From Matt Stoller blog BIG:
From railroads to plastic bags to semiconductors to ice cream, Wall Street and monopolists are creating shortages and exploiting them.
How Uber Caused a Shortage
I’ve lived in Washington, D.C. for
fifteen years, and one of the many unacknowledged changes has been the
disappearance of taxis. While the city has good public transportation,
you could jump into a taxi for a reasonably priced convenient ride
around commercial areas. Around 2012, Uber and Lyft came into the
market, and for the next seven years, it got even better, with cheaper
Uber fares within minutes. At the time, everyone knew that Uber, and its
tech economy cousins, were heavily subsidized by investors, with Uber
losing up to $1 million a week. But the cheap rides were too good a deal
to pass up.
It couldn’t last forever, and it didn’t. Slowly,
cabs, under pressure from ride shares, disappeared. Taxis had been a
reasonable business in D.C., and the drivers had middle class
lifestyles, but there was a tipping point, and the industry collapsed.
Similarly, driving for Uber, once a reasonable side job, became worse as
the firm cut the amount paid to drivers. Now, cabs are mostly gone. And
today, ride shares are often a ten to twenty minute wait, and more
expensive. It’s not just a D.C. problem; nationally, Uber/Lyft prices up 92%
over the last year and a half. And at least in Washington, cabs,
though they could now go back to their previous pricing, have not
returned. In other words, there is both inflation, and in some ways, a
shortage of taxi services.
Professional class people not being
able to cheaply zip around is not the biggest problem in the world, but
the story I just told you about why that service shriveled isn’t an
isolated incident. While once ride shares were plentiful, now they are
not. A would-be monopolist both raised prices to consumers, cut wages to
drivers, and reduced the amount of driving services available in
general.
And this story brings us to the problem of shortages and inflation.
The Shortage Problem
Last February, before Covid hit in force, I predicted in Wired magazine
that this pandemic would introduce us to the problem of shortages. And
now, almost every week I get emails from readers complaining about not
being able to buy things they need. Politicians I know are hearing about
it on the campaign trail. If you talk to local economic development
officials, they will note that both shortages of goods and labor are the
top concern of most businesses at this point. Reddit has a subreddit
dedicated to shortages. The most recent Federal Reserve Beige Book mentions
“shortage” 80 times. Even CNN is covering the problem, noting that
shipping boxes have doubled in price and the cost of moving goods from East Asian to the U.S. or Europe has gone up five-fold.
The problem is everywhere.
There are shortages in everything from ocean shipping containers
to chlorine tablets to railroad capacity to black pipe (the piping that
houses wires inside buildings) to spicy chicken breasts to specialized plastic bags
necessary for making vaccines. Moreover, prices for all sorts of items,
from housing to food, are changing in weird ways. Beef, for instance,
is at near record highs for consumers, but cattle ranchers are getting paid much less than they used to for their cows.
The
debate over shortages has become so important that it is now a key
political problem for the Biden administration. And yet, policymakers
have no institutional measurement system useful for tracking it.
Economists in the policy realm are obsessed with inflation, aka pricing
changes, but they don’t have a similar popular metric to focus on with
regards to shortages. This institutional gap blinds them, in part, to
what is happening, because if there’s no transaction because the good
doesn’t exist or can’t get to the buyer, then there’s no price. Hundreds
of drugs, for instance, have been in shortage for decades, but the
substitute of an inferior medicine doesn’t reflect in the consumer price
index.
Nevertheless, economists
are taking notice that something is off in our economy, because supply
chains are disrupting pricing, and causing inflation in many unusual
segments, like used cars and hotels. At the Federal Reserve, there is a
debate over whether this inflation is ‘transitory’ - a result of
one-time shocks from the pandemic - or something else.
Among
economists like Paul Krugman, the problem is temporary. Supply chains
will eventually work themselves out. Inflation hawks by contrast see
money printing from the Fed as inducing price hikes. Republican Jim
Banks, for instance, chalked up inflation to “reckless spending bills
Democrats have pushed for during the last year,” but it’s not just a
partisan play; Obama advisor Larry Summers agrees with that formulation.
If
you ask about supply chains, however, the answers get a lot more vague.
In response to a question about shortages, Adam Posen, a former Bank of
England official turned D.C. think tank expert, told the New York Times that normalcy might be “another year or two” away, though there is “genuine uncertainty here.”
