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Building a Resilient Economy

Today’s economy relies on a globalized supply chain—where a single broken link can lead to widespread financial catastrophe.

Earthquake, photo by EPA/ASAHI SHIMBUN

This spring's earthquake in Japan was a reminder of how fragile the supply chains on which our economy depends can be.

A few months ago, a friend in the entertainment industry told me of a new business model in Hollywood: hoarding videotapes. Apparently, the earthquake in Japan knocked offline a Sony factory that makes certain types of tape. That factory was also in the tsunami zone, so now there’s a serious tape shortage threatening the television industry. The NBA scrambled to get enough tape to broadcast the NBA finals; one executive told the Hollywood Reporter, “It’s like a bank run.”

In the last few years, economists have spent a lot of time and energy thinking about bank runs. A bank run happens when depositors think a bank is weak and scramble to get their money out before it collapses. “Tight coupling” of financial institutions, like when banks are overly dependent on each other, can create a cascading series of problems for the system itself. We saw this with Lehman Brothers when it went bankrupt. Its AAA-rated debt instruments lost value unexpectedly; that caused money market funds that held those presumably safe bonds to suddenly lose value. A shadow bank run was the result, as investors rushed to withdraw from the money market funds.

Worryingly, there’s been very little consideration of how systemic collapses can happen in another, perhaps more dangerous realm—the industrial supply system that keeps us in everything from medicine to food to cars to, yes, videotape. In 2004, for instance, England closed one single factory, which caused the United States to lose half of its flu vaccine supply.

An accident or political problem in any number of countries may deny us not just iPhones but food, medicine or critical machinery.

Barry Lynn of the New America Foundation has been studying industrial supply shocks since 1999, when he noticed that global computer chip production was concentrated in Taiwan. After a severe earthquake in that country, the global computer industry nearly shut down, crashing the stocks of large computer makers. This level of concentration of the production of key components in a globalized economy is a new phenomenon. Lynn’s work points to the highly dangerous side of globalization, the flip side of a hyper-efficient global supply chain. When one link in that chain is broken, there is no fallback.

Lynn has continued to study industrial supply shocks and says, “What I have found most interesting recently is the apparent role supply chain shocks played in triggering a synchronized slowdown of industrial economies in April—production down (in USA, China, Europe, Southeast Asia), jobs down, demand down, GDP numbers down—due almost entirely to the loss of a single factory that makes microcontroller chips for cars.”

Today, the problem manifests as shortages of videotape or auto parts, but the global supply chain is so tangled and fragile that next time it could be electronics, weaponry, or even food or medicine. As Lynn noted in an interview with Dylan Ratigan, China controls 100 percent of the national supply of ascorbic acid, which is a basic food preservative. Leading oncologists are already warning that we are experiencing severe shortages of generic yet pivotal cancer drugs, because there’s no incentive for corporations to make them.

Our government and our society needs to reorient our economy toward manufacturing and rededicate our corporations to productive uses.

According to Lynn’s groundbreaking book End of the Line, the essential problem is a basic shift in the way that American multinationals operate. In the 1980s, the competitive manufacturing threat from Japan led most large companies to eliminate waste in their production facilities. As a result, they stopped keeping spare parts on hand. Eventually, companies began outsourcing production itself, as profits came increasingly from extractive monopolistic power over an economic system. Walmart is an important example; its profits come from the power it can exert on its suppliers, telling them what to make and how to make it, while the company itself functions as a giant autocratic marketplace and trading operation. Increasingly, this is the model of success in our global economy. Boeing, Cisco, Apple—all of them rely on their power over an ecosystem of production facilities halfway around the world. They have become rent extractive profit-machines, which is a relatively new phenomenon.

It was in the 1990s that American multinationals, spurred by government policy, began outsourcing operations to China. At the same time, the Clinton administration steadily relaxed antitrust enforcement, leading to massive corporate consolidation and the creation of the virtual firm. By the early parts of the last decade, the ideal American multinational made its profits by using its market power to gut labor and supply prices and by using its political power to eliminate taxation. All of this turned giant American institutions against making things. This is why we rely on a British factory to make our flu vaccine, why global videotape production was knocked offline by a tsunami and why that same event slowed the gigantic auto industry. US corporate leaders now see the idea of making things as a cost of doing business, one best left to others. What has happened as a result is that much of the production for critical products and services that make our economy run is constructed by a patchwork global network of suppliers all over the world in unstable regions, over which we have very little control. An accident or political problem in any number of countries may deny us not just iPhones but food, medicine or critical machinery.

Andy Grove, co-founder of Intel, has made the case that America needs to be building things here, investing here and manufacturing here. We need the know-how and the ecosystem of innovation. The more corporate America seeks to push production risk off the balance sheet onto an increasingly fragile global supply chain, the more it seeks to wound the state so there is no body that can constrain its worst impulses, the more likely we will see a truly devastating Lehman-style industrial supply shock.

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There’s a good amount of grumbling about the state of American infrastructure—collapsing bridges, high-speed rail, etc. But American infrastructure is not just about public goods, it’s about how the corporations that enforce, inform, and organize economic activity are themselves organized. Are they doing productive research? Are they spreading knowledge and know-how to people who will use it responsibly? Are they creating prosperity or extracting wealth using raw power? And most importantly, are they contributing to the robustness of our society, such that we can survive and thrive in the normal course of emergencies?

The answer to all of these questions right now is “no.” And while this may not be hitting the elite segments of the economy right now, there will be no escape from a flu pandemic or significant food shortage. The re-engineering of our global supply chain needs to happen—and it will happen, either through good leadership or through collapse. This means that our government and our society needs to reorient our economy toward manufacturing and rededicate our corporations to productive uses. This will require a new conception of antitrust laws to ensure that monopolistic or oligopolistic practices in pivotal industries aren’t placing our culture at risk. It means understanding the networks of suppliers and sub-suppliers. And it means ending the race to the bottom that pushes deflationary pressures on labor and the social safety net. All of this can insure a more robust culture and economy, one which can withstand national security or environmental challenges. The sooner our leaders, both in public and private institutions, recognize how highly vulnerable we are to a societal collapse, the better chance we have of avoiding collapse.


Matt Stoller headshotMatt Stoller is a fellow at the Roosevelt Institute. He wrote this article for The Nation.


Copyright 2011 Matt Stoller

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