The Biden administration spent a couple of weeks lowering expectations in advance of last week's Employment Situation Report from the Bureau of Labor Statistics, warning that after a year of mostly good news on job creation, we would likely see a loss of jobs in January due to Omicron. In these reports, an entire month is represented by a "reference week," and the survey asks respondents very literally if they worked that week. A "no, I didn't" can be the result of layoffs or the inability of a previously non-employed person to find a job. But not going to work due to a snowstorm, a bad hurricane, or a strike also count as not working, so temporary, non-macroeconomic events like a May 2016 strike at Verizon or the 2012 superstorm Sandy sometimes have a large impact on jobs numbers. Even among those who were not gravely ill, Omicron seems to have made a large number of people too sick to come to work for at least a few days in January. Airlines canceled many flights due to shortages of available crews. Some restaurants in my neighborhood had to close or temporarily switch to takeout-only. We saw disrupted deliveries to grocery stores around the country. It seemed like a lot of people missed work at least temporarily, and the January report was expected to reflect this. But then the actual numbers came in:
So what happened? One natural interpretation of these numbers is that the fears of an Omicron impact on the economy were wrong. But this is incorrect. What actually happened is that Omicron had a large negative influence on the economy in January, but the January jobs report included good news about prior months. These revisions not only added to our estimate of how robust the recovery was across 2021, but they also gave us a somewhat different impression of its shape. Altogether, they tell a tale of an economy in which both the virus itself and virus-related fears remain a, if not the, major constraint on growth. January jobs reports are oddToday's post relies largely on the work of two other excellent Substackers. Joey Politano and Matt Klein have both done fantastic analyses of this report, and I'd encourage anyone who's consistently interested in labor market data to subscribe to their 'stacks. I'm going to offer a somewhat less technical and somewhat more opinionated account of what happened, but all credit to the two of them for digging into the report to explain what really happened. It's helpful to know a little about how the monthly jobs report comes together. On the most basic level, it's a combination of two surveys:
The establishment survey is generally considered more accurate and is the canonical source of information for the questions that it answers, but to understand the labor market, we also need information that doesn't show up in the establishment survey. Calculating the unemployment rate or more a sophisticated measure like the employment-population ratio, for example, requires knowing how many non-employed people say they're looking for work. Talking to employers doesn't tell you that, so we also need the household survey. But surveys rely on statistical samples of the population. To go from survey data to a point estimate about the level of employment, you need to make some background assumptions about the population you are surveying. Each month's report is revised the next month and then revised a second time as those assumptions are updated. There is also a seasonal adjustment that is applied to each report to try to extract the macroeconomic signal from the underlying noise. On top of this, January happens to be the month when the BLS does an annual update of some of its models. As part of this process, they use administrative data from the Unemployment Insurance system to check to see whether their survey-based estimates from a few months ago were accurate. They also use updated census data to change their estimate of how many people there are or what age they are. With updated data, they're able to generate new and better estimates. The January jobs gains came entirely from these changes. Population revisions create tons of jobs in JanuaryNear the end of the report, the BLS explains that with new Census data, they now think there are more people in the country but fewer old people than they previously believed. This increases the size of the labor force by a lot, raising the employment-population ratio. They also specifically say, "Data users are cautioned that these annual population adjustments can affect the comparability of household data series over time." But when we talk about job growth, we are specifically talking about comparisons over time. If you scroll down further to Table C, they show how the altered population estimates change the reported month-of-month change. And it says that if you apply the new population estimate to December 2021, you would have seen a loss of jobs between December 2021 and January 2022. The growth of jobs is purely a reflection of the changed population estimate.
That doesn't mean the jobs aren't real. But they are jobs we had all along. Using consistent household survey data, employment fell in January. And not only did it fall, but it fell for precisely the reason the Biden administration was worried it would fall: lots of people missed work because they were sick.
The economy is a complicated chain of dependencies. Robust labor demand is good for workers, but constraining labor supply is bad, so while some people missed work because they were sick, other people who weren't necessarily sick missed work due to temporary closures induced by other people being sick.
Population estimates don't impact the establishment survey, which did show strong job growth, particularly in the revisions to the November and December numbers. But what normally happens during a period of fast job growth (and certainly what happened consistently in 2021) is that the establishment survey misses a bunch of jobs early on that show up in the household survey. They're then discovered in revisions. We also need to note another specific piece of January weirdness. Normally a lot of companies add extra staff in the lead-up to Christmas, then lay them off in January. The unadjusted data shows a catastrophic recession every January, but the seasonal adjustment algorithm makes it go away. Every 12 months there's a sharp downward jag in employment, and every January is the worst employment month of the year. Seasonal adjustment takes a January that was better than the average January and calls it job growth.
Now to be clear, seasonal adjustment isn't some kind of scam or trick. We want to know how the labor market is doing. And what happens in a strong labor market is you see a below-average number of January layoffs. The official data is telling us what we wanted to know — demand for workers remained robust in January 2022. But in terms of "labor market data vs. your lying eyes," both surveys are saying the same thing, which is that the economy hit January 2022 with a lot of momentum but there really was an Omicron disruption. Beyond that, though, the revisions also show us that the pandemic weighed harder than we knew on the labor market all year. Restaurants are in worse shape than we knewThe pandemic pretty clearly boosted employment in warehouse and logistics work while hurting employment in hotels, bars, and restaurants. I think if you spent all of last year ignoring labor market data, that's what you would have guessed — leisure and hospitality are still pretty depressed, while transportation and warehousing are booming. That is broadly what the data showed, with a fair amount of nuance. But as Klein's chart here shows, revisions basically eliminated a lot of that nuance; there really was a huge structural shift in demand for workers out of leisure and hospitality and into warehouses. In particular, a collapse in film production and air transportation now seem to have not happened,¹ and the warehouse surge was just enormous.
This doesn't radically alter our understanding of the overall state of the labor market, but it means that the pandemic was weighing more heavily on the economy than the non-revised data showed. So what's up with restaurants? Well, for eight states (and Ontario), OpenTable can give us information on restaurant bookings now compared to two years ago. And it showed January restaurant demand staying very strong in Florida and kind of strong in Texas and California, but really hurting in New York, Illinois, Pennsylvania, and Massachusetts.
This seems like a mix of blue/red effects and warm/cold effects. We've had unusually harsh weather this January in D.C., and I have seen people braving the outdoor dining scene in freezing temperatures. Common sense is that if we had California's weather, all those outdoor dining structures would've been packed. But a lot of Covid-cautious people stayed home rather than shiver or brave Omicron indoors. And I think this is going to be a tough policy nut to crack. The restaurants aren't closed in blue America — the cautious people are avoiding them either altogether or during waves. And eating out in restaurants, even though it's something that I personally enjoy a lot, is an extremely discretionary activity. It's not like skipping doctor's appointments or taking your kid out of school. If you don't want to go out to dinner except when the weather is good, you can live that way basically indefinitely. That being said, as I wrote in my piece on normalcy, I do think Democratic policymakers should consider the interplay between school quarantine rules and other behavior. Saying a kid needs to quarantine for at least 10 days if he gets Covid-19 rather than applying the normal "don't come to school if you feel sick" rule significantly raises the stakes around the virus beyond its actual health impact on children. One point of view is that inducing fully vaccinated families to be more cautious in their behavior is a benefit of these quarantine rules because caution per se is a good idea. But from an economic point of view, it's counterproductive, and it would be helpful to nudge people into dining out if they can. Good short-term newsMy bottom line on all of this is that a correct understanding of the January jobs report should make you more optimistic about the short-term. There really was a significant Omicron effect on the economy in January, but we can expect that to taper in February. That will be a nice supply-side boost to the economy. And since restaurants in the northeast appear to be a seriously depressed sector, reduced pandemic concerns in February and then better weather come springtime should generate a further economic tailwind. But beyond the big, obvious questions about inflation, the Fed, the stock market, energy prices, etc., I wonder to an extent how robust American society will prove to be against future waves of the virus. The availability of vaccines and boosters and the accumulated antibodies from prior infections all mean that the virus is becoming less deadly over time. But vaccine protection does wane, the virus seems to keep evolving, and I don't think we'll be able to say this is "over" any time soon. So I think the Biden administration needs to ponder, not just as a matter of policy but as a matter of rhetoric and signaling, what outcome they are looking for. Unvaccinated people getting vaccinated is clearly good. People getting boosters as needed is clearly good. But if boosted people refrain from travel and indoor dining during Covid-19 waves, is that good? It strikes me as a large economic burden for a minimal public health gain, and among a population that is much more likely to be persuadable by the Biden administration than the hard-core Covid-19 denialists. As Omicron wanes, it'll be easy for the administration to do some cheerleading. But while there's no guarantee there will be another severe wave, there's a very strong possibility that there will be, and they ought to make a plan for it. Do they want to take a Fauci-led approach that emphasizes the virtue of precaution or do they prefer an economy-focused approach that emphasizes building confidence and the virtues of normalcy? Right now, I think they'd be likely to default toward the former. But they ought to be taking advantage of the opportunity to build up national stockpiles of tests and Paxlovid and preparing a message of "it's good and appropriate to keep traveling and dining with friends and family and living life" because the cost to the economy of doing otherwise is quite real. 1 My best guess is that the rise of streaming services is changing who is employing people in film production just as the shift from business to leisure demand is changing where air transportation workers are. This is the kind of thing you need the administrative data to catch. |
Tuesday, February 8, 2022
Matthew Yglesias: Breakdown of the Jan Jobs Report
Monday, February 7, 2022
Ezra Klein Show: How Bizarre the Supreme Court Is
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Produced by 'The Ezra Klein Show'
"Getting race wrong early has led courts to get everything else wrong since," writes Jamal Greene. But he probably doesn't mean what you think he means.
