All of this talk about supply chain issues are totally missing the point in my opinion. So many articles (and tweet chains I guess) have been written about supply chain issues, yet every one of them seems to ignore the elephant in the room which is demand for goods vs services. Over the course of the pandemic there was a staggering re-balancing of consumer spending [0] from services to goods, to which supply chains have not caught up.
If the spending doesn't re-balance again as restrictions are lifted this is not a temporary supply chain issue caused by just-in-time methodology, it's just the new normal.
The reason just-in-time is to blame, is that JIT assumes you have a reasonably stable flow (yes, I worked in manufacturing where we studied JIT a lot). Yes, it was a shift from services to goods that provided the current shock, but it was JIT that meant the system could not adapt to shocks. If you have no buffers (or very small ones), then you cannot quickly adapt.
If you put a vase on top of your car and drive away, it's irrelevant which bump in the road causes the vase to fall off; it was bound to fall off eventually. The global supply chain was optimized for efficiency, to the point of fragility, and whether it was a pandemic or a war or something else, a shock was coming eventually. With climate change, we can expect more frequent weather-induced changes in the future. A supply chain which cannot handle frequent, large changes is too fragile, and that's what's wrong with JIT.
I'm definitely outside my wheelhouse here, so maybe help me understand the current fixation on and criticism of JIT. Are you advocating for more buffers in supply chains generally? If the current scenario is one where goods purchases were simply deferred from early in the pandemic to later (with no real increase in total demand for goods) I can see that solving the issue to some extent.
But my point is that total demand for goods has actually increased and not by a little, by a lot. Buffers in the supply chain can't help with that, can they? An increase in total throughput is needed to solve that, and that's going to take a while. Is there something I'm missing here?
The problem is JIT is all about steady state operation, and hinders the ability to scale up.
If you have a substantial buffer, when demand picks up you notice that you are drawing from your buffer at an increased rate and you order things early so that you can scale with that increased demand. It's okay if your suppliers need some time to hire additional labor or buy a new machine, even at this increased rate of consumption you still have some time before your stocks run out. There is no need for you to pay your suppliers a premium to drop their existing orders from other customers to support your demand.
If you don't have that extra buffer, then when demand increases there is no avoiding shortages - not only do you need to scale up to increase production and meet this new demand, but now you also have an ever growing backlog of orders that you also need to fulfill. These companies scramble to rush in material and equipment asap, which drives up prices and drains the stocks of other companies, and pushes the problem further up the supply chain. Firms that aren't actually seeing an increase in demand nevertheless must buy more to guarantee their buffers will not run out, further increasing shortfalls in production. What could have been a localized hiccup cascades into a global economic problem.
However it's important to note that the pandemic was not simply a shifting in demand patterns. Early on production in many cases stopped or was extremely reduced as employees quarantined and businesses cancelled orders expecting various drops in consumer demand. Again here, JIT is a problem as it led firms to cancel orders much earlier than they should have, and it makes restarting lines much slower. For example auto makers cancelled their chip orders right away at the start of the pandemic expecting people to save money and not buy cars, but it turned out demand for cars increased, and a lack of chips grinds auto manufacturing to a halt. If the auto manufacturers had just accepted that their inventory of chips might sit on a shelf a little longer, the counter intuitive uptick in demand would have been a blessing instead of a curse.
Having inventory on the shelf during a crisis is a far greater risk to the survival of a company than failing to produce cars quickly enough after unexpected high demand. Cancelling chip orders was the safe play, not the risky one.
Having inventory on the shelf is only an issue if it cannot be sold, which would only be possible if car sales never resume, an incredibly improbable outcome to the crisis. Everyone knew people would be back to buying cars soon enough. On the other hand cancelling orders carries great risk as no one is going to wait around for you to get more stock, if you miss your opportunity to make a sale it's gone, hence the mad scramble by auto manufacturers to reverse course once it became clear they had miscalculated.
'Everyone' did not people would be back to buying cars soon enough. Stock prices of car manufacturers lost 50% of their value. Factories were closed. They could have been closed for months or even years. That is a recipe for a liquidity crisis for a company, of which there is no coming back if you can not borrow money. Moreover, even if it was possible to produce cars, people were worried about a deep economic crisis caused by long lockdowns. Car sales are the first thing to go in such a crisis.
> But my point is that total demand for goods has actually increased and not by a little, by a lot. Buffers in the supply chain can't help with that, can they? An increase in total throughput is needed to solve that, and that's going to take a while. Is there something I'm missing here?
(You didn't ask me and I'm not an expert but) Not if you just use them as a pure buffer (and there's no re-re-adjustment before they're used up), no. But they'd give you some time to think 'Hm, stocks being depleted faster than usual, we need to reorder sooner, and more.'
I disagree deeply. If you have no buffers that means you can change what you produce without waste. JIT allows you to produce a customized car as it comes of the production line. it can adapt much more quickly then any system with a lot of stock.
The problem is not "the system reacts to quickly to our controls". It's "humanity when faced with uncertainty about the pandemic choose to optimize the controls over a to short time frame leading to regret". Economic ideologies also have impact on the choice of the time frame. Blaming that the system reacts to well to our controlls just because it reacting sluggisher might have had a trajectory under the same controls that would have caused less regret this time is my opinion very mistaken.
No I am not missing that I just think that JIT done right (no true scottsman) doesn't require stable flow. At best it needs predictable flows and in the current economic system where a lot of information is lost at the company border => the only way to ensure predictability in our current system is have steadyness if things pass company borders.
If we are making statements about how our economic system ought to be it we should consider either flexible pricing that actually reflects information at the company border (with all the Pareto front guarantees that can bring us) or cross company optimization of the economy (providing better guarantees).
JIT's epitome is vertical integration so i don't think so. JIT made this all much more resilient because everyone has smaller, lower orders allowing everyone to a greater percentage of the total stock. What happened was people got alittle nervous and jumped off the JIT band wagon and tried to ensure they had large inventories to weather the storm. The big guys with the biggest orders got what they wanted at the expense of us plebs.
JIT may have originated at Toyota, but Toyota's version of JIT is not what is nowadays commonly referred to as JIT. Toyota's production sytem is a lean manufacturing method where stages of production are rate matched (ie operation B is using parts at the same rate operation A is producing them), but there still are buffers of inventory between stages. The goal is to make the whole system communicate in such a way that when one part needs to change rate, everything else changes rate at the same time.
In conventional JIT, the goal is specifically to minimize inventory by minimizing the time between when something is produced and when it is consumed. This is good from an accounting perspective as money that would be tied up in inventory can be put to other uses such as investments. JIT is about eliminating the variability for which you would need buffers, really the opposite of what Toyota does.
Do you have any sources your can share or more info about this?
I Googled and the first result was "Under delta, supply chain strains, Toyota slashes production."[0] Many similar results[1][2][3].
Six months ago they were getting temporary reprieve because they monitored supply and snapped some up[4], but now, six months later, they seem to be having to slash production like everyone else.
Toyota historically has worried more about keeping a close relationship with their suppliers, which means keeping them afloat during hard times. American automakers historically are less interested in that. My understanding was that Toyota's cuts in orders for parts were less drastic than their competitors.
The same rebalancing happened in Europe, and Europe doesn't have close to the issues the US has regarding supply chain. Europe's major ports are automated and operate 24/7, port to hinterland relies much more on rail than trucking. Overall, the US supply chain was already very fragile and outdated.
Actually, I think barge transport is a much larger contributor than rail in the modal split of hinterland operations in Europe. Both Rotterdam and Antwerp have huge barge modal splits and large hinterland terminals, often trimodal.
And the US has pretty damn good freight rail. You just don't notice it because all those containers get transferred to trucks or unloaded at distributions facilities outside the beltways in which most of HN tends to live and does the last ~20-100mi on truck.
More of HN needs the experience of waiting for a freight train to finish crossing the road. Count containers with a stopwatch and you can get an idea of how many trucks worth of containers a freight train can move vs the adjacent highway. It's still much more time and fuel efficient even slowed down for the crossing.
That’s lovely. But it’s not going to be the 400 TEU that Rhine barges do.
Trains in Europe are about 90 TEU, with them being capped by terminal handling capacity and legal maximums. Rail length at terminals in LA seem to be similar to Rotterdam and Antwerp: 600-900m. Let’s assume US freight trains can double their capacity by double stacking their trains. 180 TEU per train is still well under an average barge size.
I couldn’t find modal split numbers for LA, but I’m willing to bet their trucking share is above the ~55% Rotterdam achieves (some 10-15% is rail, remaining share is inland barges)
Trains are ofcourse still way more efficient than trucks.
That's a different level of the discussion tree. I was talking about rail appreciation in reply to someone talking about rail appreciation. HN's structure lets people talk about different aspects of the same main topic. It's neat.
Hmm, I thought US rail freight system is massive, excellent and envied by the whole world. When in the US, I saw these double decker container trains with the bogies at the ends (so the lower container could be below the axle).
That sounds nice. By contrast, the US makes moving goods between two US ports illegal.
Okay, it doesn't technically do that, the Jones Act just requires you to use a US-owned US-built US-crewed US-operated ship. These ships, in general, don't exist. Oh, sure, there are a few that go back and forth to Puerto Rico, and there are a few wastewater ships running up and down the East River in New York, but no one would dream of using ships like these for general cargo. They are not up to modern container-shipping standards. Puerto Rico pays a premium for a few of these freighters and tankers but generally does more to import goods from the Caribbean and Central America than from the US; when there are hurricanes, the President has to issue a waiver so they can move disaster recovery supplies in from the mainland.
Fish shipped from Alaska are unloaded on the east coast in Canada, where they put on trucks, and the trucks are put on a carrier train which makes a round trip back and forth for the length of the cargo terminal to qualify as being "shipped by Canadian rail" for US legal purposes, and then the trucks drive into the US with the fish. A related law afflicts cruise ships, which always stop somewhere in Canada, Alaska, or the Caribbean, on their way between US ports.
One of the premises of the Jones Act was that it will preserve American shipbuilding for national security™ purposes. This has more or less utterly failed. However, Joe Biden's campaign promises specfically called out fortifying the Jones Act so that it would be even stronger, so, don't hold your breath on change.
>Fish shipped from Alaska are unloaded on the east coast in Canada, where they put on trucks, and the trucks are put on a carrier train which makes a round trip back and forth for the length of the cargo terminal to qualify as being "shipped by Canadian rail" for US legal purposes, and then the trucks drive into the US with the fish. A related law afflicts cruise ships, which always stop somewhere in Canada, Alaska, or the Caribbean, on their way between US ports.
Can you find a citation for this, I would love to add the example to an upcoming book.
Did it? And doesn't it? How can you tell? Both Europe and the US are large and complicated.
Last I heard Europe was in the middle of an energy crisis which could easily turn out to be linked to supply chain disruptions. It has been long enough for the slow-rolling-wave nature of economic disasters to start surfacing, but it is too early to raise a head up and talk about cause and effect without some citations.
> If the spending doesn't re-balance again as restrictions are lifted this is not a temporary supply chain issue caused by just-in-time methodology, it's just the new normal.
Even if spending stays shifted supply will be able to catch up eventually. Once people believe there's a predictable level of demand they will be able to plan output for it - or else someone else will capture that new market share.
It has nothing to do with spending. This whole problem stems from shutting countries down. Now it's all stacked up ready to go back into the economy, but we can't move fast enough. In time it will iron itself out, but high oil prices don't help, empty shipping containers stacked up don't help, the ports only working 8 hours don't help. It's a bunch of little stuff that added up to make a major problem.
Frankly, people buy a lot of stuff they don't need. But I wonder how the dependence on disposable items plays in. I could never understand stressing one bit about the most disposable items like paper towels. Completely non-essential items.
re. paper towels: strictly non-essential items, yes, but it takes some lifestyle reconfiguration to make the alternatives work. My household is (I speculate asymptotically) approaching zero paper towel use, but we have ready access to laundry, the capital and bandwidth to have built up a comfortable supply of rags and towels, and our only occasionally messy coinhabitant is the cat (and you can bet that if he vomits, I'm using a paper towel to clean it up).
We can make the conscious choice to reduce our dependence on disposable products, but at some point (for everyone, for every "easy" solution x) it's not worth reducing any more.
The whole point of paper towels, or disposable nappies, is removing the labour cost of cleaning them.
My ex-wife was a stay at home Mom for her religious reasons, and was determined to be the "best" Mom, only healthy food, no TV or devices, cloth nappies etc.
Once we hit kid #3, the time needed to launder cloth nappies wasn't viable with two other kids on the go. I encouraged her to give disposables a go, and she was hooked, but very guilty about it.
