Pluralistic: 01 Jul 2022


Today's links


An icon of a person cracking a bullwhip; their head has been replaced with the frowning head of Uncle Sam. Each ascending peak of the whip's passage has a different icon; in order: ATM, shop, truck, warehouse, shipping containers, container ship, factory. In the background is a blurred out supermarket aisle, stocked high with goods.

After inflation, the whip-crack (permalink)

There's a school of economics that likens the economy to a computer, one that we all power. Every time we buy something – or walk away from an offer – we feed data to the computer, which transmits this price- and demand-information from consumers to producers to financiers, so that demand can be met with supply.

The proponents of this theory admit that this "computer" produces a lot of waste as it buds off different solutions – new businesses, products and services – and then prunes away the ones that fail, but, they say, this waste is far less than the waste we'd experience if we shut the "computer" down and switched to a "planned economy."

As Leigh Phillips and Michal Rozworski argue in their crucial, slim 2019 book "The People's Republic of Walmart," any large, complex economy tends toward high degrees of integration between firms, because the "computer" of the economy of buyers and sellers is balky, slow and often catastrophically unreliable:

https://memex.craphound.com/2019/03/05/the-peoples-republic-of-walmart-how-late-stage-capitalism-gives-way-to-early-stage-fully-automated-luxury-communism/

Here's one way that the economy-computer fails: the "bullwhip effect." That's when a retailer experiences a rush of sales for a product and sells out, and so places a bigger order. The distributor notices that their retailers are raising their orders, so they place a bigger order with the wholesaler. The wholesaler then boosts their order with the manufacturer, who places bigger orders with their material suppliers and so on:

https://en.wikipedia.org/wiki/Bullwhip_effect

Just as the little wave at the start of a bullwhip turns into a succession of bigger waves, so that a simple twitch of the wrist can cause the tip of the whip to break the sound-barrier, so too can a transient increase in demand ripple up the supply chain, creating vast overproduction of goods.

This, in turn, leads to the other side of the bullwhip effect: a series of overcorrections that produces shortages. The retailer now has a shelf full of whatever their customers briefly wanted. But the surge is over, so those products just sit on the shelf. The retailer doesn't just cut their order to the previous, normal level – they actually reduce their typical order, because they're overstocked.

Once again, this effect ripples and expands through the supply chain. The distributor is oversupplied, so they cut orders to the wholesaler. The wholesaler cuts orders to the manufacturer. The manufacturer cancels its orders with its material suppliers – and now a bunch of miners or loggers get laid off.

This can actually destroy capacity. The airlines offered early retirement to all their senior pilots, cabin crew and planners during lockdown, and now they're canceling hundreds of flights every day:

https://nypost.com/2022/06/26/airlines-got-50-billion-in-pandemic-relief-but-are-still-screwing-americans/

This is a disgusting ripoff, and the airlines could be handling it better, but they probably can't lure all those employees out of retirement. The total American aviation capacity has been reduced, and it will take years to increase it.

In People's Republic," Phillips and Rozworski describe how large capitalist firms operate a secret, behind-the-scenes planned economy. Monopolistic retailers like Walmart and Amazon don't just place orders with large consumer packaged goods monopolists like Procter and Gamble and Unilever. These gigaretailers *actually reach into the production schedules of their primary suppliers and schedule extra shifts of workers, increase the orders of material inputs, and so on. This is the only way to avoid the bullwhip effect and meet demand with supply without wild, capacity-destroying cycles of overshots and undershots.

This is basically a digital/cybernetic version of the Soviet planned economies, where different links in the supply chain explicitly coordinated with one another, not by making a series of bids and puts that transmitted supply and demand information, but by sending actual information about what they'd need and when. It's a linear descendant of cybernetic projects like Salvador Allende's Cybersyn, but controlled by unelected billionaire commissars instead of democratically accountable regulators and legislators:

https://jacobin.com/2015/04/allende-chile-beer-medina-cybersyn

As the aviation example shows, we are living through the bullwhip effect today. Writing in Freightwaves, Craig Fuller makes a compelling case that the inflation crisis could rapidly swing the other way, as slow-moving logistical chains and slow-circulating demand information leads to an oversupply:

https://www.freightwaves.com/news/the-supply-chain-bullwhip-is-doing-the-feds-job-on-inflation

Retail inventories are extremely high. Big box retailers' warehouses are overflowing with "large discretionary categories, such as furniture and household goods." Meanwhile, freight order have come to a screeching halt, as major retailers cancel their shipping reservations because that inventory isn't moving.

The trucker shortage is over. The typical springtime surge in trucking demand was nowhere to be seen – instead, there was a decline in trucking demand.

Used car demand just experienced its biggest drop in two years. Prices are plummeting:

https://www.bloomberg.com/news/articles/2022-04-07/we-just-got-the-biggest-monthly-drop-in-used-car-prices-since-april-2020

Same for lumber. Lumber commodity prices tanked 30% over the past month, (from $1,252 to $949 per thousand board feet).

