Global supply chains may be efficient, but they also risk boosting inflation and inequality

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Boston (Project Syndicate)—The global supply chain used to be the last concern of policy makers. The subject was largely of concern to academics who studied potential efficiency gains And Capacity risk associated with this aspect of globalization. However, Japan’s Fukushima nuclear disaster in 2011 demonstrated how supply-chain disruptions can be impact on the global economy, some speculated as to how central the problem might be.

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not anymore. Today’s supply-chain bottlenecks are creating shortages, raising inflation, and engage policy makers around the world.

Biden administration’s response
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President Joe Biden’s administration deserves credit for recognizing that the supply chain is the key to future economic security. In February 2021, Biden issued a executive Order directing multiple federal agencies to secure and strengthen the US supply chain; And in June, the White House published the 100-day Review “Building a resilient supply chain, revitalizing American manufacturing, and fostering broad-based growth.”

There are many important proposals in this 250-page report. Some are already part of a wider discussion on improving the skills of the American workforce and the economy’s capacity for innovation. Other ideas have been circulating in international relations and security studies for some time; For example, the document considers the national-security implications of dependence on defense and other critical industries. imported input,

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,The globalization of supply chains is an integral part of the changing balance between capital and labor.,

But the review’s most important contribution is its observation that global supply chains incur various social costs: “Our private sector and public policy approach to domestic production, which over the years has prioritized efficiency and low costs over safety, sustainability and resilience , result in supply-chain risks.”

The review then asks whether ultra-global supply chains are so great for economic efficiency.

The default position among economists is “yes, they are.” When two firms enter into a transaction in which each will gain something, which is good for both firms and possibly also for the rest of the economy, with the resultant efficiency improvements and cost reductions. Whether this involves an American producer offshore production of certain inputs to a Chinese firm is beside the point.

Threats from two sources

Yet supply chains can pose a threat to an economy in two important ways (beyond the defense concerns mentioned above). The more complex the supply chain, the greater the economic risk. Break can happen in any link affect the whole series and send a surge in prices if it creates a sudden shortage of an essential input.

The worst case scenario is when a failure in one part of the chain triggers the domino effect, bringing down other firms and bringing the entire sector to a standstill. Logically, this scenario is similar to what one would find in a financial network, where a bank failure can occur. push others Insolvency or bankruptcy, as occurred after the collapse of Lehman Brothers in 2008.

In theory, because uncertainty is costly, businesses will take these risks into account when making the decision to build a supply chain. In practice, however, there are good economic reasons why companies may want to increase their supply chains. For one thing, firms will be responsible for their own risk, but not for systemic effects They are creating, neither for the risks they are imposing on other firms or the entire economy.

Furthermore, while global competition creates powerful incentives to reduce costs, even small price differences offered by foreign suppliers can be attractive, especially in the short term. In this era of stock market SPX,
+1.54%

DJIA,
+1.89%
Options and huge bonuses, financial interests also factor into the considerations of managers. CEOs enjoy immediate compensation when they can cut costs and increase profits, while the significant cost of uncertainty about the future — or even bankruptcy — could be someone else’s problem.

squeeze the working class

Another way companies can scale up their supply chain is subtle but no less important. The problem, the White House review notes, is that “the United States has taken on some of the characteristics of global markets – in particular the fear that companies and capital will flee wherever wages, taxes, and regulation are lowest – as inevitable.” This statement echoes economist Dani Roderick’s presentation Observation that globalization is not just about trade in goods and services; It is also about the sharing of rent.

As such, the globalization of supply chains is an integral part of the shifting balance between capital and labor.

The most direct mechanism for this process is the offshoring of inputs, which can only be used by risk managers. keep pay low, This happens at both ends of an offshoring transaction: US companies can pay their workers less by expanding their supply chains to countries (such as China or Vietnam) where wages are already low. relaxation of labor rules,

A fragmented supply chain can also make it difficult for workers to organize collective bargaining and create a further profit for businesses. Companies can also cut tax benefits Globalizing their supply chain, if doing so allows them to book profits in lower-tax jurisdictions.

This second reason is also problematic for the US economy. It suggests that managers will globalize their companies’ supply chains, even if it is not more efficient to do so, simply because doing so allows them to shift rent away from workers and toward shareholders. This not only creates a highly expanded supply chain; It distorts the income distribution by reducing wages especially for low- and middle-skill workers.

Whose economy is this?

The White House report proposes to keep the supply chain more in place in the US, especially in the manufacturing sector. But how can this be achieved? A two-pronged approach will be most effective. First, the need for meaningful incentives for businesses to invest in their domestic supply chain implies that the tax benefits of offshoring inputs must be eliminated, and opportunities for labor-regulation arbitrage minimized.

But other, more fundamental changes are also needed.

The global supply-chain disturbance is an opportunity for the US to have a broader conversation about the economy and what it is for. As long as the CEO remains Obsessed With short-term stock-market performance, the ideology of “stronger”shareholder value”, they will look for ways to take the rent away from their employees, no matter what the risk.

Daron Acemoglu, professor of economics at MIT, is co-author (with James A. Robinson) of “Why Nations Fail: The Origins of Power, Prosperity and Poverty” and “The Narrow Corridor: States, Societies and the Fate of Liberty” . ,

This comment was published with permission Project Syndicate , supply chain mess,

More on Supply Chain, Efficient and Inequality

James K. Galbraith: Cause of high inflation? Too much efficiencies in supply chains

Diane Coyle: A broken supply chain is a market failure. What is the right way to restore flexibility?

Joseph E. Stiglitz: Three decades of neoliberal policies have destroyed the middle class, our economy and our democracy

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