Greene is a professor at Columbia Law School, and his book "How Rights Went Wrong" is filled with examples of just how bizarre American Supreme Court outcomes have become. An information processing company claims the right to sell its patients' data to drug companies — it wins. A group of San Antonio parents whose children attend a school with no air-conditioning, uncertified teachers and a falling apart school building sue for the right to an equal education — they lose. A man from Long Island claims the right to use his homemade nunchucks to teach the "Shafan Ha Lavan" karate style, which he made up, to his children — he wins.
Greene's argument is that in America, for specific reasons rooted in our ugly past, the way we think about rights has gone terribly awry. We don't do constitutional law the way other countries do it. Rather, we recognize too few rights, and we protect them too strongly. That's created a race to get everything ruled as a right, because once it's a right, it's unassailable. And that's made the stakes of our constitutional conflicts too high. "If only one side can win, it might as well be mine," Greene writes. "Conflict over rights can encourage us to take aim at our political opponents instead of speaking to them. And we shoot to kill."
[You can listen to this episode of "The Ezra Klein Show" on Apple, Spotify, Google or wherever you get your podcasts.]
It's a grim diagnosis. But, for Greene, it's a hopeful one, too. Because it doesn't have to be this way. Supreme Court decisions don't have to feel so existential. Rights like food and shelter and education need not be wholly ignored by the courts. Other countries do things differently, and so can we.
This is a crucial moment for the court. Stephen Breyer is retiring. And in this term alone, the 6-3 conservative court is expected to hand down crucial decisions on some of the most divisive issues in American life: abortion, affirmative action, guns. So this is, in part, a conversation about the court we have and the decisions it is likely to make. But it's also about what a radically different court system could look like.
We discuss the Supreme Court's recent decisions on vaccine mandates, why Greene thinks judicial decision-making is closer to punditry than constitutional interpretation, the stark differences in how the German and American Supreme Courts handled the issue of abortion, Greene's case for appointing nearly 200 justices to the U.S. Supreme Court, why we even have courts in the first place and much more.
You can listen to our whole conversation by following "The Ezra Klein Show" on Apple, Spotify, Google or wherever you get your podcasts. View a list of book recommendations from our guests here.
(A full transcript of the episode is available here.)
I
"The Ezra Klein Show" is produced by Annie Galvin, Jeff Geld and Rogé Karma; fact-checking by Michelle Harris and Kristina Samulewski; original music by Isaac Jones; mixing by Jeff Geld; audience strategy by Shannon Busta. Our executive producer is Irene Noguchi. Special thanks to Kristin Lin.
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John Case
Harpers Ferry, WV
Enlighten Radio
Socialist Economics
Friday, February 4, 2022
Bloomberg: America Is Facing a Great Talent Recession
America Is Facing a Great Talent Recession
If the U.S. is to stand up to a resurgent China, it needs to think as hard about finding top talent as it does about promoting equity.
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Another monthly jobs report finds employers across the U.S. still crying out in vain for workers. Goods are undelivered for want of truckers. Code is unwritten for want of coders. Hotel beds are unmade for want of bed makers, with both Hilton Worldwide Holdings Inc. and Marriott International Inc. dispensing with automatic daily housekeeping at their nonluxury properties. Even the Internal Revenue Service's struggle to have enough people to deal with taxes on time is bordering on the apocalyptic.
The obvious reason for all of this, of course, is the coronavirus pandemic, supercharged by the omicron strain. Yet in many ways the impact of the Covid-19 crisis on the workforce, whether through workers calling in sick or choosing to drop out, merely highlights problems that were already in place or at least on the horizon. What has been eagerly dubbed the Great Resignation has hastened a demographic squeeze that was the inevitable consequence of the retirement of the baby boomers and the decline in the birthrate.
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The deeper problem is that the talent model that has served America so well, especially since World War II, is breaking down. Korn Ferry, a human resources consultancy, warns that "the United States faces one of the most alarming talent crunches of any country" in its 20-country study. The institutions, practices and mind-set that enabled the U.S. to create a workforce capable of powering the world's biggest and most dynamic economy are threatened by decay, disarray and disruption. And that is happening while China, a rival hostile power that poses an even greater challenge than the USSR once did, pulls ahead of it in world-defining technology. Once galvanized to action by the USSR's launch of Sputnik, the U.S. now witnesses the equivalent of the launch of a dozen Sputniks from Beijing every year, with no corresponding response.
In that respect, the Covid pandemic provides both a timely warning and a spur: a warning of what happens to a historically rumbustious economy when workers become scarce, and a spur to fixing America's long-term talent and labor-supply problems while there is still time.
The case for action is particularly urgent with top talent. After so many decades of economic and military supremacy, the U.S. has fallen into the habit of thinking that it has easy access to all the intellectual excellence it needs. The country's great universities will always be able to find geniuses hidden in the Great Plains or the swarming cities, the thinking goes, and if, by some chance, there aren't enough of those, then it can always raid the rest of the world. Yet today the demand for top talent in the corporate world and elsewhere is exploding just at a time when the supply is threatened, as the public school system allows exceptional talent to molder and other countries do more to retain their own exceptional performers. The country needs to add a new strand to educational reform: not just giving a helping hand to the poor or average performers but also identifying and nurturing the superstars who will help the U.S. beat back the challenge from Xi Jinping's China.
The American Talent Economy...
In 1958, historian David Potter published a book whose title captured the spirit of his country, at least as it appeared to the prosperous majority: "People of Plenty." The "plenty" refers not only to the U.S.'s relative material abundance compared with other countries but also to demographic and educational abundance: America has thrived in the long term because of a generous supply of both people and skills, delivered by a combination of high fertility and immigration. In the 19th century, the population multiplied by a factor of almost 15, to 76 million from 5.3 million. By 1890, some 80% of New York's citizens were immigrants or the children of immigrants, as were 87% of Chicago's.
Two Centuries of Immigration Flows
New legal permanent residents as a percentage of U.S. population
Sources: U.S. Department of Homeland Security; U.S. Census Bureau
Note: Fiscal years for immigration figures; 1976 includes the 15 months from July 1, 1975 to Sept. 30, 1976 because the end date of fiscal years changed from June 30 to Sept. 30. Share of population calculated using 10-year census figures.
There have been exceptions to this pattern. The 1924 Immigration Act choked off immigration for decades, and the Great Depression suppressed fertility sharply. But they have not been enough to block the swelling demographic tide. The postwar baby boom sent the population soaring once again. In the 1960s, women began to enter the workforce in large numbers. In the 1970s, high immigration resumed. From the 1980s onward, a succession of presidents celebrated demographic abundance.
The U.S. led the world in three great revolutions in education — creating a mass primary school system in the 19th century, and then mass high school and university systems in the 20th. The proportion of 17-year-olds who completed high school rose from 6.4% in 1900 to 77% in 1970. The proportion of high school graduates who enrolled in universities rose from 45% in 1960 to 63% in 2000. Claudia Goldin and Lawrence Katz of Harvard University estimate that the mean educational attainment of the U.S. workforce increased by 0.7 years per decade over the nine decades from 1915 to 2005, and that the improvement in educational attainment contributed almost 0.5 percentage points per year to the growth of productivity and output per person.
