What Caused America’s Supply Chain Crunch? Corporations And Greed

When the Coronavirus Pandemic hit in January 2020, much of the world’s economy literally shut down as country after country went into lock downs in an effort to slow the spread of the disease. People were no longer working producing goods.

Manufacturing corporations try to match their production to demand, trying to keep a minimum of inventory supply on hand. There is no money in goods not sold, and inventory not sold costs money for storage. Production decreased or ceased.

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With the global lock downs, people were also not spending money in the service economy any longer, i.e., restaurants and bars, entertainment, hair salons and barber shops, etc.

The wealthy governments of Europe and the United States then provided financial assistance to their citizens. This was a financial windfall for some in the United States. The U.S. savings rate went up – because there was nowhere to spend the money.

This eventually led Americans (and other wealthy countries) to go on an online buying spree for goods instead of services. Demand quickly returned for manufactured goods in the industrialized countries of the world, but initially there was no excess inventory because of business inventory practices, and it takes time to ramp up production – especially when waiting on lock downs to end and workers to return to work.

This supply issue has now largely resolved as the industrialized countries of the world have returned to work with Covid-19 vaccines and new treatments readily available in the world’s wealthy countries. The problem no longer is a lack of manufactured goods.

It is the new high level of demand for manufactured goods over services which has led to a new problem: it has exposed the flaws in the American private business supply chain of moving manufactured goods to market and eventually to consumers.

The federal government has little to do with this free market supply chain built and controlled by private businesses, i.e., manufacturers, shipping companies, trucking companies, railroads, and retailers. Corporations built this supply chain, and corporations have failed to adjust their business practices to meet this new high level of demand for consumer goods.

In some cases, this is by design. As this 60 Minutes report exposes, there are businesses all along the supply chain that are price gouging and profiteering from the supply chain bottleneck that they created through their business practices. It is consumers who are ripped off in the end. “This is what inflation looks like.” Packed ports and empty shelves: Inside the issues behind the U.S. supply chain crisis (excerpt):

We flew over the sprawling Ports of Los Angeles and Long Beach – 40% of all U.S. imports come through here. We saw stacks of marooned containers, dormant cranes, loaded rail cars sitting idle. The country’s busiest ports packed to the gills. And out at sea? More than 80 ships stretched to the distance—a new record. They used to pull right in. Now, they can wait weeks. Petersen told us this backlog has been building since the start of the pandemic.

Bill Whitaker: Is it getting worse?

Ryan Peterson: It’s definitely getting worse. It’s as bad as it’s ever been right now. Right there do you see all those blue cranes? There’s no ship–

Bill Whitaker: That makes no sense.

Ryan Peterson: That’s what– that’s what I say. It makes no sense until you realize, hey, the yard is totally full. See how high those stacks are? Totally jammed up.

Bill Whitaker: So when you see this, what– what does this say to you?

Ryan Peterson: I think a lot of businesses are at risk. If they can’t get their products in in time for the holiday season. And of course it also means consumers are going to pay really high prices for everything.

Bill Whitaker: So this is what inflation looks like?

Ryan Peterson: Yeah, this is inflation first-hand.

The problems at the ports have cascaded across the country. So we followed the supply chain from the choked Ports of LA and Long Beach to rail yards in Chicago. Along the way we found chaos, finger-pointing, huge profits and massive losses. And everywhere, frustration.

* * *

Bobby Djaverheri runs Yedi Houseware, he imports household appliances from China. He told us his goods have been delayed for six months. Now, he has thousands of orders he can’t fill and his shipping costs have soared from $2,000 a container, to as high as $25,000. He blames this crisis on the ocean carriers.

Bobby Djavaheri: I call them pirates of the sea. They’re 100 percent price-gouging and no one’s done anything about it.

Bill Whitaker: It’s not just market forces?

Bobby Djavaheri: No. No. I– I really don’t buy it. It’s price-gouging and it’s someone taking advantage.

Bill Whitaker: And it’s hurting your business?

Bobby Djavaheri: Yeah, it’s hurting my business and many other people’s businesses.

* * *

Gene Seroka is the executive director of the LA Port. He told us the entire system has been overwhelmed by the tsunami of orders flooding in from Asia.

* * *

Bill Whitaker: Who is making money off of this? Who is benefitting from this backlog?

Gene Seroka: Liner shipping companies will make record profits this year again. They’re booking more cargo than ever before. There’s a supply/demand issue.

Bill Whitaker: So the price just keeps going up and up?

Gene Seroka: Prices skyrocketed on these trans-Pacific trade routes. There’s money being made.

This month, the world’s largest shipping line, Maersk, reported record profits of $16 billion — up 68% from last year. The ocean carriers — most headquartered in Europe or Asia — say demand for cargo space keeps rising. They blame a shortage of truckers at the port.