But yeah, disposables saved us (well mainly her) many hours of scraping shit, stirring a giant bucket of nappies with Napisan, washing them, hanging them out in the sun to let the UV sort the stains etc.
So while paper towels are technically non-essential, I'm reminded of the old sarcastic comment that "Linux is free, if your time has no value".
Seems to me like people just aren't sharing the wisdom enough about how to do these things both responsibly and efficiently.
We used just use cloth diapers, put them in a diaper-only load in our washing machine, dry them in the dryer, and it worked fine.
Scraping? We just used a sprayer attached to the toilet, held in a little clip thing that keeps the spray contained. Stuff went in the toilet, mostly-clean diaper goes in the pail.
We also did "elmination communication" part-time. Just literally set the kid over the potty around the right amount of time after eating, and each time we take diaper off, and if it looks like they're about to go. It wasn't lots of extra work, and around 6-months, we had maybe half the times just going in the potty without needing to deal with a dirty diaper at all.
The entire problem is that our society is set up for the disposable approach and you rarely even know anyone in person who can guide you through managing it better, so we all figure it out for ourselves using the internet. But like, the one other family we told about what we were doing it just followed our lead and had total success too. And kids end up fully potty trained before 2yo.
It takes more than just good intentions, it takes sharing the wisdom more. Companies that profit off of a disposable economy work to get attention instead of the better wisdom we could be sharing with one another.
Super off-topic but national differences in washing lines vs dryer use are fascinating. In an early attempt to replicate the Japanese line-drying time forecast[0], I looked around for English-language articles about clothes drying, and the predominant advice was to always use a clothes dryer, because line-drying takes too long, encourages mould and mould is deadly and to be feared. Which seemed weird as I’d never owned a dryer.
Props on sticking to your guns for so long with cloth nappies, I know some couples who couldn’t make it work and felt they’d let themselves down.
Thanks for sharing your perspective. I could have better emphasized though that I know there would have been no way for us to have managed as well as we did without having learned some wisdom that came from other people.
Yes, circumstances vary. But I stick to my basic point that wisdom is not shared anywhere near enough, and a lot of the blame for that goes on the businesses who profit from people remaining unwise. This factor is at the heart of a huge portion of the world's problems.
Yea, I found this odd that kids in US used diapers well above 2 years. I found a lot of kids potty trained in India around one. My kid's day care prohibited diapers for kids above 18 months!
If you just get a bum shower as used in many East-Asian countries, you can get away with very little paper towel use and don’t have to clean towels as well.
And these bum showers can be bought on Amazon quite cheaply and shouldn’t be too difficult to install on any toilet.
But then we're back to people needing to purchase new items to accommodate sudden changes in lifestyle where it just didn't make any sense since the last major advance in technology / the last pandemic. Sure, we know we need to avoid disposable items right now, but as disposable items go paper products are pretty dang recyclable or compostable. Whereas at other times and places conserving water is far more critical.
I’ve got japanese one and drying function just doesn’t cut it. In the end i use more toilet paper but experience is better. Could use cloth ones but toddler would destroy those.
> I’ve got japanese one and drying function just doesn’t cut it. In the end i use more toilet paper but experience is better. Could use cloth ones but toddler would destroy those.
Might depend how dry you want your bottom to be. I live in Thailand, so we got bum guns everywhere of similar style as the linked Amazon product (no drying function). I usually just use 2-4 sheets to "dry" my behind. If it's still a little bit wet, I don't mind, as my behind will get dry after a few minutes with pants on anyways (perhaps because I live in a hot country). At least I am 100% sure my behind is clean.
After talking extensively about the benefits of bum guns with my friends when we were in Asia, the hot vs cold country is a big differentiator. We loved them when we were out there, feels so much cleaner. Its also quite refreshing.
Back in the UK though you during the winter the water will be extremely cold and you really don't want to be damp down there.
The one I have I run a hot and cold line into it for warm water; then I just sit for a minute or two to air dry. I don't live in a particularly hot or dry region, either.
I wonder if you could get one with warm water. And why not use a towel to dry off afterwards? Many people keep one in the bathroom for showering anyway.
The problem is mainly with 99% of towels being ultra symmetric (up/down, left/right, front/reverse). When your towel is asymmetric, you can split it into zones for various things :)
I have owned both the cheap cold water amazon ones and TOTOs. Highly recommend either. If you don’t mind cold water the cheap amazon ones work really well.
Oh, for sure (that was what I was angling at with my comment about roommates). I suspect we would absolutely rebalance our strategy if faced with that sort of circumvention of our ... er... usual waste disposal mechanisms.
On the other hand, I've known grown, solo adults who went through a few full rolls of luxe-brand paper towels a week (who needs a plate when you can stack 10 sheets of paper towels?).
> But yeah, disposables saved us (well mainly her) many hours of scraping shit, stirring a giant bucket of nappies with Napisan, washing them, hanging them out in the sun to let the UV sort the stains etc.
We are using (modern) cloth nappies (after having used disposables early on). Our washing machine handles it all with standard detergent. No stirring or Napisan necessary. The drying via hanging up is exactly the same as for any other laundry.
I do see your general point, of course. We mostly went with the cloth nappies in the first place, because of fitting issues.
> I'm reminded of the old sarcastic comment that "Linux is free, if your time has no value".
Wow, a thread about supply chains and you manage to take a cheap jab at Linux. In response, try running Windows on a computer you only use once a month. You can watch it update every time instead of getting work done. Linux you can update while working.
Those old sarcastic comments remind me of Cygnus Solution's more up-beat slogan (they ported and supported free software like GCC, and were bought by RedHat):
"We Make Free Software Affordable"
Instead of just whining about cheap shots, Cygnus Solutions deftly channeled the doubts and problems raised by the first two slogans (which they didn't originate, but were going around at the time), into a successful service under the last slogan (which they did originate, in response).
To be fair any newish computer OS is going to act the same way in that condition, linux included. I know if I put any of my linux computers in that mode of use they would. My PS4 I use maybe every 2-3 months. Large update every time usually on the order of an hour to do so. I am pretty sure I have not 'paid' for a copy of any OS in 15 years (and that was because I built a computer). Yet I spend a good amount of time 'fixing' things. I pay in spades in time, no matter what little amount I may have forked out when I bought the computer.
Once a month? No. I hardly even reboot my Windows machine once a month...
Only the major releases of Windows 10 need a stop the world reboot. Those happen once every six months. And it's usually only a few minutes.
That's for a home machine. I've seen some enterprise machines take forever. I have no idea how they managed to fuck that up, but it's on the IT organisation of those enterprises, not on Windows.
I said once a month, because if you use your computer once a month there is no point having it powered on 24/7, not economical. What happens is you power it on when you need to use it, Windows starts downloading updates in the background, the next time you power on, installation starts on boot.
Those updates don't get installed at boot time. Modern Windows installs most updates in the background. The only ones that require a reboot are the big ones, every 6 months.
You lost me there. Which version of Windows will install the monthly cumulative update without a reboot?
Server 2016 (and older versions of W10) are horrendous for updates. You can have servers stuck on "configuring updates" during shutdown or startup for over 30 mins. Server 2019 is much better though.
Thank you for recognizing this point. It costs me $6 to do a (small) load of laundry at my complex and the time cost of going to a laundromat makes it economically unviable.
I've really cut down on paper towel usage and I used to use a lot due to having several small animals who are entirely too prone to accidents. I found it best to keep a box of a few dozen small cloths that I got as a bundle, and a small hamper nearby that I throw the dirty ones into, which also happens to be near the washing machine.
I end up doing quite a lot of washing of said rags, but it's far more economical than the paper towels ever were and quite a bit more convenient in general to boot.
I think my family’s spending since the pandemic actually geared more towards stuff we use a lot.
Perhaps the original comment is right about purchases moving from services to goods. We ended up buying things we may have otherwise used through services. A paddle board we’d otherwise rent, roof top tent (otherwise used to pay for camp sites that were closed during the pandemic), cooking equipment to satisfy cravings for food from restaurants that were closed or shut down, etc.
There is also a phenomenon similar to (inverse) traffic jams where a bottleneck wanders up the supply chain. Just in time delivery has some disadvantages and we basically use the road (or rail, sea) as warehouse nowadays. But ships, trains and trucks might not get filled when production halted because of lacking parts. Still the trucks and ships are bound to their current job and are sitting empty somewhere. It will slowly entangle as transport priority gets reordered.
I think the difficulty in making that case is that expenditures are in $ not functional units. So what you may be seeing is more higher prices (a symptom of supply chain breakdown) not more purchases, while services largely stayed similar in price and similar in volume (to slightly down due to extra money spent on pricy goods).
Seems like the answer to all of these problems is that everything changed. Nothing in particular can be blamed for the fact that virtually everyone changed most of their behaviors significantly and for an extended time.
I listened to a podcast recently that spoke specifically about how the container unloading is a major issue. Certain areas have zoning restrictions about stacking empty zoning containers only 2 high (Santa Monica??). So the container hauling trailers have largely got stuck holding empties so they can't clear the docks which means we aren't clearing the ports quick enough. I know there have been recent strides to to bypass some of these rules but it is like a slinky and will take a while to catch up. My guess is that "normal" is still 9 months away.
The other big factor in this speaks to your point. We are importing far more than exporting. Containers have gone up 10x in price over the last year and we need to get all these empties back to Asia, etc.
That or Santa Monica (?) Will become full of sky scrapers of shipping containers as no capacity is available to haul away the empties and there's no destination for them
The main take-way is, the design of the system is not fluid enough to scale up or down based on the demand. Rather, it has too many bottlenecks for it to choke and eventually die.
> yet every one of them seems to ignore the elephant in the room which is demand for goods vs services
Considering almost every article I read about the causes cites the shift from services to goods (to the point of feeling like it's filler at this point), I wonder how we are reading such different sources. I'm thinking about sources like the NYT.
Another missing piece is that COVID is still thriving in a lot of places, and typically in the places that are the "supply" in supply chain.
So while the demand is waking up there are still a lot of places with large numbers of people sick and/or dying because they don't have wealthy governments who can afford mass vaccination.
I worked at a company who made products on contract, but the contract stipulated the vendor we had to use to get the raw materials. The raw materials were just aluminum castings, but they were a custom shape specifically for this customer of ours. They could only be used for this one product.
I noticed that the inventory levels of our vendor were dropping, but we weren't buying. Meaning our customer was ordering the same product from a competitor.
I proposed that we spend the money to buy the rest of the material at the vendor. Basically denying our competitor the materials and forcing either them to come to us or the customer dropping the order and reordering through us. This would have been a risk because that's about a year supply of proprietary castings that we can't use for anything else, but I really thought it was a worthwhile opportunity. But it went against lean principles so we didn't do it.
Fast forward 6 months and our competitor basically did the same thing to us.
There's risk to that. The customer company could have gone tits up or shit-canned whatever project they were using the finished castings for "because 'rona" leaving whoever is sitting on a year of castings in a bad position. There's risk to both approaches.
Based on their example, in practice the decision is between dealing with reality and following management framework dogma at all costs.
Game theory offers amazing insights, but it doesn't really deal with internal company politics, the power of business consultants and the desire to obtain silver bullets.
Could it be that quarterly/annual budgets make one assume participation in a finite game, rather than infinite? That's precisely the kind of thing the author of the tweet chain seems to be describing.
You describe microscopically what's happening macroscopically: The US is experiencing runaway consolidation and monopolization in every market sector. It is the business plan of every VC-funded startup discussed on this forum to monopolize a market and extract ALL the profit from it. The excess capacity of every supply chain in the entire country has been liquidated for short-term profit over the past decade, and then COVID happened. No one seems to be calling out this behavior, so I expect it will continue.
I believe the claim is completely defensible and ultimately correct.
A) This was a multi-factoral event certainly but all of these other factor are "immediate causes" which can themselves be traced to absolute maximum return on equity as a more final cause.
B) No doubt "hard to restart" process are were involved. But the world relies on single-source, hard to restart, large scale production of many things today because these produce the highest returns for those who invest in them and the lowest prices for those who buy from them. And both kinds of actors have been willing to just stop producing rather than doing something that might be costly to keep production going (and they decided they didn't want backup before this for the same reason).
C) Supply lines that stretch around world exist as a combination of economies of scale and "labor market arbitrage" and both these are driven by return, even though "labor market arbitrage" doesn't increase efficiency or robustness.
D) Chip manufactures put money into "up-date" chip processes, notably leaving the sorts of chips actually used in cars woah fully under-invested and generally many sorts of lack of robustness can be traced down to money flowing only to the normally profitable. Shutting down production isn't necessarily that bad for a company - they don't wages and they can start back up once things stabilize. It's much less disastrous than making a bunch of stuff and not being able to sell it. Clearly, that thinking is guiding a lot of decisions.