America was in a strong position in job-related skills, particularly in comparison with the world's former hegemonic power, Great Britain, where the educational world had an ingrained disdain for all things vocational. America's leadership in the creation of a mass educational system stood it in good stead for the industrialization of the late 19th century and the mass-production boom of the postwar era. America also had a due respect for practical education. Legislation in 1862 and 1890 established land-grant colleges, which were focused on science, engineering and agriculture. Technology- and science-centered institutions such as the Massachusetts Institute of Technology were designed to rival elite colleges such as Harvard in the practical world.
America's advantage was particularly marked in the realm of high-level cognitive skills, thanks to its elite universities and its ability to attract intellectual stars from across the world. It pulled off the remarkable (some thought impossible) feat of creating a mass university system while also perfecting the German model of the elite research university — creating what Clark Kerr, the president of the University of California from 1957 to 1967, called a multiversity. It also turned immigration policy into a tool of intellectual supremacy. Great universities like Berkeley attracted the world's best scholars through the sheer force of their excellence, while the federal government went out of its way to recruit scientists who could contribute to military research, even to the extent of getting its hands on former Nazi scientists after World War II.
… Hits the Buffers
The age of plenty is now drawing to a close.
The United States is belatedly following the rest of the rich world into a low-fertility future. The 2020 census showed that the previous decade had the slowest growth rate since the Great Depression. And the 2020s don't look as if they will be any better: The population grew by just 0.1% in 2021, the slowest rate since the nation's founding.
Slow Growth Ahead
Change in U.S. population ages 20 through 64
Sources: Calculations based on data from U.S. Bureau of Labor Statistics and U.S. Census Bureau
Note: Annual change is averaged over three years and are for the civilian noninstitutional population; projections are for total 20 to 64 population.
There is little sign that the waning of the pandemic will lead to a new age of optimism and surging fertility like in the 1950s. Younger Americans are opting not to have children, whether because the cost of child-raising is so prohibitive or because they are worried about climate change. Indeed, San Francisco, the capital of the new tech economy, reportedly has far more dogs than children.
Fewer Babies On the Way
Since 2010, the U.S. has lost its fertility advantage
Source: World Bank
Compounding the fertility problem is the withdrawal of so many working-age people from the workforce. America's total civilian labor force participation rate, which measures the share of working-age Americans who are either employed or looking for work, declined from 67% in 2000 to 62% in December 2021. By contrast, Britain's rate stands at 77% and Germany's at 76%. "We lag all of our peers in labor force participation now," Federal Reserve Chair Jerome Powell told a Senate banking committee meeting in July 2021, "which is not where we want to be as a nation."
Less of the U.S. Is Working Than Its Peers
Percentage of 25 to 64-year-olds employed or looking for work
Source: OECD
A key driver of this depressing trend is the choice by so many men to drop out of the labor force. In 1961, the labor force participation rate for prime-age men was 97%; today it is 88%, lower than during the Great Depression. In other words, 1 in 10 men ages 25 to 54 is neither employed nor looking for work.
A Whole Lot of Quitting Going On
Quits as a share of nonfarm payroll employment, seasonally adjusted
Source: U.S. Bureau of Labor Statistics
America's triumphant educational story has taken a darker turn. High school graduation rates have stagnated: America is the only member country of the Organization for Economic Cooperation and Development in which the graduation rate for those ages 24 to 34 is no higher than for those ages 55 to 64. The expansion of college education is hitting the twin buffers of debt and utility: Americans owe $1.75 trillion in student loan debt, spread out among some 43 million borrowers, yet according to the Federal Reserve Bank of New York, more than 40% of recent graduates are underemployed in jobs that don't require a college education. That's a lot of money to spend on creating Nietzsche-reading baristas.
The Rise and Plateauing of College Enrollment
Percentage of U.S. 18- to 24-year-olds enrolled in college or graduate school
Source: U.S. Census Bureau Current Population Survey
Note: As of October of each year.
America faces a growing problem with vocational education — that is, with the training of workers, particularly those who don't complete four-year college degrees, in job-related skills. People who leave school at 16 can't access a clear, well-designed training system as exists in many European countries. And if they are lucky enough to get a job, they don't have access to continuing education: Whereas you could once be promoted from the shop floor to, eventually, the executive suite, almost all the top jobs now go to people with college degrees. The result is a frustrating mess. More than 50 million Americans are stuck in low-wage jobs without much prospect of acquiring the skills that they need to climb out of poverty; at the same time, three-quarters of employers say that they can't hire people with the requisite skills. This is the equivalent of "the last mile" hurdle in supply chains where getting goods over the last mile of the journey is the most perilous and costly part of the whole undertaking.
At first glance, America retains a wide lead when it comes to top talent. Fourteen of the world's 20 top universities as measured by research output are located in the United States. More than half of U.S. billion-dollar startups were founded by people who were born abroad. Look more closely, however, and that lead is less solid. China is on track to produce twice as many Ph.D.s in STEM subjects as the U.S. by 2025. America's best universities are in danger of becoming finishing schools for the already privileged rather than efficient capacity-catching machines: Harvard, for example, has more students from the richest 10% of the population than it does from the bottom 90%. Only about 20% of undergraduate places are awarded on the basis of pure intellectual merit (the others are awarded on a preferential basis to athletes and children of alumni and big donors); the U.S. Supreme Court has just agreed to take up a case examining whether the university's admissions policies discriminate against talented Asians. Similar problems can be found across the Ivy League.
At the same time, the tradition of relying on foreign talent might turn out to be a bear trap. A growing proportion of foreign-born Ph.D.s now return to their native countries either to teach or, more frequently, to start their own companies. From 1978 to 2007, only 25% of the 1.2 million Chinese who went abroad to study returned; from 2007 to 2017, that proportion had risen to 80%.
America's hold over top talent is under threat at a time when top talent is growing ever more important. Silicon Valley has famously applied the "10X" rule to programmers: The best programmers are 10 times more productive than the merely average programmers. Now, with the advance of technology, the "10X" rule is turning into the "100X rule." Marc Andreessen, the venture capitalist and founder of Netscape, claims that "the gap between what a highly productive person can do and what an average person can do is getting bigger and bigger. Five great programmers can completely outperform 1,000 mediocre programmers."
How Do You Fix a Talent Shortage?
The most obvious way for companies to address the crisis is to raise their wages or improve their working conditions. Apple Inc. recently surprised some of its engineers with unscheduled bonuses ranging from $50,000 to $180,000, presumably to prevent them from jumping ship to talent-hungry Meta Platforms Inc. Intel Corp. is moving to a "hybrid first" work model in order to attract and retain employees. Amazon.com Inc. and Walmart Inc. are covering college tuition costs for some of their employees. That option is plainly available more to fat incumbents than to scrawny startups.
Boris Groysberg of Harvard Business School suggests some more subtle techniques that companies can use to find talent. They can look more closely at underrepresented groups such as women, ethnic minorities and people who live in out-of-the-way places. They can make more use of freelancers and part-time workers. They can rehire former workers who have moved on ("boomerangs"). They can recruit top graduates from state schools rather than scrambling over middle-ranking candidates from Ivy League schools: Domino's Pizza Inc. is hiring recent tech graduates from Michigan State University and Wayne State University to improve its technological capabilities. Companies can cut down on labor by installing automatic checkouts or redesigning work processes.
Groysberg points out that companies sabotage themselves by screening out potential recruits. The automated recruitment systems that most companies now use routinely reject candidates for formulaic reasons — for example, because they have committed a minor offense in the past or because they don't have exactly the right qualifications. They could be reset. Many companies unthinkingly demand a college education as a condition for employment despite the fact that more than 60% of the population doesn't have a degree, and that many degrees don't have any relevance to the job. Companies can "shift the supply curve dramatically," Groysberg says, if they simply "get rid of this filter."
Still, even the most enlightened companies can only do so much unless America addresses the structural problems that underlie the shortages. America needs to start thinking about "talent" differently, not as a problem that can be solved but as a supply chain that needs to be sustained. Just as car companies think in terms of years when planning their supply of car parts rather than rely on the spot market, so America needs to think in terms of decades when considering its supply of people. Companies also need to take a more constructive interest in public policy. Rather than trying to buy their way out of the crisis with higher wages, they will have to band together to address the systemic problem. Overcoming supply-chain disruptions will involve taking on both the Republican right and the Democratic left. It will also require reexamining some of the most ingrained assumptions of the broader American political tradition.