What If There Is No “Normalcy”?
For
forty years, everyone but logistics professionals have had the luxury
of ignoring the details of how we make, ship, and distribute things.
Stuff just kind of showed up in stores for consumers. Economists who
talk about the broad economy, meanwhile, were obsessed with money; they
thought about the Fed printing more or less of it, or taxing and
spending. They too assumed stuff just kind of shows up in stores.
Yet,
using this macro-framework is oddly divorced from what people are
experiencing. Much of the handwaving - the assumption that things will
return to the way they were and it’s just a matter of waiting, or that
everything is driven by money printing or government spending - reflects
the intellectual habits borne from not having to think about the flow
of stuff.
There is a third explanation for inflation and
shortages, and it’s not simply that the Fed has printed too much money
or that Covid introduced a supply shock (though both are likely
factors.) It’s a political and policy story. The consolidation of power
over supply chains in the hands of Wall Street, and the thinning out of
how we make and produce things over forty years in the name of
efficiency, has made our economy much less resilient to shocks. These
shortages are the result.
Uber’s attempt to monopolize the taxi
market with cheap prices, and the resulting shortage years later after
the market was ruined, is a very simple way to understand the situation,
if you imagine that taking place across multiple industry segments
beyond taxis. Monopolistic business models often appear to be efficient
or good for consumers - for a time - but end up destroying productive
capacity on the backend, which then creates or worsens a shortage. In
that case, cab drivers, who used to be able to make a reasonable living,
haven’t really come back.
Two years ago, I coined the term “Counterfeit Capitalism”
to describe this phenomenon. I focused on the fraudulent firm WeWork,
which was destroying the office share market with an attempted monopoly
play turned into a straight Ponzi scheme, enabled by Softbank and JP
Morgan. Like counterfeiting, such loss-leading not only harms the firm
doing the loss-leading, but destroys legitimate firms in that industry,
ultimately ruining the entire market.
In the gig economy, the
consequences are becoming clear, as Kevin Roose of the New York Times
noted a few months ago in a story titled “Farewell, Millennial Lifestyle Subsidy.”
But beyond Uber and the gig economy, or firms like Amazon that pursue
loss-leading strategies, such destructive business practices are also
routine.
Take lumber, whose pricing increased dramatically earlier this year. As Sandeep Vaheesan pointed out,
there’s a very clear predatory pricing monopoly story here. In the
early 2000s, Ross-Simmons Hardwood sued lumber giant Weyerhaeuser Co. A
key cost for lumber mills is the price of logs, and Ross-Simmons accused
Weyerhaeuser of artificially paying more for logs to drive competitors
out of business. This practice was similar to Uber incurring losses to
subsidize the cost of rides to underprice taxis and capture the market,
only in this case it was Weyerhaeuser incurring losses to keep the price
of logs higher than they should be.
As Vaheesan put it, this
behavior changed the market. “Why invest in sawmills,” he asked, “if
dominant players will buy up necessary inputs as a means of crushing the
margins of competitors?” Though a jury agreed that Weyerhaeuser was
engaged in predatory conduct, in 2007, the Supreme Court ruled in favor of Weyerhaeuser. And whaddya know, during the pandemic lumber prices spiked,
even as tree growers didn’t see the benefit. More broadly, this ruling
undermined small producers in capital heavy industries, who had less of a
reason to invest in capacity.
This decision, like many others,
was part of a forty year trend of facilitating monopolies. It wasn’t
necessarily done in bad faith; policymakers followed the lead of
economists, who believed dominant firms were dominant because they were
efficient. This faith in efficiency over all else meant that the public
structuring of markets to force resiliency - aka regulation - was
illegitimate. So too were attempts to use public rules like tariffs to
retain domestic production of key goods.
Alas, this philosophy has
led to a series of bottlenecks in our supply chains, which are now
global. After all, what else is a monopoly but a business model designed
to secure or create a bottleneck? It is those bottlenecks that are
worsening, or in some cases, creating the shortages we see all around
us, on a worldwide scale.
Industrial Supply Crashes
I first noticed the problem of concentration and supply in 2011, when I wrote a piece on shortages of specialized video tapes,
a result of the earthquake in Fukushima and the consolidation of
productive capacity in that region. Before digitization, such video
tapes were necessary, not to watch shows, but to film them. Because of
the shortage, the NBA scrambled to get enough tape to
broadcast the NBA finals, with one executive saying, “It’s like a bank
run.” Why was this shortage so acute? The earthquake halfway around the
world had knocked offline a Sony factory that made them. That was known
an industrial supply chain crash, like a bank run, only with actual
inputs and outputs of real world stuff.
