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How to ruin your economy

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Fifteen months ago, those of us who cautioned against a blind rush to lockdown the economy were accused of “putting profits ahead of people’s lives” (I am in the at-risk, “shielding group” by the way). Today, the early manifestation of the economic crisis we warned about is appearing in the shape of shortages of everything from building materials to tomato ketchup sachets and from paint to plastic furniture.

The issue was not so much locking down the economy.  Had the virus been anywhere close to the lethality suggested in the government models, business as usual might have resulted in several million deaths – and remember, back in March last year we didn’t know that it was primarily the very old and the very sick who were at risk.  Even so, there was a complete failure to conduct a cost-benefit analysis of the lockdowns and restrictions which have become a feature of British life.  Even in the limited field of health, the government was – and largely still is – unaware of the likely additional death toll from missed doctors’ appointments, underused hospital diagnostic services and from people simply avoiding treatment for strokes and heart attacks out of fear of the virus.  And while platitudes have been made to those with mental health problems, we can only guess at the likely suicide toll resulting from people losing their jobs, their relationships and their homes as a result of the economic dislocation resulting from the lockdowns.

The bigger failing at the very beginning was the government’s inability to define the end state.  Poorly defined goals at the start – such as “flattening the curve” and preventing the Health Service from being overwhelmed – have been allowed to morph into demands for “zero Covid;”dramatically raising the bar by making SARS-CoV-2 something we have to eradicate rather than, as with a host of diseases, something we have to live with now that vaccines are available.

Even now, with an apparent end in sight, the somewhat arbitrary switching of countries on the green travel list caused chaos at Portuguese airports yesterday; as desperate Britons tried to escape ahead of new quarantine restrictions.  The UK government position had already been ambivalent – “you are free to go to Portugal but we advise against it.”  So that holiday makers couldn’t claim that they weren’t warned when a new quarantine was imposed.

Within the UK almost all of the restrictions have been lifted.  But despite an earlier assurance that all restrictions would be lifted on 21 June, government ministers are already wavering.  In Wales, the Minister for Health and Social Services has already announced that a “third wave” is now inevitable.  Meanwhile, the UK Health Minister has backtracked on the June 21 date, claiming it was only a “not before” date.  This despite growing evidence that the Indian variant has failed to result in increased hospitalisations. 

The spectre of a replay of autumn 2020 when the second wave prompted eight months of lockdowns looms over British businesses and households.  This, in turn, creates an economic instability which threatens something much more dangerous than the price rises which the establishment media is currently bleating about.  Only a clinically insane finance director would embark on a new round of borrowing to invest in growing the business when global supply chains are disrupted, shortages are popping up everywhere, and there is no guarantee that the government will not lock everything down again next week.

And so we continue to adapt as best we can.  But the individual measures we take in response to the situation are themselves the cause of further economic disruption.  The internet, for example, allowed a mass exodus from city office blocks as millions of workers turned spare bedrooms into home offices.  In the process though, the additional demand for retail toilet roll packs – as workers no longer used toilets at work – triggered toilet paper shortages even as giant workplace toilet paper rolls stacked up, unwanted in warehouses.  Similar shortages popped up for the same reason.  Millions of eggs, for example, were being thrown away even as shoppers faced empty shelves were the eggs used to be.  The reason was once again the big switch from wholesale supply to cafes, snack bars and restaurants to retail supply.  There were plenty of eggs, but a massive shortage of the smaller, retail-size egg cartons to put them in.  And it turned out that there are just three factories in Europe which make egg cartons; the nearest one – in Denmark – was on vacation just as the shortage of cartons became a problem. 

The dilemma for manufacturers accross the economy is whether to invest to meet new patterns of retail demand, or to treat them as temporary and wait until the pandemic is over.  The irony here is that the global Just-in-Time supply chains which developed as a response to the crises of the 1970s had provided a degree of stability which probably allowed the non-financial economy to weather the 2008 storm far better than it might otherwise have done.  Computerised, demand-led systems have generally proved able to respond to ordinary fluctuations across the economy.  This no doubt lulled us into a misplaced faith that the economy was resilient.  But the actions taken in response to the pandemic have pushed us over a tipping point from which we will likely never recover.  As I wrote in March last year:

“The reason we have a ‘pandemic crisis’ has less to do with the emergence of a novel coronavirus than with the fragility of the complex interconnected global economy that we have built in an attempt to counteract the impact of the remorselessly growing energy cost of energy.  Fragility – for example, in the form of dangerously exposed just-in-time supply chains – is the inevitable cost of complexity…”

In the USA, restrictions on travel to the wild open spaces of Alaska were lifted earlier this year.  But tourists taking to the airlines to fly to the state faced a severe shock when they tried hiring a car from Anchorage airport.  The hire car companies – strapped for cash from last year’s lockdowns – had sold off their old fleet to bring some cash into their businesses.  But when they came to order new vehicles for this year’s tourism season, they couldn’t get them.  The global car industry had also slowed down for the pandemic as demand for new cars – already falling precipitously from 2018 – plummeted.