I think your first mistake was saying 'I believe.'
Chip manufacturing has a clear start/end date for the product lifetime. This is necessary when you are incorporating a product into a design and product lifetime. Sometimes they will 'oops' you and send it out of print early. Generally, they have a 'b' product that "meets" your needs or product engineering just scrambles and tries to guess how many we need for a final run for our EOL. Much like the guy above me, the former requestor and probably his boss... I pad my estimates. Thank the baby Jesus I don't deal with the complicated world of sales and cocaine.
I want to put a big asterisk on "meets" because one man's performance metric is another man's failure. In discrete circuits this can be harmonics and in more complicated topology this could be tuned for an entirely different (but potentially acceptable) set of characteristics.
Enter the hardware qualification rounds where people like me make people cry and deadlines slip.
Supply lines work in months of advancement and trust me when I say this they have been fighting with chip shortages for months.
The people who care about costs have been playing a weird game of rubiks cube and the people who don't have been buying everything for year+ production. Guess who won that game of planning competition...
Taiwan going complete Orwellian and shutting down for months screwed the market in so many ways. Short sightedness on bean counters screwed themselves in many other ways and automobile manufacturers had the brilliant idea to just 'buy it all out' and give the manufacturers a big payday.
Seriously, chip manufacturers are like shoe string manufacturing. The latter counts wartime boot string orders as a big payday and that is something a lot of us look at as a bad year in a paycheck. (well the ones with skill anyway).
Lines are created with a product if the current line cannot manufacture that product. There are cases where they have to shutdown and completely retool. This isn't remotely the case regarding components today. The line simply stopped and/or went to minimal production. It wasn't news or a surprise because this is garbage we have been fighting with for months. Taiwan simply stopped producing at the level they were because they have some severe lockdown strategy.
Taiwan didn't lockdown their factories. Their border is highly restricted for entry but they haven't really gone beyond closing indoor dining and karaoke.
In Q3 2021, TSMC shipped 12.5% more wafers year over year and +5.7% quarter to quarter during the period with the highest covid restrictions. And that's already on top of the 19% increase in shipments for the full year 2020 over 2019.
I great term I came across in the retail gas industry is "hostile purchase"... as in no one "wants" to buy gas in the sense that you wake up one day and think "Oh boy, I can hardly wait to go out and get some 87 octane today" and after the purchase, "wow, that was awesome gas!"...
But people have been buying these necessities before the pandemic. If spending shifted from services to goods, that implies that it's non-essentials that people are increasing consumption of. Unless people started eating more?
The average lifespan of a company is 10 years.[0] The average lifespan of companies on the S&P is maybe a little more than twice that. Each year you have a 1/100 chance of seeing a hundred year flood. With a short lifespan the odds are decent that your company simply won’t see one. The question is then: how good of an idea is it to spend to be robust to them? Of course it is viciously circular: planning to not be robust to white swans is probably why the lifespans are so short and shrinking.
As for the turn to founder control, one counterexample is Tim Cook who doesn’t have voting control of Apple but is sitting on a massive shock absorber made of cash earning insanely low rates of return. The idea that you need control of the board to be robust doesn’t seem to be necessary. It is probably helpful, apple may be sui generis, but it isn’t necessary.
It should all come down to a cost/risk/reward/importance factor.
If you are a bakery that sells very close to 100 loafs a day, you would want to make about 100 per day. Some event happens randomly and you have demand for 400. You could call it a supply chain failure or you could call it a success to turn away 300 customers once a year vs throwing out 300 loafs every other day.
At the end of the period, all of this redundancy spend gets binned so you gained nothing from it. Some essential services like healthcare could make sense to spend extra on redundancy since turning away 300 "customers" is a lot more serious than not getting your loaf or gaming pc.
I literally worked this scenario. We procured extra proofer and oven capacity as compared to what we needed daily. The cost was marginal, there was some labor cost savings (less cleaning) and added resilience.
But on those busy days, the store would turnover 4-5x when competitors were out of product.
I'm not sure if Cook is a counterexample. Is it really a shock absorber for their supply chain?
Cash on the balance sheet is not inventory. Cash won't make the bill of materials magically appear; if a weather event knocked out 5nm production at TSMC, I'm not sure any amount would be able to address their supply chain woes. There just aren't enough ASML machines in the world, let alone everything else in a state of the art fab.
I wouldn't rule out their ability to build a fab in some sort of incredible Manhattan Project-esque feat with their outstanding funds, but at that point you'd have to ask "at what cost?" Then again, maybe that's a more efficient way they could use their cash than sitting on it.
Your raise an interesting question about whether private firms are the right actors to invest in long-term infrastructure. Alternatives include governments (whether via policy or public infrastructure) and also longer-lived industry consortiums.
With that said, citing averages on companies can be pretty misleading. For example, family-owned businesses tend to last longer, with 1/3 reaching 60 years [0]. That naively suggests a mortality rate of ~1.8% per year, not that far from the risk of a 100y storm. There may be other categories of private firm that are more optimized for longevity, or it may be possible to structure them in order to make better infrastructure actors.
All good points. The age of firms is definitely fat tailed. Further, it is hard to count firm survival (mergers don’t obviously destroy firms, is IBM the same company it was, etc). Also what a firm is has changed over time (legally, structurally, etc).
It would be interesting to see how many family generation changes family firms can survive. Obviously there are very old firms (some of which are closely tied to the gov: the British Royals, Aramco) but I would guess you have a step-like survival function.
Private firms (public or not) can and do build long-lived infrastructure. High voltage power lines are an example (maybe not a great example since they are heavily regulated). Expensive infrastructure has a long-term financing problem because DCF with any reasonable discount rate will essentially turn all earnings 30 years from now into nothing. The persistence of some government that will recognize the debt (or persist some legal entity that will receive the cash flow to service it) makes possible long-term financing. One solution is to make infrastructure cheap but that is hard (and maybe only possible in software).
Governments need to be built up to handle 100 year floods. Businesses standard life time don't last long enough to spend a ton of resources on betting towards those kinds of time scales.
Sadly the incentives government officials face also often favor short time horizons. Therefore I favor any marginal increased investment for 100-year floods from any part of society
Government can’t even let private sector build houses for 1 year demand. I don’t forsee them being able to manage anything on 100 year timescales.
Just look at the climate change stupidity, any city in the world could build a 6 foot sea wall and give the middle finger to climate change in a year with minimal cost but instead we have all manner of stupid at an international level.
I used to live in a city that was in a rainforest and would run out of water like clockwork during the two months of the year it wasn’t bucketing down rain. It even had mountains with snowpack as a backup but they could never figure out how to build a dam an extra 6 feet higher so we wouldn’t run out of water. We had enough money to buy people heroin but couldn’t figure out how to not run out of water. There was never a heroin shortage, always plenty of that, they’d just buy more but if you wanted to water your lawn, get rekt bud, we don’t have any water.
To be fair regarding the heroin, it did cost about $500,000 per person to obtain enough heroin.
See walls don't work for every city in the world. Miami, for example, sits on a porous karst substrate so building a sea wall wouldn't do much to prevent flooding.
The short time horizons for governments is due to election cycles. Projects that win votes in the next election are prioritized over things that will benefit future administrations. This often leads to wildly inefficient uses of resources, such as projects being regularly cancelled and restarted, and ignorance of maintenance costs.
Running the government "like a business" is meaningless rhetoric and no one can agree on what that actually means, but typically those in favor of the idea want to privatize government services and generally reduce governmental 'bloat' where whatever policies they don't like or utilize are defined to be inefficient. Timescales are typically irrelevant to that discussion.
It probably helps that Tim Cook had a lot of supply-chain experience before he became CEO. They also ship their phones from China by air rather than sea.
I duck-duck-go'd for a source and happened upon this article from 2015 :)
Small correction: Each year you have a (1-0.5^(1/100))≈0.69% chance of seeing a hundred year flood, if I'm not mistaken (and assuming hundred-year-floods happen independently of each other).
At 1% chance each year, it would actually be 'sixtynine year floods'.
No, if they arrive independently then they are best described by a poisson process, and the expected time to arrival is exactly 1/(event probability per interval). Not sure where you got the 0.5 from?
The 0.5 derives from 'in a hundred year interval, there's a 50% chance to observe the event', which was my intuitive interpretation of a 'hundred year flood'. But as so often in statistics, that intuition was wrong -- 1/100 is indeed correct. (I'm at least not alone in that erroneous interpretation: "A common misunderstanding is that a 100-year flood is likely to occur only once in a 100-year period."[0])
The better way of looking at it is probably: In a 100*n year window, you expect to see n such events, which makes it pretty immediately obvious that the yearly incidence probability is 1/100.
The buried lede is an assertion that a tax on unrealized capital gains will cause reduced private ownership of large companies, resulting in a reduced ability to handle 100-year flood events.
Along the way, there are a bunch of other assertions that serve as prerequisites, like the idea that these companies can cultivate better employee loyalty and plan for longer horizons.
How much do we know about how true that is, though? Do privately-owned companies disproportionately survive these sorts of events historically?
But it's critical to note that the proposal has different rules for privately held stock & real estate. So the tweet author's buried argument doesn't hold water.
I believe those assets would mostly be treated the same as they currently are, e.g. sold or death.
For the 700 or so people who are targeted it basically creates a tax on the collateralized loans they get to avoid selling stock/cap gains in the first place. While not doing that directly, that's the effect of it.
And they get 5 years to pay the initial bill. 23.8% / 5 = 4.7% growth a year to be even (well something like 6 or 7 adding the new annual 23%). Most of these guys will likely generate more on paper profit than and they get deductions for any losses if they don't
It's what pisses me off most about the proposed Purdue Sackler settlement. Giving billionaires such long lead times to pay off fines and taxes allows them make more money than they owe.
The last graph on the WSJ article though says “Smart investment bankers and asset managers are already thinking about how to financially engineer products that will emulate existing stocks but be hard to value”
Check out the 2nd link for Pandora Paper reporting showing one egregious example of how they take advantage of this.
The owner of Nike puts millions of nike stock into a GRAT, which is privately held, and then the government gives that grat a 15% discount before it's passed along to his children.
Shouldn't get tax benefits for something that you claim is harder to sell (privately held stock) when in actuality the assets are 100% publicly traded nike stock.
The Wyden tax bill is a 100 pages long so maybe it goes after some of that crud, but there will always a scheme to lower your taxes.
“cause reduced private ownership of large companies, resulting in a reduced ability to handle 100-year flood events.”
How the market speculation on the value of a company can affect its resiliency ? If tomorrow everyone sold Apple stock for 1 cent, why would Apple the company care ? Same revenue, same costs. Give me a break with the importance of the stock casino.
The problem would be if tomorrow everyone sold Apple stock for $1000, and the government took that as a reason to tax every Apple shareholder for “income” of over $800 per share in the stock casino, forcing Apple’s current shareholders to divest themselves to new shareholders and hence lose control of the company.
As well as the fact that taxing unrealized gains would have to come with _issuing tax rebates_ for unrealized losses - something the government would find difficult to do in the case of a systemic economic downturn a-la 2008. And then there's the fact that you aren't really creating any new revenue by taxing unrealized gains if they are going to be, at some point, realized. Last I checked shares of stock aren't very useful as a payment instrument in the general case, nor would IRS accept them as taxes.
This is a cynical ploy to the part of the populace that can't tell a portfolio from a hole in the ground, and there seem to be surprisingly many of such people.
Also, to address GP's comment - Apple would then buy back all outstanding stock and destroy it, dramatically driving up the share price for folks who haven't sold.
Ah but see, they'd already be printing trillions. This could get them into tens of trillions which would exacerbate the issue. This is sort of like the problem the guy alludes to: this would remove what few shock absorbers this system has.
The board of directors would almost certainly buy back all their shares if that happened, and find a time to resell once the mass insanity ended for insane profit.
For example, to buy some company to improve their business. They can do that in cash or they can issue more shares, e.g. with their Beats acquisition.
> On May 28, 2014, Apple officially announced its intention to acquire Beats Electronics for $3 billion—with $400 million to be paid in Apple stock and the remainder in cash.
The assumption that stock prices don't matter, because company ABC doesn't necessarily depend on it 'for now' - is just wrong I'm afraid.
If Apple crashed to 1 cent it would gut the entire market. Even just that crash alone, the amount of money wiped out, retiree savings etc., other companies would be valued lower and then the mass selloff would crush them as well.
Apple may not need to 'raise money now' but it very well could in the future - and - every company is somewhat of a proxy for every other company.
If there is no ROI, there is no investment, and there is no economy outside the government, it's that simple.
Taxes on unrealized gains are a separate thing, and probably a bad idea - just contemplate that they would have to be paired with tax-sheilds on unrealized losses as well. Due to speculation, it would open up the door to all sorts of shenanigans.