Domestic intermodal freight (going from rail to truck or vice-versa) is slowing. Prices are dropping. We just hit an all-time low in intermodal freight rates – it's 21% cheaper to ship intermodally than by truck.

Fuller: 'Prices for freight will come down. Supply chain bottlenecks will ease. What were recently inventory shortages are now gluts, and will likely result in price discounts, not increases. This is a late-stage supply chain correction."

Fuller says that this bullwhip cycle was exacerbated by shutdowns in China, and there is obvious truth to this, but I think it's worth looking further back up the causal chain to understand inflation.

Recall that the capitalist planned economies of The People's Republic of Walmart depend on monopolies – the reason Amazon and Walmart can reach into P&G and Unilever's production systems is that they are all giant, industry-dominating firms who face little direct competition.

This is the same dynamic – monopolism – that allows big companies to exploit our fear of looming inflation to hike prices, something their CEOs actually boast about on their shareholder calls:

https://pluralistic.net/2022/02/02/its-the-economy-stupid/#overinflated

Monopolism – and its handmaiden, finacialization, which rewards firms for issuing debt and gambling on complex derivatives rather than making things – is also behind the dismantling of US industrial capacity and offshoring it to China, making the US economy dependent on the choices of CCP bosses half a world away.

https://pluralistic.net/2022/06/01/factories-to-condos-pipeline/#stuff-not-money

The less a country can make on its own, the more vulnerable it is to shocks on the other side of the planet. The more the markets reward emptying out buffer stocks, casualizing workers, and selling off your physical plant, the more your company is at risk of failing if anything goes wrong, anywhere.

The story that inflation is "too many dollars chasing too few goods" puts undue influence on "too many dollars" and not enough on "too few goods." The 40 year neoliberal experiment in letting the economy-computer run itself was a sham from the start, a way to trade democratically accountable market structuring through public regulation for secret, unaccountable market structuring through back-room deals between monopolists.

The idea that we should fix "too many dollars" by taking away workers' jobs and cutting their wages so they can't afford the necessities of life ignores the possibility that we can work on "too few goods" instead – by onshoring production of key inputs like lithium, and by shortening supply chains so there's fewer ripples in the bullwhip's path.

Long, brittle supply chains have given us the bullwhip effect from hell. Yes, there are energy shortages as a result of Russia's invasion of Ukraine, but there's also no onshore capacity for solar panel production, leaving Americans to bid against desperate, Russian-gas-starved Europeans for Chinese panels.

As with used cars and furniture and other commodities, solar panels are – even now – bunching up in the supply chain between China and the EU, with an overcorrection likely to follow.

Here in the USA, we could face deflation – after all, if lumber prices are dropping 30% per month, why wouldn't you delay your project for another month and see if you can pick up another 30% discount?

If the economy only "works" when working people have to choose between food, fuel and health care, when bosses can reduce your pay and cut your hours because you can't get a job elsewhere, then the economy doesn't work at all.

Focusing on monetary policy – rather than productive capacity – is a trap that the wealthy set for us. The tell is obvious: "too much money creation" is never a problem when it's financing military spending or tax cuts. The rich know that the true predictor of an economy's health is its ability to produce goods, and fretting over its production of money is largely a distraction.

(Image: Lars Frantzen, CC BY-SA 4.0; Twitter, CC BY 4.0; https://commons.wikimedia.org/wiki/File:Bullwhip_effect.pngThwongterry and Toobaz, CC BY-SA 3.0; modified)

Hey look at this (permalink)


This day in history (permalink)

#15yrsago Universal threatens to drop iTunes Store contract https://memex.craphound.com/2007/07/01/universal-threatens-to-drop-itunes-store-contract/

#15yrsago Let a million top-level domains bloom https://wendy.seltzer.org/blog/archives/2007/07/01/aging_the_internet_prematurely_one_pdp_at_a_time.html

#10yrsago UK immigration test to focus on Shakespeare and Christianity instead of human rights and civics https://www.bbc.com/news/uk-18662531

#10yrsago Funnyjunk’s lawyer asks judge to stop charitable donation through IndieGoGo by The Oatmeal https://arstechnica.com/tech-policy/2012/07/funnyjunk-lawyer-aims-to-halt-distribution-of-bearlove-money/

#5yrsago Quantifying the additional killings commited by cops when they get military weapons https://journals.sagepub.com/doi/full/10.1177/2053168017712885

#1yrago Exxon lobbyist confesses to his crimes: Keith McCoy thought he was talking to an executive recruiter https://pluralistic.net/2021/07/01/basilisk-tamers/#exxonknew

#1yrago When the Sparrow Falls: Neil Sharpson's dystopian tale of an anti-AI hermit kingdom https://pluralistic.net/2021/07/01/basilisk-tamers/#rage-against-the-machine


Colophon (permalink)

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