* * *

Matt Schrap of the Harbor Trucking Association told us there’s no driver shortage at the ports. He says it’s the antiquated booking system that’s gumming up the works. Schrap told us normally truckers make an appointment to return an empty container before picking up a full one. But with so little space at the ports, there are new restrictions on even the color of container that can be returned. Truckers can wait hours in line only to be turned away because there’s no room.

Bill Whitaker: Some of the terminals will say that the no-shows of your drivers. Fifty percent of the time they don’t show up. How do you explain that?

Matt Schrap: Well, we make appointments because we don’t know sometimes until the day of whether or not we’re gonna be able to return an empty container back into that marine terminal. And then all of a sudden the day of, they say, “Sorry, we’re not taking any more rust-colored containers.” So it’s just—you know, it’s just—it’s a game of whack- a-mole, literally.

The result: lots like this, full of empty containers sitting on chassis, the undercarriage that holds the container and attaches to a truck.

Matt Schrap: Without a chassis you cannot move those containers off of dock. And the majority of chassis are sitting under empty containers, strewn around California.

Bill Whitaker: So the chassis are necessary to move the full containers out of the port?

Matt Schrap: Absolutely.

Bill Whitaker: But most of these chassis are now being used just to hold empty containers.

Matt Schrap: That’s correct.

Bill Whitaker: This is the definition of a bottleneck.

Matt Schrap: Absolutely.

* * *

Rick Woldenberg told us he tried to avoid the backlog by placing his Christmas orders in May, only to hit a monumental snag in Chicago.

There was so much cargo at the rail yards that his containers got stuck at the bottom of a pile for nine weeks. He told us it was like having his toys held hostage. The kicker? The rail line charged him for “storage.” This on top of paying $30,000 for a container from China, ten times what he paid last year.

Rick Woldenberg: If that were as bad as it was, that would still be horrible but it gets worse because we get penalized for storage. And that’s where it becomes the theatre of the absurd. So, the $25,000 to $30,000 is the market gone berserk but penalties are a punishment that is unconscionable.

Bill Whitaker: So wait a minute your– your cargo is being held up?

Rick Woldenberg: Right.

Bill Whitaker: For nothing you have done wrong?

Rick Woldenberg: Correct.

Bill Whitaker: You can’t go pick it up?

Rick Woldenberg: Correct.

Bill Whitaker: But you have to pay for it to be stored?

Rick Woldenberg: Correct.

The rail yards told us it was all due to congestion. Rick Woldenberg told us he paid almost a million dollars in storage fees in September alone.

Bill Whitaker: Can you afford this?

Rick Woldenberg: No, I can’t. It’s impossible to absorb this kind of expense so we had to raise our prices. These penalties are gratuitous. They’re not incurring extra expenses because of this.

Bill Whitaker: It sounds like you’re saying they’re charging you extra because they can.

Rick Woldenberg: Sure feels like it.

* * *

Bill Whitaker: The truckers blame the terminals, the terminals blame the shippers, the retailers blame the truckers and the shippers. How do you get that contentious group to sit at the table, stop pointing fingers, and actually clear out this backlog?

Gene Seroka: That’s been the toughest part. We haven’t moved the needle yet, but it’s not for a lack of trying and we’re going to have to just double down.

The whole supply chain mess has put a spotlight on glaring deficiencies in U.S. infrastructure. Flexport’s Ryan Peterson says there’s no quick fix and the $17 billion in the infrastructure bill for upgrading America’s ports may not be enough.

Ryan Petersen: See Singapore alone is building a $20 billion container terminal right now.

Bill Whitaker: How did we get to this? I mean, I’ve seen the ports in Rotterdam and in Hong Kong and they are light years ahead of us.

Ryan Peterson: One problem with the U.S. system is– we– the ports are owned by the cities that they’re in. And ultimately the capital expenditure for building terminals, for dredging, for you know, for investing in these ports comes down to decisions made at a local level. You know, this is a national infrastructure, it’s to serve the entire country. So there’s a real role for federal government to come in and step in.

The White House has put a top-level task force on the problem, but other than twisting arms and wrangling concessions, there’s not much it can do in an industry dominated by private companies, foreign shipping lines and local port authorities. And no one we spoke with expects a Christmas miracle.

This supply chain bottleneck is directly the result of private corporations and their business practices that built it. As Bill Whitaker correctly noted, “there’s not much [the federal government] can do in an industry dominated by private companies, foreign shipping lines and local port authorities.”