Expanding the Workforce
America's problem with its labor force participation rate starts with its failure to raise the retirement age. The average American can still retire at 65 despite the 19.5 years of life ahead of them, compared with 13.7 years after the retirement system was introduced in the 1930s. Swedes and Brits by contrast have to wait until they are 70.
When it comes to prime-age workers, two problems need to be addressed: drugs and disability. A 2018 paper published by the Federal Reserve Bank of Cleveland estimated that 44% of the decrease in labor force participation observed since 2001 could be ascribed to prescription opioids. The share of working-age Americans claiming Social Security Disability Insurance has roughly doubled in the past half-century, from 2.2% in 1977 to 4.3% last year. Local governments have a financial incentive to classify people as disabled because they then become the federal government's responsibility, even as disability programs provide scant training and work placement to people who are thus classified.
Improving Vocational Training
Some companies are responding to the shortage of job-related skills with innovative solutions. Capital One Financial Corp., in banking IT, and DaVita Inc., in kidney dialysis, are establishing internal boot camps where they pay their employees to learn for a month or so and then quickly move them to a job. Others are reengineering work to reduce the amount of human labor it requires, building up the army of checkout machines that beep at us in shops or the tablets in restaurants that allow us to order without seeing a member of staff. Revature LLC, based in Reston, Virginia, blends training and temporary staffing into an "earn and learn" business: It takes on recent college graduates, trains them in high-demand software skills, and then hires them out, for a consideration, to its corporate clients. Recruits have to work for Revature for two years, by which time they have plenty of experience to put on their resumes.
Still, why not address skills shortages earlier in the educational system so that students come out of school ready to work rather than having to spend four years in college only to find themselves unemployable? Why not reinvent America's great tradition of providing technical education at school rather than expecting everybody to go to college?
Over recent decades, America's training system has been sacrificed to the cult of the university. Schools have focused overwhelmingly on getting their students into college while empire-building universities have taken over as much of post-school education as they can, from nursing to journalism training. Professors are selected on the basis of their ability to advance research rather than transmit market-ready skills. This has reduced the number of educational on-ramps into the middle class into just one, marked "college" and with a hefty toll. It has simultaneously created a mismatch between the labor market and the educational system: However well designed to produce recruits to the learned professions, universities are ill-suited to training people in practical skills, particularly in fast-changing ones such as new programming languages.
Germany's system provides a successful alternative to the U.S.'s college-first model: technical schools that enjoy "parity of esteem" with academic schools, and apprenticeships that give young people a chance to earn a living (and avoid accumulating debt) while at the same time learning a useful trade. Far from ignoring general principles, Germany's vocational education provides a different way of teaching them, starting with the particular and working to the general — an approach that appeals to many practical-minded young people. And Germany's system does more to integrate non-academically-inclined young people into the labor market than one that confronts students with a choice between loading themselves down with student debt in return for a degree that might not render them employable, or being treated as a failure because they haven't been to college.
Can China Surpass the U.S.?
America is also confronting a problem of unprecedented historical scale: a fast-growing rival power forging ahead of it in critical sectors. In each of the foundational technologies of the 21st century — artificial intelligence, semiconductors, 5G wireless, quantum information science, biotechnology and green energy — China is either competitive with the U.S. or outstripping it. The National Science Foundation just confirmed that China has overtaken the U.S. in several key scientific metrics, including the overall number of papers published and patents awarded. China has five times more 5G base stations than the U.S., for example, and produces four times as many electric cars.
Where Have You Gone, Thomas Edison?
Percentage of international patents granted to inventors, by selected country
Source: National Science Board
What can be done about this challenge? Graham Allison, of Harvard University, argues that America needs a "million talents" program to match China's "thousand talents" program. In particular, the U.S. should make it easier for foreign students earning advanced degrees in STEM fields to get a green card.
The Backbone of U.S. Science
Share of full-time graduate students from overseas
Source: Insider Higher Ed
But it's not enough. Remaining dependent on foreign sources of talent at a time when other countries are offering better opportunities for their best talent — and as China threatens to turn off its talent spigot — is risky. The sine qua non for reviving America's economic and technological dynamism is improving its ability to generate more top-class talent internally: first by spotting talent that is currently lying fallow, then by cultivating it more carefully and, it is important to add, more lovingly. That will require reorienting its educational system away from equality of results and toward equality of opportunity.
America has always had two rival traditions when it comes to its foundational doctrine of equality of opportunity. The first emphasizes the opportunity part of the formula: Everybody should be provided with equal opportunities to reach their natural level, but those natural levels will be unequal. The Founding Fathers, particularly Thomas Jefferson and Alexander Hamilton, talked of "natural aristocrats." W.E.B. Du Bois, a founding father of the civil rights movement, wrote about "the talented tenth." Cold War warriors stressed the importance of recruiting talent to beat Russia in the intellectual arms race. In his address to Amherst College in October 1963, John F. Kennedy said that "I look forward to a world which is safe not only for democracy and diversity but also for personal distinction."
The second tradition puts its emphasis on the equality part of the formula. Populists from Andrew Jackson to William Jennings Bryan to Donald Trump have led rebellions against the fancy-pants "sneering elite." Horace Mann declared that common schools would be "the great equalizer of the conditions of men — the balance-wheel of the social machinery." Recent educational reform movements, most notably George W. Bush's No Child Left Behind, have all focused on improving the performance of the disadvantaged.
The American public education system has been profoundly shaped by the second tradition. Out of some 24,000 public high schools, only 165 admit students on the basis of academic promise rather than catchment area. Twenty states don't have a single such school. The country's only federal program for the gifted received all of $12 million in 2019, a tiny fraction of the money spent on the disadvantaged. The progressive wing of the Democratic Party, particularly the Black Lives Matter movement, is convinced that even this nugatory provision is too much. In one of his last acts as New York City mayor, Bill de Blasio tried to close down both the city's elite schools and its gifted education programs. The city governments of both San Francisco and Boston are trying to kill off their leading selective high schools (Lowell High School and Boston Latin School, respectively) by forcing them to replace entrance examinations with lotteries. Universities across the country are replacing standardized tests with "holistic assessments," which rely on things like teacher evaluations and extracurricular activities.
This one-size-fits-all tradition is actually not very good at promoting its stated aim of equality. Parents of the middle class and higher can do everything in their power to stretch their (sometimes talented) children to the maximum — algebra classes in the evening, academic summer camps, weekend violin lessons. Gifted children from more humble backgrounds can expect none of this and may be destined to turn into what the poet Thomas Gray called "mute inglorious Miltons" and economists now call "lost Einsteins." Though the one-size-fits-all approach might have been well-suited to the age of mass production and identikit managers, it is incompatible with one in which high ability drives a disproportionate amount of economic growth.
The U.S. responded to Sputnik's 1957 launch with a raft of initiatives from both the public and private sector to counter the USSR's success. Congress declared "an educational emergency." The federal government passed the National Defense Education Act to increase the supply of brainpower and established the National Aeronautics and Space Administration in 1958 to reassert America's mastery of the heavens. Funding for the National Science Foundation more than tripled. John Gardner, the president of the Carnegie Corporation of New York, noted in 1962 that gifted children who had once been treated with "an almost savage rejection" were now feted as agents of national survival.
Sputnik delivers its wake-up call. Photographer: Donaldson Collection/Michael Ochs Archives
Today, in the face of the multifaceted economic and technological challenges posed by the ascent of an autocratic China, the U.S. needs to adopt the same seriousness about intellectual leadership that it mustered following the beep, beep, beep heard round the world. Massively increase spending on gifted children. Improve selection into gifted programs so that they choose the truly able rather than the socially advantaged. Expand the academically selective schools like Lowell that did such a formidable job of providing opportunities for poor immigrants after the great wave of immigration in the late 19th century. Understand that diversity is a tool of excellence, not its antithesis. Force universities to broaden their social catchment as a condition of keeping federal money.
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Official America seems to have concluded that the pandemic is over: CEOs are preparing assaults on the "work from home" culture; central bankers are preparing to raise interest rates; the federal government is removing income support. But normality is likely to prove illusive. Workers have more power now than they have had for decades. The immigration spigot is harder to turn than before. Universities are not churning out enough homegrown first-rate technologists. The age of unearned plenty is over. To thrive in the coming age of talent shortages and meet the challenge posed by China, America will have to reengineer what first made it great.