It's just a bad idea all around.
Elon Musk is a 'paper zillionaire' that's very, very different than someone with a zillion in the bank.
There are probably some very boring, old, already established ideas for increasing taxes on the ultra-wealthy that would probably work very well. Including getting rid of loopholes etc..
1) The market value of a company is true, aka the owners of this company must be taxed for the real value growth in their portfolio (since it constitutes income), even if they do not sell
2) It’s a casino, a share is just a ticket that may worth nothing or a billion. In that case we don’t need tax protections. The owners of the tickets must be taxed only when they cash out. The governments should actively disincentivize gambling into this and ensure the pensions of its citizens by funding public projects and enabling future growth.
> The market value of a company is true, aka the owners of this company must be taxed for the real value growth in their portfolio (since it constitutes income)
well, if you follow this logical conclusion, why are you not taxing a baby because the baby's value is the future income of that person's job. Sure, it's unrealized, but you're still considering it income even though it's unrealized.
Not really. My thesis is that IF the stock market is NOT a casino, then the capital gains are real income, thus they need to be taxed. For example if the stock prices were set by the companies and they were obligated to buy back shares at that price if asked, then indeed you have a valuable asset on hand. If the company increases the asking / paying price for the stock then you have real tangible income that you can realize. Similar to the interest you accrue from savings.
But if we agree it is a casino, then we should not tax air, only the ones who cash their earnings and walk out of the casino. And goes without saying that we should stop incentivizing people to gamble their money and pensions on this. 401k, Roth and all these need to go.
Property tax taxes an asset that doesn't move, literally and figuratively. Before financial markets exploded, and especially in agrarian societies like the United States at its founding, a property tax was effectively a wealth tax. (It still is a wealth tax, technically speaking, it just no longer reaches the wealth of the richest in society.)
> In what intervals would you do this?
In whatever interval you'd like. Presumably yearly. But don't companies have to "mark-to-market" for their quarterly reports?
> Your bank account would go to zero.
This is already the case with inflation, very deliberately so.
I can't say I'm a fan of a wealth tax. And in any event I don't think it'll ever happen in the U.S. But the reasons for disliking a wealth tax are more complicated than the above.
In a capitalist society money (investments, etc) produces money. "Returns on investment" are like rents. And like rents, the government can choose to tax the asset itself rather than or in addition to the rents.
If the underlying asset is real (not speculative) and it grows, then it is income. So it should be taxed whether you spend it or not.
But nobody wants this because we all know it’s pure speculation. That is why we call it “unrealized gains”.
If everyone tomorrow tries to cash out their Apple stock, except from the first few, all the rest will get 1 cent each. There is no value in these tickets, just the power of combined speculation.
“ Also, you'd have to provide a tax shield for the losses as well.”
Not really. My car is losing 10% of its value each year but nobody is returning me the sales tax I paid for the full price. Let alone returning me some of lost value.
Why if your stock depreciates do I have to compensate you?
Say you bought a vintage car -- do you have to pay more sales tax each time the car appreciates? I know some owners of FJ Cruisers that would be pretty upset.
Depends on what you decide on the question I asked.
Personally I believe that your claimed cars value is speculative since you don’t mass produce and sell it widely. As a result, it makes no sense to tax you for the unrealized gains.
When you actually find a loser to buy it for the asking higher price then you should be taxed for your lottery earnings.
>Say you bought a vintage car -- do you have to pay more sales tax each time the car appreciates?
Some states and countries actually do tax personal property like cars. Virginia and Rhode Island, for example.
In those jurisdictions, if you have a vintage car in 2021 worth $100k, then you pay $100k * TAX_RATE in 2021. If the value of your car jumps up to $200k in 2022 (due to a movie or something), then you pay $200k * TAX_RATE in 2022. As long as the property is still in your possession, you pay property tax on it.
The thing is, there is no need for people to be inventing their own accounting standards, particularly in the area of tax accounting. These debates about accrual versus cash based accounting have been hashed out long ago. Nothing material has changed just because there is a new tax initiative proposed.
There is such great risk in that to create self-serving definitions that the industry as a whole decided these terms needed standardization and definition.
Now we already have these standards, so let's just stick with them and all use the same meaning of "income" rather than switching to something based on personal intuition. If you want to change the tax code, change the tax code, don't try to redefine "income".
Well, publicly owned companies have, in the last 20+ years, been very bad at keeping spare capacity around. Lots of "rationalizations" and "rightsizing" and so on have cut all the reserves.
That said, this does read like someone with a personal axe to grind, leading to motivated reasoning.
Behind every big corp is a well armed government and police apparatus
Given how many Fortune 500 companies have died even in prosperous times since the list started, I’m gonna file this away as “manufacturing consent to maintain the status quo.”
Corporations are not literal machines or organisms. They’re a social acquiescence given the reality of biological need at scale. The logistics are necessary; the behavior is necessary; the ownership angle is propaganda.
One major claim of Nobel Laureate Vernon Smith's "Rationality in Economics" is "the profit-maximizing firm will fail in finite time."
The book is excellent, one of my favorite econ books, and is Smith's somewhat dense but well-written explanation for and interpretation of economics. His main thesis is that "rationality" is not a "constructivist" property of various agents, being possessed by any (or every) individual separately, but is an "ecological" property that emerges collectively from e.g. the price system, organization of firms and other economic relations.
His argument about profit-maximizing firms proceeds almost exactly along the lines of this tweetstorm, but goes further. Why would Wall Street want to reward companies that fail to be robust to changes? Are there other structural problems (the law? regulatory regime? bailouts? monopoly?) that cause CEOs and Wall Street actors to be collectively "irrational" as we are seeing today with JIT-everything?
IMHO, the problem is political-economic. Finance has arrived at this equilibrium of asset price insanity and phony accounting because the regulatory regime and state actions as a whole (e.g. bailouts) are entirely out of whack – the system has no working feedback mechanisms at the moment, so the economy is in a real sense failing. How did the state fail? Partly in response to demands from powerful & wealthy entities on e.g. Wall Street.
I think the massive difference between income and capital gains taxes plays a huge role - especially when you get into the .1% where a substantial portion of wealth and income lie.
All of this funny stuff is mostly people trying everything they can to get capital gains instead of income so they can pay a 25% tax rate instead of a 39% tax rate. When you're talking about billions of dollars - 14% is a lot of money.
From the perspective of the average person - the tax code probably makes sense. If you already pay 39% tax on your income, and THEN you have to pay 39% on your capital gains and half of your capital gains are actually just inflation - it's like you're getting taxed on your tax! True inflation has likely been ~4% since 2008. The S&P average is ~7.25% per year. So half of the "capital gains" the ordinary index fund investor would pay are just inflation.
But the .1% are different. You don't make it into the .1% with a ~7.25% return and a laborer's salary. You need to be making ~30%+ returns for decades. Or, ~10,000% for a few years (a lot of the successful VC-funded entrepreneurs).
Half of their capital gains aren't inflation. Barely any of it are. Effectively, there tax rate is ridiculous low compared to the average Joe.
And what's worst - the Fed is causing so much of that inflation. Would Tesla be a $1.1T company today if the Fed wasn't pumping up asset prices, lowering interest rates, and making future cash-flows absurdly and artificially valuable? No. And yet, Elon Musk gets to make $100Bn on paper - and he can take loans against those gains with <3% interest and never pay ANY taxes.
It really seems like this is a completely separate world - and it's >30% of US wealth - and it should be dealt with separately.
> True inflation has likely been ~4% since 2008. The S&P average is ~7.25% per year. So half of the "capital gains" the ordinary index fund investor would pay are just inflation.
How does one measure "true inflation?" I am sympathetic to the idea that inflation is nearly unmeasurable, but not the idea that "true inflation" was happening when it clearly, obviously was not.
> And what's worst - the Fed is causing so much of that inflation.
The Fed causes all inflation (at least in the US – Europeans have the EU central bank and Britishers have the Bank of England). Inflation is always and everywhere a monetary phenomenon.
>All of this funny stuff is mostly people trying everything they can to get capital gains instead of income so they can pay a 25% tax rate instead of a 39% tax rate. When you're talking about billions of dollars - 14% is a lot of money.
0.1% doesn't pay 25%. That's well documented. I don't know what the effective rate is, but averaged out over multiple years it's probably somewhere around 5% and then another few % that's spent on avoidance (not taxes). Maybe 10% at most.
Just look up Bezos or Musk's tax return. Same with Buffett.
The system is coming apart, shaking itself to bits because it's become unmoored from its foundations. It seems like a lot of different reasons because the system is so complex that it's fractal; you can zoom in to any one part and still see complexity, so it's easy to pick out PhD-thesis-size problems and just get lost in it. But fundamentally, if you zoom out, it's really simple.
It's greed. I'm not religious or spiritual, but I am really talking about a serious psychological/spiritual disease that has infected our society. It's not just about getting enough to survive, or even enough to thrive, but there are so many actors out there out to get as much as possible that they simply cannot be satisfied anymore. Their stomachs are bottomless pits.
How else can you possibly explain multiple individuals being worth more than $200 billion (Sixty. Thousand. Lifetimes. Of Wealth), and yet it is not enough for them. They must command huge empires, the boards of which must "motivate" them with more money. These people have serious psychological problems. Like, please, just disappear to your islands and enjoy the rest of your short lives, please!
The entire world economy has been just one massive casino, one huge get-rich-quick scheme. And TV too. Fame and fortune without working for it, getting famous with no talent or skills. Think of how many millions and billions of people worldwide have been programmed to think they can and should be millionaires and that it can happen at the drop of a hat?
And now, a CEO has 1000x the pay of a median worker. They're all mini warlords, their plunder is bullshit bonuses and hollowing out business after business. A huge pump-and-dump scheme.
Just a couple decades ago, people dreamed of simpler lives. Plumbers, electricians, doctors, lawyers, engineers, small business owners. People dreamed of a kitchen renovation and saved up money for years to afford a new garage or that nice car at retirement. They couldn't imagine becoming YouTube starts or overnight millionaires because of some reality TV show or viral video.
Everything is fucked and it's because everyone thinks they are getting rich tomorrow. It's a mad dash to grab as much as possible, and people don't even enjoy the stuff they do have!
Society is sick and decades of neglect are coming due; the blighted pillars are crumbling.
This has happened many times before, and it will keep happening because humans do not (cannot?) change their fundamental nature. Even if society as we know it dies, it'll just get reborn like a cursed phoenix. Every doomsayer seems to forget that there is nothing new under the sun, and society has "fallen" and picked itself back up over and over and over again, but this time "it used to be better" and this time "society will really die, because it's different!" Of course it's different, but humans don't change.
> Just a couple decades ago, people dreamed of simpler lives. Plumbers, electricians, doctors, lawyers, engineers, small business owners.
Things weren't so great after the Roman empire fell. The wreckage left in the wake of falling societies is never pretty. Look at Easter island.
Things are bit different now. The economy is global, human impact on the planet is global and massive. We are beyond its carrying capacity and are quickly expending its energy reserves. But that's a different conversation.
None of us were alive in the "roaring 20s", but I will point out that that was very localized to east coast cities. Trust me, there were no roaring twenties out on the prairie.
How bad are the supply chain bottlenecks really? Compared to the amount of discussion on the matter they seem pretty minimal outside a couple sectors. I certainly don't see any lack of products being sold at grocery and big box stores. The only exception I see are some hot items like GPUs and game consoles but I don't they the supply chain itself is the constraint but rather the actual silicon.
The only significant example I can think of is the car market. If you sold or didn't have a car pre-pandemic then getting one now is going to be expensive both new and used. Then again I have scene dozens of used cars sitting in parking lots (w/o license plates and with old car rental decals) so I'm starting to think there is some scalping going on in that market as well.
Getting a basic door for inside your house has a 2 month wait, it used to be 2-3 days.
A certain type of adapter (3/4 inch to 1/2 inch) used to attach modern washing machines to older water lines is completely sold out in every store on a 50km range from my house, no-one knows when it'll restock. All other sizes are fine.
About half of the bog-standard IT gear I normally buy is months+ lead time if I need that specific part. I can usually find a workaround, but it's often ugly. Don't look at the man behind the curtain swearing in the racks.
I had hoped that by now things would have eased up, but if anything it is worse than the start of the year.
We just bought a house in SF, closed end of July. Furniture of all kinds is backordered... in some cases severely (think 26+ weeks).
Daily necessities are doing fine and most products aren't completely unavailable, but prices & lead times are increasing. There's a finite amount of time that can continue though... if companies can't get new delivery trucks or locomotive engines then eventually that will have a significant impact.
