconcerting.
Radiofreewill wrote:
‘“What if I could make All Social Security/Medicare/Medicade issues go away *forever* by removing the SSN max salary deduction cap, currently set at $106,500, and…
…what if I shaved $4T off the debt by letting the Bush Tax Cuts expire and running the economy for ten years on the Clinton Tax Rates?”
It wouldn’t make a difference at this point. Remember, the problem is not taxes, debt, spending or any of that. The problem is an overall decline in aggregate demand caused by the decline in wages over decades. First we sent mom off to work and that covered it up for a while. Then we gave people access to easy credit and that covered it up for a while longer. Then Greenspan came along and blew enough money into the economy that they would give credit to anyone breathing and that covered it up for a while. What now – will we give credit to the dead?
Ask yourself this. Why do we hear so much about all these corporations that have so much capital sitting on the sidelines? We hear from the troglodytes they won’t invest it here because we won’t let them burn the rivers or pollute the air but why aren’t they investing it anywhere else? Why sit on cash (treauries) earning 1%? Because it’s the same problem everywhere – there is NO DEMAND. If a company already has excess capacity they aren’t going to expand until all that capacity is absorbed by increased demand. However, once we allowed basically unrestricted movement of capital across borders it became nothing more than global labor arbitrage. Head to wherever some oligarch will use his internal police force to force his peasants to work for $1 a day. Now the whole world has the same problem – NO DEMAND because workers have NO MONEY. Any injection of capital into the economy is going through the equivalent of a negative feedback loop. Something goes in but nothing comes out. It just ends up in some capitalist’s bank account and eventually parked in treasuries.
This isn’t going to end until a critical mass of people are starving. Then they might get up off their asses and blow up the global trading system as it now exists. Until then, anything you do is like pissing into a hurrican force wind.
I should also say that while Marx was an asshole of a politician he was an excellent mathematician – the subject in which he was actually trained. This was all entirely predictable from the mathematics.
EW @14
This rings very true and is confirmed by discussions I have had with neighbors who are, shall we say, nowhere near the “left” side of thinking, yet who do well understand the need of rebuilding the infrastructure and, likewise, are interested in composting and support local, organic farming and antibiotic-free, “free-range” livestock “production”. All lament the loss of American manufacture and speak of the clearly related job losses. There is also broad concern about Social Security and Medicare … as many have aging parents who will need residential care, and neither of these prohrams are regarded as “entitlements”. There is far less support of unions, but even that is, slowly, beginning to change.
DW
@GulfCoastPirate:
Well said! It may very well be too late, but if there were time, then one elegant way out of this mess – for both sides – is to do a big, well-timed deal composed of spending cuts and ‘no new taxes’ revenue increases, plus jointly roll-out a Huge Jobs Program ‘for the People.’
Then our bumbling, bickering politicians could actually make lemonade out of lemons, for once…
@Diane: My contact who knows many folks in the pharma business swears that what is really going on is that outsourced manufacturing went to too many plants that don’t meet quality standards, but mid-level managers are afraid to report that news to upper levels of the organization for fear of losing their jobs.
I’ll take ‘need to start making things in this country’.
The politicians aren’t nearly as smart as they think they are, when the voters can come up with better solutions.
this is a very nice specific report illustrating a generally unappreciated fact: the human species’ supply chains are terribly extended.
we see this in aluminum market manipulation,
we see this in petroleum market manipulation,
we do not see it in fundamental areas like rainfall/water and food grains.
the june 30 issue of nature details a wheat crop fungus (“the wheat stalker”, p.563) originating in east africa which has spread to virtually all the areas of the world the u.s. is now militarily engaged in – pakistan, afghanistan, north africa – as well as india, nepal, bangladesh, and australia.
sudan is now experiencing starvation.
china has a major drought on its hands.
air, water, food, and shelter
of these, water and food supplies are increasingly threatened for numbers of our species.
from an aluminum bottleneck created by rapacious traders at goldman-sucks to wheat shortages created by a fungus with no intent other than to feed and procreate, we are a species under the shadow of sudden large decreasing numbers, if not extinction.
and none of this counts the damage of major volcanic eruptions which our species has developed without.
@HotFlash:
See comment on Daily Kos, Barbara Kingsolver and local tomatoes: “Local [Appalachian] farmers were trying to form a cooperative to sell to local supermarkets, and in the end their harvest went to waste when the markets bought from California instead — because taxpayers pay the shipping.”
The reason Tea Partiers want a default?
As a group, they’ve gotten heavily invested in Gold.
If a debt deal gets done, then the price of Gold drops precipitously, wiping them out, but sending the stock market soaring.
A default, however, sends them towards $5,000 an ounce…and collapses the market.
Nevermind that a default pulls the whole economic house down on everyone, their Greed is so strong that it’s completely short-sighted them with the ‘chance’ to become the Lords of America.
@Petro:
I was just about to write an independent comment about “just in time” supply chains: Warehouses are deemed so 20th century. The modern standard business plan abhors warehouses in favor of make it and ship it plans (to minimize storage costs). This works fine, as long as there are no shortages due to fluctuations in demand. But “just in time” business models are much more vulnerable to shortages in the supply chain, resulting in far-ranging ripple effects.
Bob in AZ
Every country should be self supporting. Not because of isolationism, but because it avoids double headed leadership, power struggles, and headaches. Just as being self supporting as an individual is the best way to stay safe from the greed of others, so it would be true with a country. It doesn’t mean that we can’t need this or that from a country, but that we can’t “depend” on other countries in a way that could ruin us. This is part of the traditions of AA. It is meant to prevent that dysfunction that goes along with co dependency. Expecting a country to act a certain, expecting a country to take care of this or that. Manipulating a hostile country into giving us what we need. (alot of work). All of that stuff increases the risk of war and the use of power and control. One if one of the country’s you depend on is a “drunk”. (metaphorically speaking…or the leader is, or is dysfunctional).
We should strive to be self supporting. It would fix many of the woes of our nation today and it’s been a part of the twelve step program that works very well at creating serenity. Pair this up with the idea that participation is the key to harmony, and that community service is the center of all serenity…you get the picture! I am not selling AA but making the point that this concept is central to an organization that serves every country in the world. (think of that…you can go to any country and find an AA meeting, that uses the steps, the tradition and the principles. ) There is a reason that it works for the world and so many people. And this concept is one of them.