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John Case
Harpers Ferry, WV
Enlighten Radio
Socialist Economics
Monday, January 10, 2022
NY Times: Manchin’s Choice on Build Back Better: Mine Workers or Mine Owners
Senator Joe Manchin III is caught between the mine workers' union, which supports President Biden's social policy and climate bill, and mine owners in his state who oppose it.
https://www.nytimes.com/2022/01/10/us/politics/manchin-coal-miners.html
WASHINGTON — For years, burly men in camouflage hunting jackets have been a constant presence in the Capitol Hill office of Senator Joe Manchin III, their United Mine Workers logos giving away their mission: to lobby not only for the interests of coal, but also on more personal matters such as pensions, health care and funding to address black lung disease.
So when the miners' union and the West Virginia A.F.L.-C.I.O. came out last month with statements pleading for passage of President Biden's Build Back Better Act — just hours after Mr. Manchin, Democrat of West Virginia, said he was a "no" — the Capitol took notice.
With the miners now officially on the opposite side of the mine owners, it signaled the escalation of a behind-the-scenes struggle centered in Mr. Manchin's home state to sway the balking senator, whose skepticism about his party's marquee domestic policy measure has emerged as a potentially fatal impediment to its enactment.
While most of the attention to the fate of the social safety net and climate change bill has fixed on ideological divisions among Democrats over its largest provisions and overall cost, the battle underway over parochial issues in Mr. Manchin's state could ultimately matter more than the public pleas of liberal groups and relentless bargaining by Democratic leaders.
"We urge Senator Manchin to revisit his opposition to this legislation and work with his colleagues to pass something that will help keep coal miners working and have a meaningful impact on our members, their families and their communities," Cecil E. Roberts, the president of the United Mine Workers of America, or U.M.W.A., said in a statement just before Christmas.
The far-reaching centerpiece of Mr. Biden's domestic agenda has passed the House, but with every Democratic senator needed to push it through the Senate, Mr. Manchin's opposition has stopped the bill in its tracks. At this point, the president and the lawmaker standing in his way cannot even agree on whether negotiations continue: Mr. Biden says they do, but Mr. Manchin says they do not.
But the decision of the labor groups to come out forcefully in support of Build Back Better could be significant. Mine workers are likely to be more persuasive to Mr. Manchin than the progressive activists who kayaked to his houseboat at a Washington marina to harangue him or the colleagues buttonholing him at Senate votes.
"Joe Manchin grew up with coal miners," said Jonathan Kott, a former aide to the senator who still advises him. "His heart is with them. His sweat is with them — and in the end, Manchin will always be with the U.M.W.A."
But Mr. Manchin has also long been allied with the coal industry. His own family has profited from waste coal from abandoned mines, which the Manchins sell to a polluting power plant in his home state. And Mr. Manchin has received more campaign donations from the oil, coal and gas industries than any other senator in the current election cycle.
For much of last year, miners and mine owners were in sync on their skepticism of the Democrats' far-reaching social policy and climate change plan, fearing measures to hasten the economic transition from fossil fuels like coal and natural gas to renewable sources like wind and solar.
But in the bill, Democrats included provisions dear to the unions of West Virginia, which have been watching employment in the coal industry diminish for years.
Most pressing was an extension through 2025 of an excise tax paid by coal mine operators and protected for years by Mr. Manchin. The levy finances a trust fund that pays about 30,000 miners coping with black lung disease and their beneficiaries a little under $700 a month. Because Build Back Better did not pass last year, the tax was cut in half as of Jan. 1, pushing the struggling fund further into debt.
The bill also includes top priorities for union leaders, such as stiff penalties for employers that block union organizing and collective bargaining.
Beyond those provisions is a weightier matter in coal country: whether to shore up a polluting power source or transition the Appalachian economy away from coal.
The bill includes industrial policies proposed by Mr. Manchin that would help wean the region away from fossil fuels, including $100 billion to aid manufacturers and $25 billion for advanced manufacturing outreach, with $4 billion of the outreach funding set aside for coal-mining regions. A tax credit for energy investments includes a generous additional subsidy for those investments that flow to communities with oil and gas workers, a closed coal mine or a shuttered coal-fired electricity generator.
Image
Mr. Manchin with Cecil E. Roberts, the president of the United Mine Workers of America, center left, in 2017. In a statement last month, Mr. Roberts took issue with Mr. Manchin's opposition to the domestic policy bill.Credit...Bill Clark/CQ Roll Call, via Getty Images
For years, coal miners and operators alike looked skeptically at such efforts. Miners rallied to Donald J. Trump's side in the 2016 campaign as he promised to bring their industry back, not replace it with clean energy. He did not keep that promise, and coal mining employment, which was at about 51,000 jobs when he took office, had fallen to a nadir of 39,000 by the time he was denied a second term.
Union mining jobs with good pay, pensions and health benefits have been replaced with low-wage work — if they have been replaced at all. The promise of renewable energy as a replacement has so far yielded little. Jobs installing solar panels or building wind turbines tend to disappear once a renewable energy facility is up and running, since such facilities require little ongoing labor.
Jason Walsh, the executive director of the BlueGreen Alliance, which has brought together labor and environmental groups to marshal support for initiatives like Mr. Biden's domestic policy bill, said he did not fault miners for their doubts. But he pointed to active conversations about building a solar panel assembly plant in the Ohio Valley that would hire more than 2,000 union workers. Such projects could use a federal nudge.
"Build Back Better provides really the best opportunity for any industrial policy vision in these areas," Mr. Walsh said.
It took a while, but last month, those arguments won over the unions of Mr. Manchin's home state, which have long been the backbone of his political support. In its statement asking Mr. Manchin to return to negotiations, the state's A.F.L.-C.I.O. chapter noted that the bill included his industrial policy legislation.
The bill "would help workers, our families and the labor movement both across the country and right here in West Virginia," the president of the labor group, Josh Sword, said in the statement.
The manufacturing provisions, in particular, have driven a wedge between coal miners and coal mine owners, who have been working hard to shore up Mr. Manchin's opposition. The miners appear to have embraced the reality that coal is dying and they must look beyond it to survive, but their bosses do not see the end as inevitable.
Chris Hamilton, the president of the West Virginia Coal Association, which represents the owners, said coal employment would remain viable for years to come, and he accused the unions of "waving a white flag." He also suggested they did not understand the damage that renewable energy incentives in the bill would do to what is left of coal.
"Frankly, we were shocked" when the unions endorsed the social policy and climate legislation, Mr. Hamilton said.
"We would have thought they'd have gone down swinging," he added. "I don't think we ought to be trading one job for another, particularly basic fossil energy jobs which are extremely well paid and carry benefits — and could last for another generation."
Phil Smith, the United Mine Workers' chief lobbyist, responded, "We're still swinging, but we're swinging in a smart way and in a way that will provide a real future for fossil energy workers in West Virginia and throughout the country."
Union officials, speaking on the condition of anonymity to avoid angering mine owners, said Mr. Manchin should not be listening to the West Virginia Coal Association, which includes some of Mr. Trump's staunchest supporters and switched allegiances in 2018 to back Mr. Manchin's Republican challenger in that year's election, Patrick Morrisey.
Such personal considerations should not be overlooked. The United Mine Workers made Mr. Manchin an honorary member in 2020 for his work securing pension, health and black lung benefits. At every turn, the senator notes that he lost an uncle, high school classmates, friends and neighbors in a 1968 explosion at a mine in Farmington, W.Va., that killed 78 miners.
And while Mr. Manchin has snapped at reporters in the Capitol shouting questions about Build Back Better negotiations, his spokeswoman, Sam Runyon, was effusive about his concern for mine workers.
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John Case
Harpers Ferry, WV
Enlighten Radio
Socialist Economics
Tuesday, January 4, 2022
Supply Chain: N. Smith Interview: Ryan Petersen, founder and CEO of Flexport
Interview: Ryan Petersen, founder and CEO of Flexport
The supply chain crunch, modern logistics, and that famous trip around the Port of Long Beach
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For the last year or so, the global economy has been hammered by a massive supply chain crunch. The phenomenon is impossibly complex, encompassing a dizzying array of factors — demand shifts, the shift to e-commerce, Chinese industrial crackdowns, Covid, inflation, legacy regulations, trade imbalances, and much much more. But a small moment of clarity appeared in October, when Ryan Petersen, the founder and CEO of the supply chain software company Flexport, took a trip around the port of Long Beach and tweeted about a specific outdated regulation that was holding up the flow of goods. The city swiftly changed the regulation, and the congestion situation improved.