FWIW some companies have managed things much better. Our new Tesla Model Y was delivered in a bit under three months. Compared to what some auto makers are doing that's a miracle.
Raw materials are seeing issues, which is trickling down to nearly everything. Metal costs have gone up >25% from what I've seen, plastics are nearly impossible to get from the large suppliers, etc.
Many electronics components are majorly supply constrained right now, is isn't just silicon components, passives also have shortages everywhere.
Cash bids on corn are up ~70% from last year. The production figures do not suggest to me that the supply is constrained on the production side to justify a jump that large. Especially when we're seeing large increases across all kinds of commodities in unison, suggesting there is something else going on. Are people currently holding onto such resources as a hedge against inflation or what may be driving it?
I went for a flu vaccine at CVS this week and the person giving it to me explained the process would be a bit different because they were using much larger needles than usual. I asked why and they said it was due to supply chain issues. While it effectively didn’t change much for me, it also was easy to see that with a bit more pressure, some pretty critical supplies could simply not be available in sufficient quantities.
This is maybe half right. The demand for short term maximization of profits over all others is really driven by being a public company and shareholders only being satisfied if they see gains that exceed the market even at the detriment of the long term viability of the company. The US stock market is better at accepting risk of than my country (Canada) where companies are really harshly punished by shareholders if they show any signs of reduced profits/revenue.
Keeping inventory down is one easy way to maximize the profit as you aren't accounting for unused inventory. While it is correct that this is risky in case of supply chain bottlenecks, holding lots of inventory isn't a good solution either, because the company is now holding the risk of unsellable inventory should there be an economic downturn and people aren't buying your goods. Either one could easily sink a company.
I don't have a great answer, but after what has happened over the past year, I think the solution has to involve manufacturing be better distributed throughout the planet. You greatly reduce the chances of "once in a century" events preventing your shipment of product if you can shift production elsewhere and rely on a distributed supply chain. This would be better environmentally as well as it would require significantly less shipping if things were manufactured near where they were consumed. The costs of implementing this and the complexity for companies to manage is just too high for this to practically happen.
It highly depends upon who’s behind the private equity. As an anecdotal example that always stuck with me, Google post-public very quickly became a very different company, much less principled and “don’t be evil”.
Yet they did have private equity. I think they key difference is that you can choose to a reasonable degree who your private investors are, where there is no such option with public investors, and public markets tend to be more hostile.
Even benevolent private equity forces companies to operate on a 3-5 year time window where the PE owner needs to maximize returns over the period.
Inevitably results in lots of conversations along these lines. “Yes that would be good long term but we are not investing in that because it won’t add value before we flip the company”.
I don't know a ton about finance, but isn't "value investing" another way of describing the thing Ryan is complaining about? ("Value investing" = using metrics like P/E ratio)
Must also take into account that many industrial processes are not easily restartable. Even if only shut down for 1 day or 1 week, it can take multiples of that length of time to ramp back up to 100% output rate. Complex factories do not switch on and off like a lightswitch.
My dad worked on some testing software for a float glass factory back in the 1980s. Float glass is a process where a factory makes a continuous sheet of glass that floats on a river of molten tin, about 3 meters wide, 24 hours a day. It never stops. If it does then the glass cools down and solidifies inside the machinery, and the factory needs to be practically scrapped and rebuilt. I imagine that's the worst case scenario, but many large scale manufacturing businesses are likely to have similar processes that can't be stopped easily, and that cost a fortune to restart.
Many of the processes might require the product is pushed and/or pulled through the machinery. If there is no material behind to push it could cause problems within the machines.
Once the continuous process is broken it needs to be restarted somehow. Depending on the type of production this could be days or weeks of work just to rethread all the material through the machines and getting it going.
Might not be an option. If the material hardens in the machine it might need to be completely disassembled and rebuilt with many of the parts requiring replacement (since it wouldn't have been designed with disassembly in mind).
Now you've gone in a circle. That's what the original comment was talking about. This subthread is hinged on the idea of that specific problem not happening.
I don't know. I imagine it takes a lot longer than that to cool down though, ans perhaps you can't run the machinery without glass in it to take the heat away?
On the other hand, sometimes, it's straight ahead bad luck.
A chip we use in one of our products is made in a semiconductor fab in Malaysia. It's the only place in the world that makes the chip. That fab has been shut down for about 6 months as the nation struggles with COVID. In the meantime, the inventory in the supply chain, and even customer warehouses, has been picked clean by brokers to be re-sold for high-cost applications like cars and industrial equipment.
We've paid as much as $15.00 for that $0.47 chip. One broker offered them for $50.00.
Many, if not most, chips (by part number) are fabricated in one fab on the planet. It’s not possible to design a product with dual sources for every chip. This is particularly the case with older designs that are on the sustaining end of their life cycle. In some cases, a part # is run once a year, in one fab on the planet.
We don't buy enough chips to compel Infineon to build another fab.
Usually, we manage end of life matters with last time buys, etc. But this wasn't an end of life situation, and frankly, was not anticipated. To solve, we'd need to design alternate chips for all that are used, which is not economically feasible at this point in the product's life cycle (now 20+ years).
More likely, another HNer who knows of a supply will use that information to "hustle" their way into a bigger profit. I'd strongly advise against sharing the part number.
While I agree with you in general terms, I still prefer to think people, at a fundamental level, are good and like to help each other. Yes, I know, silly.
What? This turned from a supply chain to don't tax the rich post. I completely disagree with it. A good CEO will be able to do both look at the long term and deliver shareholder value. Yes, the growth could be slower but it is on the CEO to convince the board and investors that its a good thing. Either way, now that this issue is front and center, CEOs will not be blamed for planning ahead, so we can happily tax the rich? His logic not mine.
For articulated analyses of complex phenomena a Twitter thread is completely inadequate. For simplistic explanations whose objective is to promote an opinion it is great, because it makes it easy to re-share morsels of the argument.
Everywhere I travel, tiny life. Single-serving sugar, single-serving cream, single pat of butter. The microwave Cordon Bleu hobby kit. Shampoo-conditioner combos, sample-packaged mouthwash, tiny bars of soap. The Tweets I read each day? They're single-serving books.
after a very short period of time after a major disruption, there ceases to be a simple cause and the answer rapidly becomes "well, it's the gibbs phenomenon, it's gonna ring for a while now".
What it is the alternative to the current just-in-time regime?
Warehouses filled with stuff to be sold. Overproduction. Stuff getting destroyed because it expires or cannot be sold for whatever reason.
We may get there, hopefully only temporary, as a reaction to the current situation. For most companies, the amount paid to the factory in China or elsewhere, is only tiny fraction of the price the product is sold for.
That is why companies now are double or even triple ordering. Most of that stuff will just ending up getting destroyed.
Companies should stockpile where they are most vulnerable. I'll give an example. I make (assemble) my own bullets (cartridges) for target shooting.
There are 4 parts: primer, powder, bullet and casing. The casing is the most resilient because I can pick them up and reuse them. The bullet is probably the second most resilient, because in a pinch, I can get molds and pick up and melt down lead and make them. The powder is also pretty resilient because there are multiple manufacturers and all kinds of powder per manufacturer that would work, I would just have to adjust the drop (amount) for the new powder. Primers are the least resilient, because it's hard to replace and also competing manufacturers who make pre-assembled cartridges also need them, so I would certainly make sure I had plenty of those.
Of course, even with all that, there's no way of knowing how long the shortage will last. We're going on a year plus now, and who would have anticipated that?
Well, Overproduction is a problem when you make big batches and then need to store them. A lot of "inputs" outside of food production can be stockpiled reasonably longer, so without breaking with JIT/Lean philosophy all you need to do is to create a bigger buffer at the start of the value chain, which might mean that missing X deliveries won't stop your production rate instead of 1 missing delivery stopping the whole factory.
The average lifespan of a company is 10 years.[0] The average lifespan of companies on the S&P is maybe a little more than twice that. Each year you have a 1/100 chance of seeing a hundred year flood. With a short lifespan the odds are decent that your company simply won’t see one. The question is then: how good of an idea is it to spend to be robust to them? Of course it is viciously circular: planning to not be robust to white swans is probably why the lifespans are so short and shrinking.
Tim Cook doesn’t have voting control of Apple but it is sitting on a massive shock absorber made of cash earning insanely low rates of return. The idea that you need control of the board to be robust doesn’t seem to be necessary. It is probably helpful but it isn’t necessary.
Nassim Taleb calls this fragility vs. "antifragility". A system with frequent small shocks, gets information from those shocks about what to keep buffers of. A system without an absence of frequent, small shocks, keeps no reserves (like the bones of an astronaut in weightlessness too long becoming thinner, or the muscles of someone who does not work becoming smaller). Small shocks are information, and they tell a system what to bulk up on.
Long periods of tranquility, leads to fragility. Which, for many reasons (climate change? war? pandemics? disruptive technologies?) is not a good preparation for the near future.
> Only founder led companies and family owned businesses can stand up to the immense pressure from the dogmas of modern finance.
How about worker-owned companies, co-operatives, and collectives? I totally agree the problem is that with the finance people steering the ship there's incentives to push up your short-term performance and collect bonuses and watch your publically-traded stock value go up. So don't go public; use the value an organization creates to pay the people in it, and invest in making it better for those people and the people you serve. The people who have say in the decisions are the ones who are most interested in having the organization continue to be healthy and a good place to work.
There are other ways. We don't even need to imagine them, they've already happened. We just need to resist the siren song of the lottery ticket and instead try to create systems and organizations that we want to be a part of.
The fact that there are so few of these types of company around probably means that they have trouble surviving in a world where the competition is supported by modern finance.
> they have trouble surviving in a world where the competition is supported by modern finance
The problem with coöperatives is longevity. We have white-collar coöps of sorts: partnerships. They tend to disintegrate after a generation or become quasi-corporations over time because immortal entities can make plans and promises on time scales that ones that grow old and change priorities and die can't.
Can you have a cooperative with limited liability? I'm sure you can emulate it with a limited company and particular arrangements of stock ownership and voting rights, but I doubt that's easy or cheap to set up.
The John Lewis Partnership in the UK is a public limited company whose shares are entirely owned by a trust that pays shares of profits to all of its employees, which isn't quite "ownership" but close, and they have a $15bn revenue. Publix Super Markets in the US has a $45bn revenue and is privately owned with all employees receiving stock.
Financing is probably an issue at a certain level but it doesn't seem to be limiting otherwise. They're just unusual, although if you consider startups giving employees a stake isn't that strange today.
> Can you have a cooperative with limited liability?
Yes, in the US, at least.
A coop can be a corporation or LLC (and a coop that is either the former or the latter when taxed as a corporation has special tax status with the IRS, under subchapter T, so occasionally they are referred to as “T corps” analogous to C or S corps.)
An S-Corp is the structure made for that sort of spread to a limited number of stakeholders. Not to say it's viable in some states with current regulation.
Also, LLP is a limited liability partnership. Wholly state entity, though, so the same caveat again. Member limits, etc.
And that's the USA of course. Your country may vary.
This is something that is interesting to me, I have been reading about various ideas for worker owned companies. Some friends and I have been talking about how we might organize a side business built around a similar structure and where it might fail for reasons that are not just the business side of things.
The RoE analysis is decent, but it wouldn't be HN if every now and then someone really wants to sell the idea that your average business owner and your average S&P 500 business are all in this together with taxes as their enemy.
Taxes don't apply equally. Taxes are a good thing. Taxes can work.
Mandating a lower-than-maximum container stacking height was itself a buffer, which is now being filled by temporarily stacking higher.
The idea that we run without buffers in the supply chain is contradicted by his own big idea to use one of them.
We don’t have big warehouses full of inventory sitting around like we used to, true. But we do have the money we generated by running more efficient supply chains, and money is more flexible than outdated inventory.
Edit to add: whether that money is sitting with founders, shareholders, or employees is largely irrelevant from a macro perspective.
Money doesn't do you much good if you can't actually spend it on anything. Getting rid of warehouses full of car parts to save some cash doesn't do a lot of good when no one can sell you car parts for any price.
Buffers won't solve a long term shortage, but they can prevent a short term shortage from cascading. When the entire global economy is running with minimal buffers, then the effects of supply disruptions can last years, and that problem can't just go away by throwing money at it.
In the grand scheme of things, having a couple weeks of extra inventory on hand will not help you weather a 100 year storm. But it will increase waste - inventory that you have to throw away when there are defects or when they become obsolete.
Imagine trying to predict the run on lumber, and the solution was to have kept a bunch of lumber sitting in yards rotting waiting for the off-chance that there was a sudden unexpected demand. The proposal that we should have been shipping over more of everything, building giant strategic stockpiles across the country of everything, and then tossing out 10-15% of everything from storage loss is bonkers.