This wasn’t the first such
industrial supply chain crash in the era of globalization. There was
one in 1999, when an earthquake in Taiwan hit semiconductor production,
causing factories all over the U.S. to shut down and firms like Dell and
Hewlett-Packard to stop selling computers. The key to these supply
crashes was the consolidation of production in one area, often under the
guise of trading off resiliency for efficiency. This was also the logic
behind mass outsourcing of production.
Similar to the lead-up to
the financial crisis, policymakers only saw in these trends the
efficiency of large firms and beautiful global supply chains, not the
pooling of hidden risk. The intermingling of banks and shadow banks into
a complex and unknowable system caused a huge crash in 2008. Who knew
AIG, Goldman Sachs, and fly-by-night California mortgage lenders
connected to German land banks? Certainly regulators didn’t. The same is
happening in slow motion with our supply chains. As one trucker noted,
his Freightliner is in the shop due to a broken air line, and he was
told that shop had seven other trucks sitting there with a similar
issue, and so they can’t truck anything. That specialized part to repair
his vehicle is no longer made domestically, but must be… trucked in
from Mexico or Canada. See the problem?
The lack of resilient
supply chains in the United States (and around the world) was masked,
until a global shock came among. That Covid would cause such a shock was
obvious; as I noted above, before the pandemic hit in force, I predicted it.
And now, the pandemic is introducing shortages into our politics for
the first time in living memory, largely because our highly thinned out
supply chains are no longer resilient.
Forty years of
consolidation suddenly met with a pandemic that required a social
flexibility that our monopolistic commercial systems can no longer
provide.
The Basics of Shortages: Bank Runs and Economic Shocks
So what is actually happening? I’m not sure, but below I’m going to lay out some of the dynamics I’m seeing.
First,
there are two things at work that have nothing to do with
monopolization. The first is Covid, a massive shock to our economic
system that changed consumption habits. We switched from restaurants to
grocery store food, from movie theaters and concerts to home electronics
and hunting gear, from vacations to home improvement, from public
transportation to driving, etc, along with parallel shifts in various
commercial sectors.
Under any circumstances, such changes would
necessarily cause chaotic price movements. Hotels and airline prices
collapsed, lumber prices skyrocketed, and gun owners are still
experiencing the “Great Ammunition Shortage.” But some significant
shifts were inevitable.
Then there is the dynamic of bank run-like
panics, which induce shortages by drawing down inventories. One home
builder wrote me about shortages in his industry, noting that a lack of
supplies “are, predictably creating further shortages, reminiscent of
the toilet paper shortages in 2020: once someone finds black pipe or
whatever, they buy way more than needed since they might not find it
again. I'm as guilty as anyone; I have 50 stoves sitting in a storage
unit since I'll need them at some point. Meanwhile, a 54 unit project is
in suspended animation while I wait for the Packaged Terminal Air
Conditioners that won't be in until next year.”
Another example is the gas lines
resulting from panic around the shutdown of the Colonial Pipeline
earlier this year. People topped up their tanks en masse, which caused
shortages at gas stations even when there wasn’t an actual lack of
adequate gasoline supplies.
Supply shocks, and some panic buying,
was inevitable. In an economy with lots of flexibility and multiple
buyers and suppliers at every level, these problems are manageable. But a
monopolized economy makes the problem much worse.
The Different Types of Bottleneck Problems
Here are the five ways I’m seeing it play out.
1) Monopolies manipulate prices and lower supply.
Unregulated firms with market power raise prices, cut wages, and reduce
supply. That’s just what they do. A very simply example of this problem
is in the beef, poultry, and pork industry, the three types of meat
that are responsible for roughly half of the inflation in food. The
White House came out with a very good blog post
on the problem, noting that “just four firms control approximately
55-85% of the market for these three products.” The result is price
spikes to consumers, lower amounts paid to farmers and ranchers, and
record profits for the packers. Half of our food inflation, in other
words, is a meatpacking monopoly story.
It’s not just meatpacking.