That episode suggests that the supply chain crunch isn't just one big thing — it's a ton of little things that we've allowed to build up over the years. So to get a bird's-eye view of the situation, I sent a list of questions to Ryan Petersen himself! In the incredibly informative interview that follows, Petersen explains how the U.S. and global supply chain system fell apart, and what policy changes and technological upgrades we can use to put it back together. If you want to understand the supply chain problem, start here.
N.S.: The supply chain crunch has been the biggest economic story in the world for about a year now, causing inflation and throwing the Biden administration's plans into disarray. What sparked the supply chain crunch? How much of a factor was increased demand for physical goods due to the pandemic? Were shifting trade patterns at all to blame? Basically, why now?
R.P.: The supply chain crunch was started by increasing demand for goods, as consumers stopped spending on services. Americans in particular had more money in their pockets because they weren't going on trips, spending at restaurants and bars, or attending concerts. Instead as city after city started enforcing lockdowns and restrictions, people started spending a lot more goods and not services. You've got to get your dopamine somewhere. So what we saw was an unprecedented increase in imports from China—as much as 20% more containers entering the United States than were leaving our ports since the start of the pandemic. It turns out, our infrastructure is just not made to scale this fast, and by infrastructure what we mean is the entire ecosystem: The number of container ships in the world, the number of containers available, the throughput of our ports, the availability of trucks and truck drivers, the availability of chassis (the trailers that haul containers around), the entire system is overwhelmed and clogged. We simply don't have enough of these essential supply chain elements, or resilient systems that are agile enough to shift the supply of these assets to where they're needed.
While the pandemic drove this shift in demand from services to goods, it also changed where consumers were buying goods (increasingly online), the types of goods they were buying, and where those goods were flowing to and from. One thing to note is that e-commerce logistics networks are fundamentally different in their geographical and physical space than that of traditional retail. They're more complicated because you are edge caching your inventory to be closest to your users instead of positioning everything in a distribution center in a single hub. You now have to position your warehouses all over the United States, making it exponentially more complicated. So the more people bought things online, the more these systems were overloaded.
Then there was the impact of cascading second orders that are inherently unpredictable. For example, as imports increased as much as 20%, exports actually decreased because the United States economy was slow to reopen. In fact exports are still down. If you look at the journey of a shipping container, it runs in a loop: The same container that brings in imports later helps transport exports out of the U.S. So if there are fewer exports going out, that means companies are consciously choosing to ship empty containers back to Asia or else they will run into shortages at the origin ports. At one point over the last year, as an industry, we were 500,000 shipping containers short in Asia. These shortages led to increases in prices. If you wanted to get a container you had to pay a real premium to get access. In some cases renting a container for one journey was more expensive than the price to buy one. In January 2019, rates on the Trans Pacific Eastbound route (TPEB), and Far East Westbound (FEWB) were around $3000. In December 2021, rates remained elevated in the $12,000 - $15,000 range. At one point this year, TPEB rates were as high as $24,000.
Consumers are just buying more stuff than ever and our infrastructure, frankly, isn't ready for it. It's getting held back by dilapidated port infrastructure, by congestion, non-automated ports, and bad rail connections to the ports. We're just recognizing the pain of 20 years of not investing in our infrastructure. And we're feeling all that pain in one year right now. It's increasingly difficult for truckers to pick up or drop off containers at ports and warehouses, leading to today's congested ports, lots, and railyards. So boats can't get in, we don't have enough containers, a lot of the empty containers are stuck on the chassis, we don't have enough chassis because we don't have enough warehouse space, and we don't have any space in the warehouses because we can't move the goods out fast enough.
Until we can focus on what actually clears the ports, rail yards and warehouses, and goods can begin to move at a pace that aligns more closely with the growth in consumer demand, there's nowhere for the containers to go, and the number of ships waiting to unload will continue to grow.
N.S.: How much of the crunch is international, vs. U.S.-specific?
R.P.: While the current supply chain crisis has global impact, the greatest delays by far are in the U.S., owing to port bottlenecks and trucking shortages. But, while it's true that in percentage terms the shipment time to North America had a more significant increase, this is not a purely U.S.-specific problem.
We have two recent Flexport Research reports that speak to this. First, we have a report that looks at the tilt toward consuming goods over services internationally. The U.S. had the second-biggest shift towards goods, behind the UK, but we did see a similar shift in 23 out of the 25 countries for which the OECD had the relevant data, showing this is a global trend.
Second, Flexport's Ocean Timeliness Indicator shows significant increases in journey time for both shipments from Asia to North America and shipments from Asia to Europe. For example, in mid-December, TPEB (Asia to North America) timeliness increased to a record 109 days from an already-high 106 days a week earlier. There was a significant increase in the time taken to ship from cargo origin to the Asian ports and sailing times also rose. And for FEWB it was 109 days.
The situation in Asian countries with manufacturing hubs has a role to play as well. Multiple factories in China, Vietnam and all over Asia have experienced closures and slowdowns due to Covid outbreaks among employees, and it's the same situation with some of their ports.
The U.S. and U.K. have seen the biggest shifts but also had the lowest proportion of goods versus services in pre-pandemic levels. That may explain why the logistics networks in both countries appear to have struggled versus their peers, though other factors such as Brexit clearly played a part, and the relationship is statistically weak.
To summarize, the wide range of economies facing elevated goods' share of household spending, and the continued divergence versus historic norms, shows that the demand shock for logistics networks is a global and persistent phenomenon.
N.S.: You had what's by now a sort of legendary adventure where you actually went to inspect the port of Long Beach, and you found that local regulations were preventing containers from being stacked high enough, causing backups that were ultimately keeping ships from being able to unload cargo. After you tweeted about it, the city revised its regulations. Did you sort of know that you would find something like that when you decided to tour the port? Is this a special case, or are there lots of little pointless regulations like this at ports all over the country?
R.P.: That was not actually my first port visit this year. I had gone down there a few weeks prior with a couple of Flexport colleagues because we wanted to see what was happening at the port firsthand. There's nothing better to do on a Saturday than a fun boat ride, so we went out on the water. What we saw was effectively that the port was not operating at full capacity, but we didn't know why and that kicked us off on a journey to try to better understand the cause of the congestion.
We started brainstorming ideas for how we could learn more about the situation on the ground. Who could we talk to that could help us understand things better? Port workers and track drivers seemed like the right place to start. The first thing we actually did after this boat ride was send a taco truck to the port and offer free tacos for the union workers there. While we had that time with them, we were able to ask questions and that's when I actually published my first tweetstorm on the LA/LB ports, which did got a lot of impressions but didn't have as high of an impact as my following tweetstorm about suggested fixes (which includes allowing truck yards to store empty containers up to six high instead of the current limit of 2).
Some port workers told us that one contributing factor was that truck drivers were not showing up for their appointments to pick up containers from the port. To pick up a container you need an appointment for a specific container number, and the workers at the port have to find that specific container amongst all those stacks and bring it to the front so it's there when the trucker shows up. We were told that truckers were missing 50% of all the appointments, and it was creating absolute chaos. So we talked to the CEO of a trucking company that we work with closely down in the Long Beach area who handles our port pickups, and we took him with us on that second boat ride in late October mostly to pick his brain because we didn't really believe that truckers were to blame. What was their side of the story?
This is one of the more important aspects of supply chain—the emphasis on chain. There are so many different companies and people involved. When you actually look closer, it's a complex network and adaptive system that everybody in the chain is optimizing for their own interests. So it's really important to get the different perspectives and hear as many viewpoints as possible to get the full picture. Everybody's operating sort of like that allegory of the elephant in a dark room where everybody's touching one body part and describing it and no one's really seeing the whole picture. Our plan was to synthesize that full story to get a coherent view. The Twitter thread that went viral was a result of our conversation with that CEO who told us that he has a severe shortage of chassis because they're already holding empty containers which his truckers are unable to store in his yard (lack of space) or return them to the port (because the ports are so full) and you end up in this Catch-22 situation.
You can't return empties, so you can't free up the chassis required to move full containers out of the port. And because you're not pulling the containers out of the port, you're not able to return empties to the port. I did not know that this was the case before I went down there. We only discovered it during that three-hour boat ride.
With regards to your question about whether there are pointless regulations all over the country, I think the answer is obviously yes. It's like the saying about advertising, that 50% of all your ad dollars are wasted but you just don't know which 50%. There are lots of good regulations too, and it's a very hard problem to solve. No government in human history that I'm aware of has ever figured it out.