Just In Time manufacturing reduces waste and improves quality across the board. And stockpiling only hides your bottlenecks!
Quite the opposite, the lumber industry has been selling greener and wetter wood year after year. If they would stockpile the quality would increase, and they could build a cushion to fluctuating demand.
I've noticed this with musical instruments, and it sucks. This has been a chronic problem with Gibson guitars, but also even small scale luthiers are being hurt.
Do you have a source to back up either of these claims?
1. greener/wetter wood
2. quality increase from drier wood
There are standards for the moisture content in dimensional lumber. It's unlikely lumber yards are going to be selling wood that's outside of the standard ranges. Additionally, some of the soft woods are a PITA to deal with if they get too dry, as they are more prone to cracking when driving fasteners without drilling holes.
Much of the quality issues stem from having cut down most old growth forest and converting these past forests to farmland or suburban yards. The primary source for fir, spruce, and pine these days that are used for dimensional lumber come from managed farms. The trees are only grown as long as needed to harvest certain sizes of lumber. This leaves you with grain running in less than ideal directions and a lot of sapwood instead of heartwood.
To be honest though, most dimensional lumber people complain about is fine for the sort of framing it's used for. It's a lot more efficient to use wood the way we currently do, rather than clear cutting our now very rare old growth forests and producing high quality, wasteful lumber.
Increasing lumber stockpiles isn't going to solve any of these issues.
I don't have a study I can link you, but I would encourage you to ask around. I buy a lot of lumber and I talk to people across the country who do too. It goes far beyond anecdotes, the practice is common knowledge today.
True, but what isn't on the table is producing locally even if it doesn't optimize to the penny instead of shipping crap halfway around the world to save half a cent.
This has the advantage that you already have industries that have capacity that can scale up. You have people trained who can train others. You already have equipment and facilities to which you can add to to break a bottleneck.
Basically, vertical integration at the country level.
Of course, this is the CEO of a shipping startup so that solution isn't on his plate of possibilities.
> In the grand scheme of things, having a couple weeks of extra inventory on hand will not help you weather a 100 year storm.
That's not really what he's saying. It's not about a single company, it's about the whole economy. When every company is running JIT, a small temporary supply disruption anywhere can bubble and propagate through the whole chain, becoming a huge disaster. It's like a traffic jam; when a highway is running right at capacity it only takes one person hitting the brakes to turn the whole thing into a parking lot. Except it's worse than a linear highway because the economy has many backlinks where companies early in the chain rely on companies later in the chain, causing feedback loops. Whereas if there was slack in the system then the relatively small initial shock wouldn't propagate.
Supply chain issues were sooo much worse before JIT. Imagine one person taps the brakes, but every car weighs 100 tons.
When companies kept huge inventories, most of it was not useful to solve the supply chain issues that came up and often made it harder to respond to demand shocks.
Even if you are right, what would be your solution?
I mean, the problem is not that we lack transparency, but that we have run out of options to fight the bottlenecks. Having some stockpiles as buffers would be one options to fight the problem.
Is there even a better solution than to let the current supply chain issues play out?
The status quo with supply chains and manufacturing is there for a reason, silicon in particular reflects its boom bust cycle as well as the absurd costs of CapEx.
I think people are reaching when they table the hypothesis that current supply chain issues are due to mistakes or mismanagement of some middle manager, in some corporation somewhere.
Maybe, just maybe, the cost of having a bunch of spare infrastructure for a once in a lifetime rearrangement of the supply chain due to Covid isn't worthwhile?
Sure, waiting is an option. But I wonder which other options are available in the long term. We talked about stockpiling. But how about rearranging the supply chains? Distribute the production of products? Shortening the supply chains? Estabilishing multiple cheap transport routes? etc.
Well, as long as it is just about luxury goods like the PS5 waiting is certainly an an option. But what about healthcare equipment? Would you still argue that waiting is the solution if it would mean that people die in hospitals because the hospitals cant get the required equipment?
In addition, the supply chain problems are not just about chips. To my knowledge, they affect nearly every product that is being produced in the far east (China, Bangladesh, etc.). A few weeks ago I wanted to buy a blue suit and I got lucky: I could choose from a wide range of exactly one suit.
So yes, who cares about suits? But I wonder which essential things are unavailable currently.
Waiting might be the best option, but inaction might also kill the patient. Think of it as a patient with arrhythmia. Sure the patient might simply have sinus tachycardia that goes away when the patient's fever dissipates. Or it might be ventricular fibrillation that can easily kill the patient.
the wood in my house is over 100 years old and is still in good shape. Stored properly, wood lasts very long. but i get your overall point. A balance has to be struck between too much and too little inventory...
Production and logistics capacity. If you run a factory at 100% efficiency, anytime >100% throughput is necessary you get backlogged. If you have ~15% headroom as a GOAL, you can weather a shock without any downstream impact.
In the case of the Port of LA shipping containers, optimizing lot storage so that you always have exactly enough space (100% efficiency) breaks down as soon as that space requirement jumps to 110%.
I think they do mean inventory, just not sitting around in a forgotten storage room. To try other computer analogies, it might be increasing the queue size or using a capacitor.
From my time in manufacturing I can also say there is a cult of 'lean development'/'Toyota Production System' almost always done wrong and removing any backup buffers for long lead time parts.
The fact that my home state billed us an Inventory tax on items we had on the shelf further pushed the business to keep inventory as slim as possible.
Market forces tend to reward efficiency rather than resilience through redundancy. But super-efficient systems can be fragile ones too. So dude has a point. But seems like a mistake to say that its the only relevant factor.
Is "NIFO" really the right way to do accounting? If you sell the government one aircraft carrier, the cost of producing a second one will be much lower, so NIFO doesn't seem to fit there.
I suppose it depends on what we're talking about, but probably not. LIFO and FIFO are book accounting concepts, and business decisions aren't (shouldn't be) based on book.
For example, almost every successful company is valued at some multiple of book equity, because book equity doesn't (and shouldn't, and can't) incorporate any notion of growth. Tesla's book value per share is something like $27/share, which reflects the cars it has sold and the ones in process. It trades at $1077, which reflects hopes for cars that it will sell.
LIFO and FIFO are just book accounting methods for tracking costs of production. They tell financial statement readers how management puts the cost of unit production into inventory values on the balance sheet, and how inventory values are translated into Cost Of Goods Sold on the income statement. They really aren't the right basis for business decisions like pricing or production.
I don't know what he means by "companies now use FIFO or LIFO accounting" as if this is some innovation. These have been the _only_ choices under GAAP for . . . a century? Longer? Letting companies use Next In First Out for financial statements would be inviting management to manipulate its balance sheet and earnings through its cost assumptions. Of course a company will use up-to-date cost information for pricing decisions, but they've always done that.
Accounting is really a language of its own. It provides a lot of useful information, but you have to know how to use it and what to use it for.
I think NIFO applies only to variable costs. Fixed costs are fundamentally different.
Also, low-volume items like aircraft carriers are probably a bad example. Aircraft carriers are ordered and built in small, specific quantities; I think it makes more sense to account for building a single aircraft carrier as a construction project rather than as a unit of mass production. Almost like you were building a small airport, thousands of units of housing, and a nuclear power plant.
But my point was that variable but decreasing costs seem to throw NIFO off too. Aircraft are the extreme example but I'm sure the first of Tesla's latest car model costs more to produce than the thousandth. Not even counting capital expenses but just by things running smoother with practice. NIFO seems to fall short here too.
I’m not sure that’s always or necessarily true. The variable costs will go down over time if there are process improvements, but eventually there are diminishing returns to those. Meanwhile, the cost of materials and labor could rise.
Sure it's not 100% of the time but that's besides the point still. Isn't NIFO a bad fit for the times when per-unit costs are decreasing? And since this happens fairly regularly it seems like a bad choice period, or at least not obviously better than FIFO or LIFO.
typically when you're selling aircraft carriers, you're selling it before you build it - the customer is paying you to make it, not paying you for the one you've already made. so the neither the economics or the accounting work the same way as acting as middleman for retail goods.
The port congestion problem comes partly from incoming traffic being up while outgoing traffic is flat or down. Port Hueneme in Ventura County, CA, is a major agricultural export port. They have enough outgoing traffic to keep full containers going out, and they're not overloaded. Nor are they choked with empties.
Freightwaves has good coverage of this issue.[2] Comments from people who are working to fix the problem.
There's a startup working on this, "Container-Xchange".[3] They're trying to connect people with empties with people who want containers. Their site is funny to read, because it's designed like a B2C site, aimed at a B2B industry. "100% free and no credit card required".
"Grow your network in container logistics." You can just see the VC pitch deck: "Uber for containers". Their competitor, MatchBox [4], seems to be further along. At least their list of partners includes major shipping lines. But they're still thinking B2C. "5 free bookings for referring one person".
What they're both trying to do is create something like the settlements system US railroads have for boxcars, which makes them mostly interchangeable regardless of who owns them.
But those startups are working from a position of far less strength than the Association of American Railroads. The startups have to get container owners and users to sign up, and there are lots of players. Even then they mostly make bilateral swaps.
One outcome of this empty container mess may be some major ports saying "look, you want to park an empty at this port, you have to sign up with the settlements system so we can send it out".
I prefer shopping for B2C anyway, regardless of if I'm acting as a B or C. If I look at the pricing of something, and they have a "contact us" form, I leave.
Where are the bottlenecks? I see that things are in low supply and sold out, but when I look at specific things (say cpus or complete computers) I see increasing and record numbers of units delivered.
Runaway inflation looks like a supply problem at first, as shelves are emptied by the huge amount of money in the economy chasing the goods available. The price increases are a supply side response to demand being higher than can be supply can keep up with.
Please feel free to downvote this and insist that inflation is a myth as is usual on HN.
That’s just finger waving. The main cause is the madness of the situation where a deadly global pandemic causes the money supply to increase across all sectors. If you were a manufacturer in March 2020, the only responsible thing was to reduce operations to the bare minimum.
Add lockdowns and changing, unpredictable consumption patterns (e.g buying more cars against all predictions because who wants public transport now?) and you get the perfect storm.
You could hold a years worth of inventory and you’d still have a problem.
Correct. The Fed is holding huge amounts of assets artificially boosting stocks and both corporate and govt. investment, creating a housing bubble and wealth inequality as a tradeoff to keep unemployment low. Combined with the government 'stimulus.' School districts and municipalities with millions to spend for several years into the future.
Why would we expect there to be a perfect equilibrium immediately?
Hm, seems like a monocausal 'explanation' of a complex problem - or let's say a mere opinion with little background information.
Given the 'hundred year crisis', I think we have fared relatively well from a purely economic point of view... So, yes, some problems may exist but I think we have witnessed a surprisingly resilient system, given how optimized everything is and how unprecedented the issue is.
I don't know if a slight price increase in graphics cards is the key issue to worry about at this point.
Keeping tons of spare capacity is neither economical nor environmentally friendly. Also, it would probably only shift the problem elsewhere.
> I don't know if a slight price increase in graphics cards is the key issue to worry about at this point.
The price increase in graphics cards isn't related to this.
GMs trouble selling cars because they don't have enough chips to finish off the cars is a problem related to the pandemic and planning like the posts on Twitter note. The lack of new cars available has driven up prices on used cars. This is all supply chain driven.
> how unprecedented the issue is.
How unprecedented is it? In the last 130 years there have been two world wars and two global pandemics.
The US has now outsourced most of the production of goods to places in other countries. So, if something changes there (like the mask issues we had early in the pandemic) we have limitations here. And then there is the changes in posture of China where many of our things are manufactured. It wouldn't be unheard of, historically speaking, for that to impact businesses in the future.
> In the last 130 years there have been two world wars and two global pandemics.
One rationale behind the push for global integration after WW2 and later on with China and the former Soviet Bloc was the idea that such integration would create incentives against a resurgence of war between great powers. It is precisely because another world war would be so disruptive in light of global economic integration that global integration was promoted and pursued in the first place by many policy makers—in order to make such wars less likely to occur.
I suppose the thinking was that the obvious downside—that if a great-power war were to occur, the global economy would be in shambles—was irrelevant given that another world war would likely amount to Armageddon.
In other words, preparing for the contingency of a world war is worse than useless, because the only viable path (both from a utilitarian and from a moral perspective) is to do what is most effective to prevent the occurrence of such a war (which pursuant to this line of thinking includes, of course, making significant investments in defense).
> One rationale behind the push for global integration after WW2 and later on with China and the former Soviet Bloc was the idea that such integration would create incentives against a resurgence of war between great powers. It is precisely because another world war would be so disruptive in light of global economic integration that global integration was promoted and pursued in the first place by many policy makers—in order to make such wars less likely to occur.