The list of supply reductions seems endless. For instance, there is a
shortage of various forms of generic pharmaceuticals. One would think
we’d be investing in more production. Yet, as a result of a merger
between Mylan and Viatris approved by the Trump administration, Viatris
just shut down a giant pharmaceutical plant
in West Virginia, costing 1500 jobs, but also reducing the capacity of
the U.S. to make its own medicine. Similarly, in 2017, Linde and
Praxair, two industrial gas giants, merged. Whaddya know, now there’s an oxygen supply shortage.
2) The Keurig Interoperability Problem: Then there are the artificial bottlenecks produced on purpose to exploit market power. For instance, why don’t we have enough specialized plastic bags to use in making vaccines? Over
the past fifteen years, the producers of biopharmaceutical equipment
consolidated the entire industry, such that there are really four
producers each of whom sells, in business school speak, an “integrated
set of products” to pharmaceutical firms who want to make stuff.
However,
as I noted back in May, an ‘integrated suite of products” is really a
euphemism for locking in your customers through product design, a
classic sign of monopoly. If you use one kind of bioreactor bag, you
can’t easily switch out to another, because the industry refuses to
standardize. As this International Federation of Pharmaceutical
Manufacturers Associations noted,
“the high degree of specificity and the lack of standardisation of
these items represent a hurdle to short-term supplier switches and thus
flexibility.”
Basically, it’s as if these firms all make their
own type of Keurig coffee machine, and don’t let the coffee pods work
with each other’s machines to lock in their customers. There is no
shortage of coffee, but the focus on market power has created an
artificial bottleneck via product design. (To amplify the market power
problem, these firms created intellectual property thickets, with
thousands of patents on the plastic bags alone.)
Such interoperability issues are pervasive; railroad monopolies, for instance, don’t allow switching of freight loads to rival networks, which hinders shipping. Many of these shortages in the economy, in other words, are intentional.
3) Right to Repair, or the McDonald’s Ice Cream Problem: Another
artificial bottleneck created to facilitate certain corrupt business
models is to prevent firms from repairing their own equipment.
For
instance, why is McDonald’s often out of ice cream? Their ice cream
machines are always broken, leading to unhappy customers and frustrated
franchise owners. There’s no shortage of vanilla, cream, sugar, or other
inputs, but McDonald’s, and the food equipment conglomerate Middleby,
do not allow franchise
owners to repair their own equipment, because allowing that would
jeopardize the fat maintenance equipment fees they get from servicing
overly complex machines. And so there’s a shortage of ice cream.
If
McDonald’s couldn’t force franchises to buy specific equipment, or if
Middleby didn’t roll up the food services equipment space, or if it was
illegal to block people from repairing their own equipment under
reasonable terms, then there would be no shortage.
This problem,
like the Keurig interoperability problem, is pervasive. John Deere
tractors, weapon systems, wheelchairs, ventilators and many types of
electronics have provisions preventing the ability of owners to repair
their equipment. And market power creates an incentive for monopolists
to produce over-engineered crap that breaks down, or to make it
impossible to replace a part with a similar though not identical part
from a rival firm.
When you need a flexible supply chain in a
crisis, the ability to repair something comes in very handy. And the
inability to repair stuff means shortages.
4) Infrastructure Monopolies: One
of the most problematic monopolies is that of Taiwan Semiconductor
(TSMC), which is the main fabricator of high-end chips used in
everything from phones to computers to cars, whose customers include
every major tech firm. Semiconductors, like oil, are infrastructure at
this point, going into a large swath of products. Infrastructure
monopolies are bottlenecks whose effects cascade down supply chains. I
mean, PPG, which is a paint conglomerate, is pointing to chip shortages as a cause of its supply disruptions.
As Alex Williams and Hassan Khan note,
sustained national investment by Taiwan, combined with disinvestment by
the U.S. government, led to the consolidation of manufacturing capacity
in TWSC. Additionally, TWSC engaged in dumping of products on the U.S.
market in the 1990s, which is a form of predatory pricing. Intel, rather
than focusing on competing, organized itself around monopolization, and
thus loss the technological lead over semiconductor production in the
early 2010s.
The net result is that we are now highly dependent
for a key form of infrastructure on a monopoly that cannot expand as
quickly as necessary, and that is halfway around the world in a
drought-riven geopolitically sensitive area. Disruptions or supply
shocks thus mean begging Taiwan for one’s ration of semiconductors.
But
there are many other infrastructure monopolies we’ve facilitated over
the last forty years. There are, for instance, railroads, an industry
where there used to be 30+ competitors, and which now has seven monopolistic rail lines
that are constantly reducing service and destroying freight cars.