Well, maybe there is one thing: the Department of Justice can open probes for price gouging and profiteering with the formation of the COVID-19 Hoarding and Price Gouging Task Force. But only few criminal prosecutions by U.S. Attorneys under the Defense Production Act have occurred to date. Federal Price Gouging Enforcement Update(July 2020):

While the majority of price gouging enforcement has occurred at the state level (see Proskauer on Price Gouging — A Coast-to-Coast Reference Guide), the federal government has also been active, and several federal price gouging bills have been introduced, though none have been signed into lawSee, e.g., S. 3574 (empowers the FTC and Attorney General to enforce civil and criminal penalties for price gouging); H.R. 6472 (prohibits “unconscionably excessive” pricing “indicating the seller is using the circumstances related to” the emergency to increase prices); H.R. 6264 (creates a new criminal offense for price gouging during a state of emergency); H.R. 6450 (based on California law, limits raising price of consumer goods to no more than 10% after an emergency declaration).

Therefore, with no comprehensive federal legislation on price gouging, enforcement has largely taken the form of the Department of Justice and other executive agencies acting under the Defense Production Act (the “DPA”), a law passed in 1950 in response to the Korean War which gives the president broad authority to manage domestic industrial affairs in the interest of “national defense.” While originally enacted in wartime and more commonly employed to regulate certain foreign investment into U.S. businesses, authority extends to the Executive Branch to act in response to national emergencies like COVID-19.

The DPA has two sections relevant to the COVID-19 pandemic: an anti-hoarding provision and an anti-price-gouging provision. The anti-hoarding provision bars accumulation of materials “in excess of the reasonable demands of business, personal, or home consumption.” The anti-price gouging provision bars accumulation of materials for the “purpose of resale at prices in excess of prevailing market prices.” The act carries both civil and criminal penalties.

* * *

While a general prohibition on price-gouging may seem familiar, two distinctions are worth highlighting with respect to federal enforcement. First, the DPA explicitly focuses on accumulation of materials. This is in contrast to many state price gouging laws that focus solely on whether the price being charged is in excess of a determined baseline level, with various exceptions like for increases in costs.

Second, while many state price gouging statutes have either specific benchmarks for price increases (generally ranging from 10-30%) or use specific language to target only extreme price increases (such as “excessive” or “unconscionable”), the DPA simply prohibits “resale at prices in excess of prevailing market prices.” Because “excess” is not defined in statute and has not yet been defined by the courts, it is unclear what exactly qualifies as price gouging under the DPA (though state laws probably provide a reasonable analogue). In comments before the Senate Judiciary Committee on the progress of the Task Force, DOJ attorneys stated that the Task Force is focused on “profiteering.” However, despite further noting that traditional costs may play a role in determining whether price gouging has occurred, the DOJ declined to offer any bright line rules.

Enforcement to date offers some guidance. In the first case brought by the federal government for COVID-19 related price-gouging, criminal charges were brought against a defendant for allegedly using his retail sneaker and sports apparel store to amass and sell large quantities of PPE at a more than 1,000% markup. In other instances, federal prosecutors have brought criminal charges against companies and individuals, alleging either attempts to overcharge the government for PPE or simply defrauding the government with offers to sell equipment that never existed in the first place. However, while federal enforcement to date might seem focused on “bad actors” selling and hoarding PPE and other medical equipment associated with the COVID-19 pandemic, the broad language of the DPA, along with accounts of active DOJ inquiries, makes it important to continue to monitor federal actions in this space and to consider federal restrictions when putting a price gouging compliance program in place.





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3 thoughts on “What Caused America’s Supply Chain Crunch? Corporations And Greed”

  1. The AP explains, “Key reason for supply shortages: Americans keep spending”, https://apnews.com/article/business-global-trade-e9b91af9bce8e32a7df2d5b4f75a30ee

    Even as the pandemic has dragged on, U.S. households flush with cash from stimulus checks, booming stock markets and enlarged home equity have felt like spending freely again — a lot. And since consumer demand drives much of the U.S. and global economies, high demand has brought goods shortages to the U.S. and much of the world.

    Add the fact that companies are ordering — and hoarding — more goods and parts than they need so they don’t run out, and you end up with an almost unquenchable demand that is magnifying the supply shortages.

    That’s where a big problem comes in: Suppliers were caught so flat-footed by how fast pent-up spending surged out of the recession that they won’t likely be able to catch up as long as demand remains so robust. That’s especially so because Americans, still hunkered down at home more than they did before the pandemic, continue to spend more on goods — electronics, furniture, appliances, sporting goods — than on services like hotels, meals out and movie tickets. All that demand for goods, in turn, is helping to accelerate U.S. inflation.

    Unless spending snaps sharply back to services — or something else leads people to stop buying so much — it could take deep into 2022 or even 2023 before global supply chains regain some semblance of normalcy.