That's a topic explored a bit in The Interdependency Series by John Scalzi. I found it am amusing read (and actually liked Wil Wheaton as a narrator for it... though not everyone agrees on that point).
The teaser for the first book of the series:
> Our universe is ruled by physics, and faster-than-light travel is not possible - until the discovery of The Flow, an extradimensional field we can access at certain points in space-time that transports us to other worlds, around other stars.
> Humanity flows away from Earth, into space, and in time forgets our home world and creates a new empire, the Interdependency, whose ethos requires that no one human outpost can survive without the others. It's a hedge against interstellar war - and a system of control for the rulers of the empire.
> One rationale behind the push for global integration after WW2 and later on with China and the former Soviet Bloc was the idea that such integration would create incentives against a resurgence of war between great powers.
i wonder what the recent resurgence of nationalism and "us vs them" thinking plays into this...
is it possible that our global economic system, international relations etc are not yet evolved enough to keep such a system functioning stably (in geo-political terms)?
For such a system to function, there must be one superpower, rather than two.
The US has clearly emerged as the one superpower in the aftermath of the soviet dissolution. But China has now emerged as a potential competitor to the superpower status (they've basically replaced the soviets in this model). They haven't yet reached the same level, but will soon according to all modeling and prediction.
I do believe that it is the US's hope, in the clinton administration, to have china's market economy open up, and thus, allow western "democratic" culture seep in (ala, like japan and korea - but without having a war to start with). This certainly, and clearly has failed now. China do not want to be "subservient" to the US superpower like the other westernized asian nations.
> The US has now outsourced most of the production of goods to places in other countries.
I think that is the point (or one of the points): it's not just logistics and spare capacity - it's a much more complex set of issues.
This isn't something accounting practices or "less greed" would solve, as seems to be implied in the Twitter thread.
Would you have voted for a party that spent $1b annually on mask manufacturing subsidies for masks nobody even bought? Who could have foreseen that demand spike?
Would you have voted for a party that spent $1b annually on mask manufacturing subsidies for masks nobody even bought?
I would have voted for a party with a program of "bring the manufacture of strategically crucial items back to the US and make it robust". This seems like it would even be Republican "bread and butter" and I don't see why either party had an issue with it.
Plenty of people foresaw it. California spent ~$200m on building up a stockpile of PPE and other medical supplies back in 2006, before Brown cut funding for the program in 2011.
It might have something to do with drastically lower labor prices and environmental laws.
There is only so much discrepancy in prices that global markets will allow before buyers start rewarding the lower priced sellers for taking advantage of the arbitrage.
> Would you have voted for a party that spent $1b annually on mask manufacturing subsidies for masks nobody even bought? Who could have foreseen that demand spike?
Many people did (only at the $450MM level/annually). It was considered standard practice to have the federal government purchase large quantities of N95 masks to have in case of an emergency. GWB started the program, and Obama distributed 100,000,000 masks during the H1N1 crisis from the stockpile. I will say that restocking the pile took a cut after 2010, Congress cut its funding and Obama's team didn't fight for it. And what funding they did get didn't seem to get prioritized into masks.
Use the stockpile to sell / provide such masks to the VA, Military, and other government organizations on a FIFO basis so the stock is never stale. For stock that can not be moved quickly enough donate it to other countries that may need it.
"mask manufacturing subsidies for masks nobody even bought? Who could have foreseen that demand spike?"
The entire industrial capacity of USA, country of 300 million people, could produce zero Meltblown, so it could make zero masks. Do you think it's acceptable?
People talk about conflict with China while we depent on them for toilet paper to wipe out butts, it's like a mentall ilness.
The US gets a neglible amount of toilet paper, if any, from China. And there was never a supply disruption: there was a demand disruption, a distribution disruption and a run.
> In the last 130 years there have been two world wars and two global pandemics.
Delays on intercontinental shipping and lack of availability of a few durable goods is a perfectly fine price to pay on that frequency. Optimizing to surviving a global pandemics without any problem would be ridiculous expensive.
Yes, specifically on the subject of cars, the manufacturers seem to be accepting way more risk than what is sensible. But that's their decision to make. If they were just left to face the costs of their decisions, they would stop making bad ones quite quickly.
(By the way, there were 2 flu pandemics similar or worse than this one on the last 100 years. That's one more than you are counting.)
The 'lack of chips' has nothing to do with US preparedness, it's entirely an overseas issue.
China & Co. did a big over-correction during the start of the pandemic, and that put a lot of things into chaos.
You now have chip speculators entering the foray, jacking up prices, not very helpful in letting the market clear.
10% padding in US operations I don't think would have made up for anything, the problems exist in shipping and on key/acute issues from the suppliers in Asia really.
I don't think it's reasonable to imply 'We should build all the stuff here to avoid delays during 1 in 50 years pandemics'.
I'm not blaming so much as pointing out that's where the underlying issues are.
Of course exacerbated by other things.
I think working out solutions to transportation, buyers paying for things like guarantees, plant and supply chain risk analysis etc. will become a thing now.
CEOs will hire consultants and firms to measure the likelihood in supply chain failure and make ammends.
I actually think we'll get adapt past most of this.
There were many more global pandemics in last 130 years. There were multiple global flu pandemics that were within the same order of magnitude of severity as Covid-19, eg. the Hong Kong flu of 1968 killed more people than Covid-19 had on per-capita basis.
It is not deadly global pandemics that are unprecedented, it’s the lockdown response to them that is.
what's your methodology? The linked section includes stuff like the "2015–2016 Zika virus epidemic", which was "worldwide" but had a death toll of 53 people. Should that be considered a pandemic? If we go with the "Epidemics and pandemics with at least 1 million deaths" table, there's only 6 worldwide pandemics.
If you're counting pandemics since 1891, I think any number between 6 and 13 is more defensible than the number 2.
Let me count again, while leaving out relatively minor pandemics like Zika:
* Fifth cholera pandemic
* Third plague pandemic (multiple outbreaks are listed)
* Sixth cholera pandemic
* 1915 encephalitis lethargica pandemic
* Spanish flu
* 1957-58 "Asian flu"
* Seventh cholera pandemic
* 1968-70 "Hong Kong flu"
* 1977 Russian flu
* HIV/AIDS pandemic
* 2009-10 swine flu
* COVID-19
That's 12 and doesn't count stuff like Zika, SARS, or MERS. It also doesn't count any of the Ebola epidemics.
I don't know if cases or deaths are a good proxy for expected supply chain impact. SARS, for instance, had relatively few cases and deaths because it mostly broke out in well-functioning developed East Asian countries that were capable of responding to it effectively, but those same countries have outsized effects on global supply chains.
It seems obvious to me that covid-19 had a much greater impact than any of those previous pandemics, even more severe ones, because it’s the first one for which we even attempted to implement such disruptive mitigations. Working from home was not feasible for most people in 1968-1970 for example, and nobody would have seriously suggested a major economic shutdown to deal with it.
An epidemic is an unexpected rise in cases within a community or region, which could mean part of a country, an entire country, an ethnic group spread across multiple countries, or an entire landmass. And a pandemic is an epidemic that has exponential growth.
An epidemic usually starts within a particular country and if it becomes a pandemic it will grow rapidly and spread to other countries, but the WHO definitions are only based on the number of cases compared to normal and how fast the number of cases is rising.
If it was just one item, such as graphics cards, I wouldn’t be particularly concerned. The problem is it’s a bit of everything, a mere 11-ish years after the Great Recession, which was itself “supposed” to be a once-a-century economic catastrophe.
Sure, it affects everything and given the complex interconnections and dependencies within production chains / networks, the cause-and-effect relationships are hard to understand and cause for concern. But given how complex and decentralized things are, I am still amazed we haven't seen worse effects (yet). I doubt that spare capacity in logistics alone would make a huge difference, because you'd also need spare parts, materials and manufacturing capacity, all of which are part of the same network.
With shipping containers being sent back to Asia empty rather than taking an extra leg to mid-America to fill up on US farm products to sell in Asia, is the price of soybeans and corn in Asia going to spike soon?
Farmers are smarter than you give them credit for.
They check real-time shipping costs and choose the cheaper option. It takes a few dollars worth of cardboard to turn a shipping container into a suitable container for corn or soybean shipping (really!).
To be even more fair, there's absolutely no reason to think these types of events are independent; there's good reason to believe they're positively correlated. This means once one happens the chances of it happening again soon are greater than before it happened. (But if you're lucky and it doesn't happen again the chances decrease further, giving you an average of 100 years between them again.)
> This means once one happens the chances of it happening again soon are greater than before it happened.
or more likely, it happens, but because of prior experience, the event is no longer as calamitous as the first time.
Looking at the GFC in 2008, the monetary policy back then was too tight (hindsight 20/20 and all that of course), causing the recession to be extended longer than it would've.
This covid disaster would've caused a similar problem, imho, if the Feds did not loosen up like never before. It "solved" that same problem the GFC produced. Had the GFC not occured, the pandemic would cause a double wammy - a medical problem, and also a monetary problem.
I can believe a pandemic might cause a global economic catastrophe on par with the Great Depression or the Great Recession, but I my imagination isn’t giving me any ideas how the latter might cause the former?
By the economic catastrophe causing us to elect a president who dismantled a group that worked to monitor and respond to global health issues to prevent them from becoming a pandemic. I think it's hard to say if that group could have prevented Covid-19. Nor am I necessarily saying that the economic crises of 2008 caused us to elect Trump. But I think you could possibly find a path from one one to the other.
Keeping tons of spare capacity is neither economical nor environmentally friendly. Also, it would probably only shift the problem elsewhere.
* There some things that are people simply need for survival. At a certain point, having no spare capacity and cascading failures means people die. Lack of masks last arguably killed people last year.
* It's quite possible to excess capacity and be good to the environment while present production is often terrible despite the lack of excess capacity.
* Sure, a complete lack of excess capacity is economical. Which is the OP's point in different words. Robustness to failure has been traded for immediate returns.
> Lack of masks last arguably killed people last year
I think that was the least of the problem. At the beginning of the pandemic in the US, hospitals, nursing homes, and many other companies would not allow their workers to bring in their own PPE. This continued for upwards of six months. Several outbreaks occurred in my area because management refused to allow their workers to use PPE. Fast food operators also had several outbreaks because they were not testing their employees temperatures until it was far too late.
As late as April, we had dental offices across the country refusing to allow receptionists to wear masks. Same went for supermarkets and restaurants. Upwards of 30% of lives could have been saved if corporate and management hadn’t setup major roadblocks for worker protections. One of the most common arguments I heard was, “we don’t want the customer to see our people behind a mask”. For companies, this wasn’t a pandemic with real health risks, this was a front-facing visibility problem for the organization. These people should all lose their jobs for the suffering they caused.
Given the 'hundred year crisis', I think we have fared relatively well from a purely economic point of view...
Covid was essentially "Sars II". If Sars1 had had the qualities needed to be a world wide epidemic, we'd be looking 10-100x the casualties. Sars1 happened a decade ago. Calling this a "hundred year crisis" seems wholly disingenuous. This event was forecast by quite a few people, the world was terribly unprepared and there's every reason to think the same factors that created this virus will create others much sooner than a hundred years from now.
The original SARS didn't have the qualities needed to be a world-wide pandemic, though, and one of the big obstacles to that was that it was just too deadly. Not only do people who are so sick they have to be hospitalized not go out and socialize and spread the disease, all the hospitalizations and deaths gives a whole bunch of really obvious starting points for contact tracers - instead of only knowing about a tiny fraction of cases, most of them are highly visible and those people's contacts can be tracked down and isolated before they become infectious.
Also, a lot of governments did take suitable precautions in case Covid was more like the original SARS early on and just got flak for it. This was particularly visible here in the UK, where Public Health England and the government had already planned for another SARS or MERS-like virus and introduced really aggressive testing and contact tracing early on in case this was it. They just got attacked in the press for not continuing that once it became clear this wasn't like SARS and it wouldn't work - and then once they gave in and reintroduced testing and contact tracing as a measure, they were attacked again because (predicatably) it wasn't that effective and the media fuelled endless badly-informed conspiracy theories about the testing and contact tracing program only existing to funnel money to their pals.
The UK test and trace program cost £37 billion, which was handed solely over to a company that has a long history of delivering projects poorly. By all good measures it wasn't effective in tracking COVID or preventing cases. In my opinion the government were rightly attacked over this issue.
See, this is what I mean about there being a lot of misinformation out there. That £37 billion wasn't handed solely over to any one company - political opponents of the current government kept on falsely claiming that it was all given to Serco, but in reality only a small fraction of the Test and Trace spending went to them: https://fullfact.org/health/test-trace-march-2021/ (I think most of the money that went to Serco was ultimately spent on employing the numerous call center staff required to actually scale up manual contact tracing too.)