N.S.: To follow up on that, do you think there's something systemically wrong with the way we do regulation in American ports? Is there some reason we're not quick to adapt regs to changing circumstances? Is it a cultural thing, where stuff has just kinda-sorta worked OK for so long that we've lost the flexibility to change when we need to? Or are there problems with the way regulatory authority is allocated?
R.P.: At one point this October, there were over 500,000 shipping containers on ships waiting out at sea, with an estimated $30 - $50 billion worth of merchandise in them. Much of it did not get into warehouses and shops in time for the holiday shopping season. If businesses who have imported all this merchandise don't get it in time, much of it goes unsold during their busiest season. That means huge write offs and losses. Secondly, shipping prices have gone through the roof so we're seeing a lot of inflation already and it's worse than is being reported. Ocean freight costs alone add 5% to 10% to the cost of everything we buy, and remember, 90% of the stuff we buy is shipped on a container ship. The globalized supply chain and shipping containers have brought down the cost of shipping goods and manufacturing by close to 90% over the last 50 years. If we lose that, that is a huge source of economic prosperity that's going to go away, and it won't be good for the U.S. economy, brands or consumers.
One thing to remember here is that in America, the ports are owned by the local city that they're in. Therefore, they're not managed as a strategic national asset, which they clearly are. We're realizing the implications of this right now. For example, I live in San Francisco and our main port is the Port of Oakland, which is owned by the City of Oakland. The mayor of Oakland has a lot of local issues to focus on and probably won't prioritize multi-billion-dollar investments in their port as the city simply can't afford it. So there's just an inherent underinvestment in many U.S. ports and until recently it was really hard to get the federal government to make major investments in our ports.
We've under invested in our supply chain infrastructure for over 20 years. In hindsight, the signs were there for years. Almost no logistics companies can show you where your freight is in real-time on a map. Most data is exchanged in unstructured email messages with attachments. There are almost no logistics APIs to speak of. The pandemic has dramatically amplified two major trends in supply chains: the rise of e-commerce and the diversification of global supply and demand. The internet has put consumers in the driver's seat: they can get what they want, when they want it. And they want it right now. If you can't get it to them right now, your competitor will. But both these trends long pre-date the pandemic and will continue for the next few decades. And both require more agile, tech-enabled logistics and supply chain infrastructure, federal level investment in our outdated infrastructure, and more automation.
We're going to get sub-optimal outcomes if you don't invest in technology. If we don't have robotics, if we don't have systems that are better at managing appointments for managing pickups and returns of containers at ports, if we don't have better safety mechanisms (some of these are incredibly hazardous jobs and robots would be far safer), it's going to take many years, not months to fix this crisis. Technology and automation have helped modernize and increase the efficiency of ports in other countries like the port of Rotterdam in the Netherlands, but that's because it's managed as a strategic asset for the country. It has been a fully automated operation for over 20 years so the technology exists, but we still have a lack of investment to implement those changes in the United States. That's a fundamental problem. The reality is if you want to be competitive globally, you need to have world-class infrastructure that enables U.S. businesses to lower costs and find their ideal customer, manufacturer or supplier or anywhere in the world. That's how they can grow their business provided our logistics networks are not holding back economic growth and progress. We simply have to have modern technology and be able to implement it.
N.S.: What should the Biden administration have done to overwhelm supply chain bottlenecks early on in the crunch? What should the administration be doing now?
R.P.: I think many of us imagined that we live in a world where there's a wizard behind the box. That there's actually somebody in charge of all of this, and that that somebody must have made a mistake. And of course, it must be the president of the United States. But that's not actually the world that we live in. It's a market-based system. We're lucky to live in an economy that's built on the principles of free enterprise, and so while it's easy to cast blame and point fingers at the administration, we have to recognize that they're not really in charge of all of these things. They didn't create this situation and I'm not 100% convinced that they're the ones that are going to be best equipped to solve the problem.
That said, there's a very clear role for our government to intervene in markets when you have systemic failures. As much as we love the idea of a free enterprise system, the reality is that markets often fail. And when they do, we need our leadership to step in and help resolve problems. I think what we're observing at West Coast ports right now can best be described as a market failure. So there must be some role for government to step in here. I outlined a few ideas for how the government can resolve supply chain bottlenecks in my Oct. 22 Twitter thread.
The first thing that I would do if I were in charge would be to actually put a team in charge. Right now, there isn't a dedicated team within the federal government to coordinate all public and private sector activities to help resolve the supply chain crisis. It's spread across multiple regulatory agencies, jurisdictions and levels of government. I don't have an opinion on who should be in charge, but if you're trying to address a market failure, you want to have a single person or team in charge that can dictate terms to all the different market actors. You saw this in the 2008 financial crisis where they put the President of the New York Fed and Secretary of the Treasury Timothy Geithner in charge of working with the private sector.
With that person in charge, you could then start to implement meaningful fixes. The two big bottlenecks are a lack of chassis and a lack of yard space both at the container terminals and in the yards around neighboring cities. We know that the federal government and the state government of California owns a lot of land so we'd love to see them make it available for storing containers and creating off-terminal storage facilities where truckers can pick up containers easily without having to wait in long lines at the gate to the ports.
Some of the simplest things we can do are changing zoning laws. President Biden needs to call the mayor of Los Angeles and ask him to implement the same container stacking rule that Long Beach adopted. It's still unclear to me why Los Angeles has not done this.
There are more drastic measures to consider like identifying borrowing chassis from the United States military, including the National Guard, to move containers. Right now, we have a real shortage of chassis and without them, you can't clear the bottleneck. So if the government has chassis anywhere in its reserves anywhere we need them. If we don't have a strategic reserve of chassis, maybe that's something that we should invest in to make sure this ever happens again.
N.S.: Was the global economy simply over-engineered? Did we optimize supply chains for efficiency at the cost of resilience, like a machine with tolerance gaps that are too small? And if so, should we recalibrate going forward, to leave more slack in the system in case of future crises?
R.P.: In my opinion, what's caused all the supply chain bottlenecks is modern finance's obsession with Return on Equity (ROE). To show great ROE, almost every CEO stripped their company of all but the bare minimum of assets. "Just-in-time" everything with no excess capacity, no strategic reserves, no cash on the balance sheet and minimal investment in R&D. We stripped the shock absorbers out of the economy in pursuit of better short-term metrics. Large businesses are supposed to be more stable and resilient than small ones, and an economy built around giant corporations like America's should be more resilient to shocks. However, the obsession with ROE means that no company was prepared for the inevitable hundred-year storms. Now as we're facing a hundred-year storm of demand, our infrastructure simply can't keep up.
Most global logistics companies have no excess capacity, there are no reserves of chassis, no extra shipping containers, no extra yard space, no extra warehouse capacity. Brands have no extra inventory and manufacturers don't keep any extra components or raw materials on hand.
And let's not forget the human aspect of the workforce that makes this all happen. A lot of companies in the industry haven't invested in taking care of their people, especially during market downturns, so now they can't staff up quickly to meet surging demand.
When the floods inevitably hit, the survivors will be those who invest in excess capacity, in strategic reserves of key capital assets, in employee trust that let them attract and retain talent. Running lean systems may seem beneficial, until the whole system fails like it did this year. We've removed the shock absorbers from the economy and it's time we add them back.
N.S.: Why aren't American ports more automated, like in other countries? Is it just politicians trying to protect blue-collar jobs? And if so, why have some countries like the Netherlands that have strong dock worker unions been able to successfully automate their ports, while we sit around and do nothing?
R.P.: If you look at the largest port in the United States, which is the Port of Long Beach/Los Angeles port complex (there's a jurisdictional line between the two cities that runs down the middle of the port), that port can only handle ships as large as 16,000 TEUs. (A twenty-foot equivalent unit or TEU is a unit of cargo capacity based on the volume of a 20-foot-long intermodal container, a standard-sized metal box which can be easily transferred between different modes of transportation, such as ships, trains, and trucks.) And this is the largest port in the United States. A few U.S. ports can handle 12,000 TEUs and most of the East Coast ones are even smaller than that. Today's largest ships are as big as 24,000 TEUs. If you look at the Ever Given—the most famous ship in the world that got stuck in the Suez Canal—it's almost 21,000 TEUs. So it would not be able to come to a U.S. port if it was full of containers. But there are other international ports like in the Netherlands that are able to handle these larger ships and have successfully automated a lot of their port operations.
The Dutch government has pushed for infrastructure innovation for decades and has a great working relationship with unions and employers through a polder model, which is based on consensus. This effort was started in the eighties. They used the polder model to successfully implement solutions developed by Delft University of Technology.