Railroads, like many network systems, require not only competition, but
regulation, or else the incentive to disinvest by owners is too strong.
For instance, in 2019, the Union Pacific shut down a Chicago area sorting facility
to increase profit margins for its Wall Street owners. As a result, in
July of this year, the rail line had so much backed up traffic in
Chicago that it suspended traffic
from West Coast ports. Such a suspension of service backed up port
unloading, causing a cascading chain reaction, delays piled upon delays.
Regulators are noticing. A few days ago, the head of the Surface Transportation Board Martin Oberman, told his industry that
US railroads are focusing too much on pleasing Wall Street at the
expense of shippers and the general public. To reach Wall Street profit
goals, he said, “railroads have cut their workforce by 25
percent…Operating the railroads with that many fewer employees makes it
difficult to avoid cuts in service, provide more reliable service, and
reduce poor on-time performance.” So we know the problem. Infrastructure
monopolies, when unregulated, intentionally create shortages.
We
saw something similar with ocean shipping lines that have consolidated
into three global alliances that build larger and larger boats. When a
big dumb boat crashed in the Suez canal, a significant amount of global
shipping came to a halt,
which again, caused a cascading chain reaction that is still being
felt, months later. And trucking is also being disrupted by the private
equity roll-up of third party logistics firms which, like Uber, pushes down wages and likely removes supply from the market.
5) Power Buyers and Economic Discrimination: Then
there’s price discrimination to remove small players from the market.
One BIG reader, an administrative assistant at a small college, noted
she’s seeing “shortages in previously plentiful food items.” There are a
host of foods they can’t get anymore. “We order from Sysco mainly, and
we sometimes can't get basic things like spicy chicken breasts for
sandwiches. We get the same spicy chicken that Wendy's serves, so we
presume Wendy's is taking priority on this.” Sysco has tremendous market
power in food distribution, it is what is known as a power buyer, using
a system of rebates to coerce suppliers and buyers into using its
services.
Power buying is why large firms like Walmart are out-competing small ones. Walmart, for instance, tells its suppliers they must deliver
on time 98% of the time, or it will fine them 3% of the cost of goods.
“Known in the industry as "power buyers," large retailers have had an
advantage for years when buying goods because they order larger
quantities than smaller wholesalers do,” wrote
CNN’s Nathan Meyersohn on this problem. “Large retailers' scale and
buying clout make them a top priority for manufacturers, he said, and
they often get promotions, special packaging or new products early.”
Price
discrimination means smaller firms, both producers, distributors, and
retailers, can’t get access to what they need to do business, and small
firms are often more flexible than big ones, and serve customers in
rural or niche areas. In West Virginia, for instance, where small pharmacists
were the key vaccine operators, the roll-out of the vaccine to nursing
homes was initially far quicker than in states that used CVS and
Walgreens. The collapse of niche specialties, or the disappearance of
small dealers who can fix products or service customers, is one result.
There
are many other ways power buyers operate, and I’m going to devote a BIG
issue to breakdowns in the pharmaceutical supply chain as a result of
what are known as Group Purchasing Organizations. But that’s the gist of
the problem.
A lot of people look at the economy
over the last year and a half, and see the shortages that we’re having
as a result of the pandemic and the resulting supply shock. But while
Covid provided the spark, it also leveraged pre-existing fragilities
existing all over the economy, including some shortages that were
longstanding before the disease emerged. What all of these examples I
offered have in common is the basic idea that when a monopolist
concentrates power, that monopolist also concentrates risk.
The story of my book Goliath
is the story of how policymakers and Americans came to see monopolies
as efficient, or useful, or perhaps simply inevitable. We relaxed
antitrust policy, facilitated the rise of concentrated power, and
enabled looting by financiers. And this created a political crisis which
is simple to explain. American commerce, law, finance, and politics
is organized around producing bottlenecks, not relieving them. And that
means when there’s a supply shock, we increasingly can’t take care of
ourselves.
The scariest part of this whole saga is not that a
bunch of malevolent monopolists run our economy, inducing shortages for
profit. Indeed, these shortages are not intentional, any more than the
financial crash of 2008 was intentional. Most of what is happening is
unintended. Bad actors aren’t steering the ship. They are just making
sure that no one else can, even when it’s headed for the rocks.