    [O]ne reason people may eventually stop spending so much is that everything simply costs more now. Consumer prices in the U.S. skyrocketed 6.2% over the past year as food, gasoline, autos and housing catapulted inflation to its highest pace since 1990. The laws of gravity suggest that the cumulative effect of so much inflation will eventually exert a brake on spending.

    For now, though, manufacturers foresee no end to heavy demand — and no end to beleaguered supply chains or spiking inflation pressures.

    [T]hough Americans have increasingly ventured out in recent months, the balance between spending on goods and services remains skewed. The pent-up demand that followed the economic recovery is still tilted toward goods like furniture and cars and less toward haircuts, concerts and restaurant meals. Though services spending has grown in recent months, it isn’t nearly enough to close the gap.

    Since April 2020, consumer spending on goods has jumped 32%. It’s now 15% above where it was in February 2020, just before the pandemic paralyzed the economy. Goods account for roughly 40% of consumer spending now, up from 36% before the pandemic.

  2. Binyamin Applebaum writes at the New York Times, “Monopoly’s Bad Cousin”, https://www.nytimes.com/2021/11/15/opinion/antitrust-penguin-biden.html

    The nation’s antitrust police, asleep for the past few decades, barely opening their eyes to buzz through the latest corporate mergers, finally seem to be emerging from their slumber. That is a very good thing for the American economy.

    [T]he Biden administration is attempting to break out of a cage that has constrained antitrust enforcement since the 1980s.

    The power of large corporations can warp the economy in several ways. The most familiar is that companies with monopoly power can impose higher prices on consumers. To the extent federal antitrust regulators have done anything in the past few decades, they have objected to deals that seemed likely to result in higher prices.

    But big companies also can pad profits by squeezing their workers and suppliers, and they can influence politicians to entrench their advantages.

    [C]hecking corporate power over workers as well as consumers is a necessary corrective. A 2018 study estimated that 20 percent of Americans work in highly concentrated labor markets, meaning that there are few alternative employers for the work they do within a reasonable commuting distance. “It means that employers have the power to underpay those people,” said one of the authors, Ioana Marinescu, an economist at the University of Pennsylvania. In a separate paper, Ms. Marinescu and her co-authors calculated that employers underpay workers by about 17 percent of the amount justified by the workers’ productivity.

    [At] first blush, it may seem that companies with the power to squeeze workers — the technical term is “monopsony” — would pass along savings to consumers in the form of lower prices.

    In fact, monopsonies are bad for consumers, too. Monopoly and monopsony are different forms of market power, but both let corporations sell less stuff without making less money.

    [A]ntitrust minimalism is deeply ingrained in the federal judiciary. The Biden administration is trying to shift 40 years of legal thinking. It makes sense to start with a narrow case where the facts are relatively clear.

    [Mr.] Biden has presented his approach to antitrust as a break with Robert Bork. “Forty years ago, we chose the wrong path, in my view, following the misguided philosophy of people like Robert Bork, and pulled back on enforcing laws to promote competition,” Mr. Biden said this year in signing an executive order detailing areas in which the government would seek to increase competition. He said he wanted to restore what he described as the antitrust tradition of “the two Roosevelts” — Franklin and Theodore.

    [In] acting to protect producers, the Biden administration is not just breaking with Mr. Bork. It’s breaking with Franklin Roosevelt, too. It’s a break that’s long overdue.

  3. Robert Reich, a former secretary for the U.S. Department of Labor and a professor of public policy at the University of California at Berkeley, is explaining why he believes the United States’ inflation problem is indicative of a much larger issue. “Here’s the ‘deeper structural reason’ for disturbing inflation across the US: Robert Reich”, https://www.alternet.org/2021/11/robert-reich-2655538416/

    Since the onset of the pandemic, prices have risen across the nation at an unprecedented speed. On Wednesday, November 10, it was reported that the consumer price index, which, according to The Guardian consists of “a basket of products ranging from gasoline and health care to groceries and rents,” has increased by 6.2% since last year.

    Although former Federal Reserve chairman Jerome Powell believes the issue is temporary and a result of “supply bottlenecks,” Reich also points to a structural reason that may only worsen over time. According to Reich, corporate control is a big part of America’s inflation problem.

    “But there’s a deeper structural reason for inflation, one that appears to be growing worse: the economic concentration of the American economy in the hands of a relative few corporate giants with the power to raise prices,” he wrote.

    “If markets were competitive, companies would keep their prices down in order to prevent competitors from grabbing away customers. But they’re raising prices even as they rake in record profits. How can this be? They have so much market power they can raise prices with impunity.”

    However, Reich believes there is a way to resolve the structural issue. He concluded, “This structural problem is amenable to only one thing: the aggressive use of antitrust law.”

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