There were two reasons they were able to accomplish this:
- The Port of Rotterdam, a government-owned commercial entity running the port, had this vision way before other countries did as logistics is a key source of GDP in the Netherlands.
- They had a proper, documented approach to getting buy-in from multiple stakeholders through a polder model. The polder model is a method of consensus decision-making, based on the acclaimed Dutch version of consensus-based economic and social policy making in the 1980s and 1990s. The model is characterized by the cooperation between employers' organizations, labor unions and the government with a central forum to discuss labor issues (with a long tradition of consensus). This model helped them defuse labor conflicts and avoid strikes. Similar models are used in Finland.
We should really explore why the U.S. can't do what many mature and rapidly-growing economies already have. Big structural changes are hard to make, but we should at least start somewhere. For example, new technology can be used to eliminate appointments at terminals and allow truck drivers to just show up and take the first available container with a mobile app telling them where to go. We've already built this technology and it's ready to go right now and we believe it could clear the backlog at the Long Beach/Los Angeles ports within 30 days. However, it requires changes to contracts of who's responsible for picking up which container and a lot of coordination between the private sector, trucking companies, importing businesses, warehouses, ports and ocean carriers. This type of coordination is inherently difficult for the private sector to coordinate, where each is looking out for their own best interests. But in the interest of our nation's economy, right now this is a great role for the federal government to play. I strongly believe that all the private-sector parties would get onboard if you had strong federal leadership coordinating it, calling in favors and asking people to do their part on behalf of their country.
N.S.: Are there emerging technologies that could help us make our supply chains more resilient and flexible without sacrificing efficiency?
R.P.: Look around the room you're in and ask, "Who made that?" Everything you see was built and shipped from all over the world. Yet even though we're more connected than ever, our ability to ship, store, and trade goods has remained fragmented. Did you know it can take up to 20 companies to move a single shipment, each with their own system, processes, and documentation? This complexity keeps companies from growing and great ideas from reaching their potential.
Recent technological innovations like the Flexport Platform are simplifying global trade by connecting everyone in the supply chain. What the internet has done for bits, logistics technology solutions are doing for physical goods: giving every business the ability to grow globally and reach any customer, wherever they are.
Technology platforms are the way forward, powering every part of the economy: how we buy and sell, pay and get paid, and run companies in the cloud. Next-generation logistics platforms like Flexport can connect the entire ecosystem of global trade, empowering buyers, sellers and logistics providers with solutions and technology to grow and innovate.
Some of the new and emerging solutions that can help supply chains become more flexible and resilient include:
● Real-time tracking, exception alerts, milestone updates, landed costs, and inventory impacts, transit time, and container utilization, all at your fingertips
● More visibility with a single-source-of-truth for your supply chain. Customizable views to give everyone in your supply chain the insight and tools they need.
● Immediate Exception Management—being able to flag any exceptions or changes in a shipment's lifecycle and quickly fix issues before they result in demurrage, late fees, or other snafus.
● A multi-modal booking system that brings it all together: FCL, LCL, air, trucking, and rail. A unified view to help you balance speed, cost and compliance.
● Real-time collaboration to manage orders from suppliers, track your containers in motion, know what's inside them, and how that impacts inventory. More accurate, SKU-level visibility, door-to-door.
● Tools to ingest, digitize and store all your commercial documents in one place so you can search by SKUs, HS codes, POs, styles, or custom tags—instantly. No more time lost bouncing between systems.
● Public APIs with easy integration to automate full data visibility from purchase order to invoicing, saving time, reducing errors, and improving decisions.
Flexport provides all this and much more to our customers today.
N.S.: On that note, what do you think are generally the most interesting and exciting emerging technologies in logistics and supply chains? If I were a young engineer or entrepreneur who was interested in going into logistics, what would I want to be looking at right now?
R.P.: There's a ton of innovation going on in the logistics and supply chain space right now and we're really excited to work with the industry to find solutions that make global trade easier and more accessible for everyone. Some of the emerging innovations we're excited about include:
● Self-driving trucks
● Drilling tunnels or even hyperloops to allow containers to skip the LA traffic and be transported inland at rapid speeds. It doesn't make sense that we bring all containers into Los Angeles, the city with the country's most notorious traffic jams. So after you wait all this time to pick up a container from a congested port, you don't have to get on the 405 freeway and sit in bumper-to-bumper traffic.
● Startup Incubators that are investing in emerging logistics technologies including ODX Flexport that we are partnered with.
● Sustainability solutions for the industry. Ocean shipping contributes 1 billion metric tons of carbon emissions each year. Flexport.org is a critical part of the Flexport mission. Since its founding, we've offset over 150,000 tons of CO2 emissions. We enable brands to measure their emissions with our free, accredited carbon calculator.
● The use of technology to find the optimal mix of ocean, rail, air and trucking to lower a brand's carbon impact. Flexport's platform and the Flexport.org team analyze our clients' emissions to find the right reductions for their business. We also partner with organizations like GoodShipping to help change the global fuel mix—enabling decarbonization through sustainable marine biofuels.
● The massive cargo ships of today aren't able to fit at many of the ports around the world leading to congestion at a handful of ports. We're excited to invest in startups like Fleetzero working to decarbonize the cargo shipping industry with zero emission battery-powered container ships that could help ease supply chain snarls. Electric power allows for smaller and less complex ships which are less susceptible to route disruptions, mechanical breakdowns, and port constraints.
N.S.: What's next for Flexport? Will your company be able to capitalize on efforts to upgrade and improve our supply chains?
R.P.: We want to make global logistics as reliable as the electrical grid. When you flip a light switch, you just get power. You take it for granted. But what's actually happening is an incredibly complex coordination where a power plant somewhere in the world is getting slightly hotter just to provide you that extra dose of electricity that you need. It's the same thing people expect when they buy something in a store or online, that there's an incredibly sophisticated logistics network orchestrating things in the background to make sure that product arrives at your door. That's not actually how it works today. There are armies of people pushing paper, duct taping the system together, making phone calls and sending emails, and it's almost a miracle that any of it works. Flexport wants to make global logistics so reliable that businesses can count on our technology and solutions every time, with minimal effort. So brands of every size can really focus on what they need to do: make amazing products, connect with customers, and grow their business. That's the core need of any business. We also want to create an infrastructure layer that includes financing, insurance, compliance, customs and other services that you don't have to worry about. These operations are only going to get more and more complex in the years to come.
The rise of e-commerce means brands need a much more sophisticated and complex network with far more inventory, which means more risk and capital outlays. You need to be able to load balance: know where to position inventory to be ready for future growth, but not have so much inventory that it goes unsold and the business fails. This is a problem that companies are struggling to solve today. Businesses need good data to understand where bottlenecks are and good partners to support them. The traditional freight forwarding businesses do not provide automated load balancing and network optimization solutions to businesses. Your customers want exactly what they want, when they want it, and if you can't deliver, your competitor will. Flexport wants to build a technology platform that enables companies to thrive in this environment, giving them the infrastructure to meet customer demands and grow their business, without having to hire a huge bureaucratic back office to make decisions. We're now in a realm where machine learning is needed to solve these complex problems, not spreadsheets.
One of the biggest opportunities that we see in global logistics is that there isn't great data on all of the world's logistics assets, trends, and the supply and demand for those assets. Our in-house research team has created a number of helpful economic indicators that enable you to understand the latest trends, the throughput at various ports, and the transit time on every trade lane. We are building this ecosystem using service-oriented architecture in an API-first manner so that any company can tap into our data. In time we hope that this can become a developer platform, so that supply chain technology companies don't need to build out the graph of all the
logistics networks, but can tap into our data to power all their applications. It's still early days but we're investing aggressively to make sure that we are the leaders in this space, and then we're creating this as an open platform so that any company, including potentially competitive businesses, can tap into it.
We're shaping the future of a $8.6T industry by reimagining how brands move goods—fast, with confidence, and at scale. And while we're doing all this, we're also investing in making logistics a positive force for social and environmental impact. Our non-profit arm Flexport.org has delivered aid to over 66 countries and offset over 150,000 tons of CO2 emissions. Through greenhouse gas mitigation, discounted shipping, and product-donation matchmaking, we help nonprofits, NGOs, and Flexport clients with their social and environmental impact.
Easier and faster access to data—and the transparency it enables—has the power to catalyze global trade. From the biggest retailers to the newest brands, and from the most established carriers to the hottest delivery startups, we're excited to power a new generation of solutions that make global trade easy for everyone.