Worse still, with millions of workers across the developed states taking to the internet to work from home, not only was demand for cars down but demand for computers, laptops and mobile phones was up.  And the one component common to cars and electronics is microprocessors.  The entire supply chain switched from automobiles to computing in 2020.  So that when demand for automobiles picked up, there were not enough chips.  And so vehicle manufacturers were forced to continue short-time working, and car hire companies had to learn to function without cars.  This is why the few Alaskan hire cars which are available will cost you more than £390 per day to hire.

As Peter S. Goodman and Niraj Chokshi at the New York Times note:

“The most prominent manifestation of too much reliance on Just In Time is found in the very industry that invented it: Automakers have been crippled by a shortage of computer chips — vital car components produced mostly in Asia. Without enough chips on hand, auto factories from India to the United States to Brazil have been forced to halt assembly lines.

“But the breadth and persistence of the shortages reveal the extent to which the Just In Time idea has come to dominate commercial life. This helps explain why Nike and other apparel brands struggle to stock retail outlets with their wares. It’s one of the reasons construction companies are having trouble purchasing paints and sealants. It was a principal contributor to the tragic shortages of personal protective equipment early in the pandemic, which left frontline medical workers without adequate gear.”

Global shipping developed just-in-time practices of its own.  Importing ports developed to handle precisely the volume of containers of goods required by retailers.  Sufficient ships – but no more than that – would be deployed to move those containers around the world’s sea lanes.  Manufacturers would produce just enough goods to fill those ships; and raw material producers would extract and ship just enough to allow that manufacturing to occur.  In this way, global shipping became simultaneously efficient and fragile.  Disruption at any point in the supply chain – such as, for example, a ship blocking the Suez Canal – could create shortages which might take months to rectify. 

When China locked down its manufacturing regions last year, not only did it create shortages for importers, but it left shipping containers piling up in the wrong places.  This was then exacerbated by importing ports being locked down some weeks later.  Instead of being quickly unloaded and turned around, ships had to wait at anchor outside the ports while a skeleton workforce unloaded ships as quickly as they could.  But delays unloading extended the effective travel time of the ships.  On the route between Shanghai and San Francisco, for example, shipping times were effectively doubled.  To make matters worse, the usual circulation of containers was severely disrupted; with less than half the normal empty containers being returned to the exporting ports.  This has resulted in a backlog wave in which new demand cannot be met until prior shortages have been overcome; with some shipping insiders predicting disruption for years to come.

So long as the consuming economies of Europe and North America remained locked down, this might have rumbled along in the background.  The fact that café’s cannot guarantee their supplies of ingredients, for example, is of little consequence to a population locked up in their homes.  Attempting to unlock is a different matter altogether as both businesses and consumers attempt to second guess supply and demand based on supply chains that are incapable of recreating the flow of goods of 2019.

Even having governments step in as investors of last resort, as is happening in the USA and UK, does not automatically overcome the problem.  Not least because the kind of public infrastructure projects that are “shovel-ready” are those – like new roads – that are unnecessary to a post-Covid world in which living and working habits have radically changed.  Furthermore, in economies which import most of their consumer goods, it is essential that public investment goes to projects which stimulate private investment in indigenous businesses rather than merely paying more workers to go and buy imported goods.

Without renewed stability across the economy though, private investment is unlikely to happen.  Instead – as we have seen throughout the pandemic – potential investors will seek refuge in various unproductive asset bubbles where they are ultimately at risk from a deflationary collapse.  This is why we needed to know the end state before we blundered our way into locking down our economies.  It is also why we desperately need a responsible adult not only to define that end state, but also to stick to their guns in the face of media-inspired variant scares.  Only then can we hope to understand just how much economic damage has been done.  And only with that understanding is there any hope of restoring the degree of economic stability required to prevent a severe collapse.

As you made it to the end…

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