I have a tidbit on the following:
>> we'd be looking 10-100x the casualties.
Viruses conform to the distribution of deadliness-vs-reproduction rate. For Sars 1 to spread widely, it has to be less deadly. There are limits to how a virus can both be deadly and contagious.
There are limits to how a virus can both be deadly and contagious.
That leaves out the whole question of incubation time. The scary thing about COVID is that it gives you several days to a week or more to walk around spreading the infection before you even know you have it.
That's why the reaction in the public health sector was so dramatic. It was the sort of thing that could have easily been much worse than it has turned out to be.
And it's still only one or two mutations away from living up to the worst-case fears: a seriously-deadly virus that spreads all over the world before anyone knows what's happening. One that large sectors of the population have already been preconditioned to deprecate or ignore.
Viruses conform to the distribution of deadliness-vs-reproduction rate.
That's a fine rule of thumb but not something to literally bet your life on. When smallpox was introduced to North America, it wiped out a substantial percentage of the population of the continent (This [1] claims 90%, which might be much but it was a lot).
In wealthy countries like the US it might be harder to get that new XBox you wanted. In the rest of the world there's hundreds of millions of people who are starving to death.
as someone originally from a 3rd world country. I can truly say never trust what the UN or any of those big NGO's say. It's propaganda pushing a narrative. what causes starvation in most poorer parts of the world are western induced climate change i.e draughts, floods etc. Then of course political instability
There's no reason to think that we are 'just getting started'.
We know what the system looked like before, and post-pandemic, there's no reason to believe it wouldn't return to that state. Aside from some ongoing pandemic measures, by and large, we should see things mostly settle into the system that already works.
It's just going to take some time to clear. In the meantime, most things are working well enough.
Much of the inflation we are seeing is a function of 12 years of mass money printing and pandemic response, if it were not for that, the pricing issue wouldn't be so acute.
If there is a 'new normal' it will due to monetary issues - the adjustments in supply chains I think will be incremental, with a few strategic changes i.e. TSMC in Austin etc..
Well at least we will be going back to writing everything in C and squeezing everything out of our old legacy chips because what else can we do? Maybe the Intel/IBM/Globalfoundries fabs in the US can continue producing whatever last gen chips they are capable of.
> Washington must protect and nurture these engines of competitive dynamism, but instead they're conspiring to kill the golden goose.
I was with him throughout, until this. Here it seems, also for him, his personal interest gets in the way of rational problem solving. He may be a hero for helping solve a problem, but he is still human: just another tax-exempted billionaire business owner, no problem here.
I'd say he was mostly correct about the causes, but the thing to remember is that this situation is not going to be with us forever. It's going to last a year maybe two at most and then after that it's business as usual, the companies that have the least spare capacity will win out again and everyone will forget the post covid supply chain issues. So no I don't don't think we'll see much more investment in excess capacity. What it has highlighted however is the over reliance on certain geographical locations for manufacturing, especially key electronics components and the problems it caused. Expect certain items to be manufactured closer to key markets now or to be branded strategically important so that government aid can be provided to them to keep them going.
All nice and logical, and the stark lack of long-term planning is a huge part of the problem, but this:
> Only founder led companies and family owned businesses can stand up to the immense pressure from the dogmas of modern finance.
This observably does not compute. Unless those family owned businesses are the size of Samsung or comparable, they can rarely afford to invest so much in their prime, much less so now. Founder-led and family businesses seem to be the huge collateral damage in this clusterfuck. Or am I wrong? Are those businesses not hit with transportation growing expensive AF and energy shortages just as bad? Do they have enough lobbying power that their government simply will not let them drown one way or another?
Of course there's no cash on the balance sheet. If you leave it on, your competitor won't. I don't know why people continue to believe there's an invisible economist in the sky making sure that your economy will always be healthy as long as the market can do whatever it wants.
Or, perhaps we're just looking at it the wrong way. Nature has epidemics, hurricanes, droughts, forest fires. Maybe a recession every 20 years is an economic forest fire clearing away the dead brush, and a collapse of global infrastructure is just a global logistics drought. Sure, companies collapse, people's lives are thrown to the wind. But nature's cruel, right?
There is no punishment for having zero cash on the balance sheet only penalty, even in a crisis.
I would love to see the corporate equivalent of a pandemic, let the weak die off and the strong continue on. Sadly that isnt what happens. The weak become zombies, propped up by government money out of fear of the weak being killed off.
This is like a Rorschach test. There is truly something for everyone.
What caused all the supply chains bottlenecks?
Hard Left: "It's the fault of *capitalism*!"
Hard Right: "It's the fault of *unions*!"
Soft Left: "Truckers don't have a living wage!"
Soft Right: "We stopped producing because of lockdowns!"
Greens: "It's *climate change* disrupting the economy!"
Libertarians: "*Government mismanagement of ports!*"
YIMBYs: "*Zoning laws don't allow stacking!*"
De-regulators: "*AB 5 bans independent operator trucks!*"
Taleb: "Globalization JIT is *too fragile*!"
Krugman: "Republicans destroyed our infrastructure!"
Montana: "Workers are staying home, collecting unemployment!" (h/t tamaharbor)
Did I miss any explanation? I need to start collecting these.
Full Disclosure: I have no idea what the causes of the port bottlenecks are, but it's a great launching pad for talking about all of these issues.
It's not just the port mind you - the whole logistics system is straining.
Broadly, too few workers to move too many things and a heavy reliance on "just in time" manufacturing techniques.
Like the ports are just one component of the issue, so are labor shortages at domestic manufacturers, overseas manufacturers, disruptions from COVID, and all of these things interplaying with one another.
We went from a self optimizing system, that had some risk of someone having too much of something, to a highly optimized system where there was no slack in the system - largely in the name of saving money - if there is less inventory on the shelf, there is less sitting on the balance book, and less that needs financing. Furthermore moving the kind of manufacturing overseas that we have, has increased fragility, both because because it adds obvious choke points - and because it's components that we've moved, so now the ports break down, and it takes 4 months to get a new car.
I make my living predicated on the assumption that digital optimizers over loss functions have practical value, but seeing a pretty terrifying meta-pattern where defining and then subsequently obsessively optimizing and inevitably gaming metrics will burn away basically all of the useful parts of most human institutions, as we see in nearly every kind of business as noted here, as well as government endeavors like education, I'm pretty close to genuinely believing that quantifying success and trying to optimize over a metric is something human institution should literally never do, which is a weird place to be
Isn't sort of foolish to expect companies to do anything but play by the rules of the game which are defined by their stakeholders(customers, partners, suppliers) and the government? You can rant all you want about things companies should do, but if they're rewarded or incentivized towards bad behavior then that's what you'll get.
Companies may increase their buffers for a while, but the market will punish them and they'll move back towards their pre-covid behavior in short order. You can write all the blog posts you want about it, but without incentives and rules nothing changes.
“Over the long run, in our complex, dynamic, power law world, the reference assets will be those companies winners willing to challenge the dogma of modern finance.”
This might be the worst sentence I have ever read.
I liked this tweet of the thread: "Almost nobody has any employee loyalty because they haven't been willing to take care of their people through thick and thin of business, and thus they can't staff up quickly to meet surging demand. All businesses now complain about employee loyalty, but have we earned it?"
It's hard to find someone loyal to their employer. The only loyal low level workers that I know they work in the public sector or NGO. Is this a usual feeling in other countries?
> All businesses now complain about employee loyalty, but have we earned it?
I'd say that business schools have been for the past few decades teaching that management has to be outright militantly hostile towards any employee, going through great lengths to work them to death and drop them at the drop of a hat.
Thus, these people have been leading by example on how everything and everyone is replaceable, even creating and validating the temp agency industry as a legitimate employer, and once the lessons on how everyone and everything is replaceable are applied by employees towards employers... We have a crisis?
Not really. The US military is renowned for providing soldiers with a social security safety net that's unthinkable for the US's general population, encompassing healthcare, higher education and even social services.
Why would you expect a company that pays for buffers to be able to compete with a company that doesn't, even if the first company is owned by benevolent founders? Shouldn't the company that's cut inventory to a minimum be able to charge less than the competition, and drive the high-inventory competition out of business? I understand that not having inventory might create long-term problems, but how is the high-inventory company supposed to compete during the good times?
It's a policy problem. Truth is hard to determine because the delays are the effect of upstream decisions. There were internet anecdotes about California port policy preventing drivers from picking up loads (allegedly the owner operator law changes that hit Uber also hit truck drivers as well), federal policy changes reducing the time drivers can spend at the ports and number of loads they can take each day, but it was hard to separate these from partisan criticisms, even if the problems seem to have appeared overnight. Covid was around all last year, and between the availability of vaccines and the number of cases in cities being in the low hundreds, it's not like people working on supply chains are suddenly home sick with it.
It's getting more challenging to not interpret the destruction of independent business (such as owner operators of trucks, retail, restaurants and bars, and other policies) as an intentional soft-dekulakization of western economies, which is a necessary step in an old playbook. It would be helpful toward demonstrating a better explanation if there were some other economic factor that has appeared in the last year that was not just clumsy application of policy.
Why is there an expectation that the consumer goods economy will be robust to a once-in-a-100-years global pandemic? It's a nice property to have for sure, and we should plan for it from a public health and governance point of view. But should we expect consumer good production to be robust to such a major event? Yes, some people are seeing sofas take months to come in, and books are taking longer to be produced (there's not enough supply for the books of the latest Nobel winner, for example), but these are not necessarily necessary goods. Food and other necessary ingredients of a normal life seem relatively okay. But I am in a little bubble, like everyone else.
When everyone is going through pain, people don't put too much blame in one person. If every country is losing people to the virus, people seem willing to not punish a government that loses a lot of people. If every company is suffering from supply-chain issues, wall street will not necessarily put special onus on a particular company, saving a company's leadership from embarrassment. That said, certain sectors do seem to be hit - Apple's recent miss vs Microsoft, for example.
He's talking about risk, thats all. "obsession with "Return on Equity."" is just high risk tolerance in CEOs. He states that Founders are more conservative than hired CEOs, which seems like an excessive generalization.
He clearly misunderstands the relationship between accounting and pricing goods. Companies price goods to maximize profits.
I doubt companies routinely try to pay extra taxes to make their accounting books look better. Companies still try to pay as little tax as they can. Maybe they do it when they hit an IPO to get a better initial prices but usually more goes into valuation of a company than their GAAP accounting sheet.
The only good point he almost touches on is determining who should bear the risk on a 100 year flood event, the company or the consumer. With JIT, the consumer bears more risk in the supply chain. It's not seen if this is actually a bad thing.
Lastly, his whole shtick seems to be centered around being against the billionaires tax. Sorry Ryan Petersen, Founders don't provide extra stability to the supply chain because they are more conservative.
> The proposed tax on unrealized capital gains will force founders to sell larger and larger pieces of their companies to pay the tax, until eventually they lose control of their businesses and turn them over to the Wall Street sharks to run their disastrous playbook.
Are the billionaire founders actually better--on a societal level--than the "Wall Street sharks" he's complaining about?
In my country mostly legislation that taxes small business on revenue even over 50% effective rate and prevents from claiming legitimate business expenses. That wiped off thousands of HGV drivers working through their own small business. They got also smeared by the government as tax dodgers without showing any proof that this was ever the case. They of course blamed that on Brexit.
The pandemic may be the proximate cause. But Petersen is saying the sufficient cause is
Modern finance with its obsession with "Return on Equity."
With a more robust economic system not so beholden to return on equity, this may not have happened even given the pandemic. Without such a robust system, other proximate triggers can cause similar effects.
Not being snarky but I find it hard when well-meaning folks like Petersen don't give alternatives. Maybe the obsession with RoE is bad but what's the alternative? What measure should CEOs care about if the shareholders who put them in charge aren't happy?
My industry (international freight) is hemorrhaging people left and right in "the great resignation", COVID outbreaks at ports and facilities have been shutting specific facilities down on and off for almost 2 years, cargo containers aren't moving from ocean ports because there aren't any chassis to be had, Suez canal, weather, etc. etc. , so on and so forth.
This is such a lame-ass take geared towards bashing the proposed tax on unrealized gains...
It's clear enough that the pursuit of ROE incentivizes stripping excess capacity in the short term. But NIFO vs LIFO accounting is a small insignificant detail of this, and the claim that founder-led businesses are fundamentally different doesn't pass the sniff test.
First there are many businesses in logistics that are founder-led or privately controlled by founder families, from Walmart to Maersk. If founder control was really critical to setting up a business to weather a 100-year storm, you'd have expected the logistics industry to fare pretty well.
There are also plenty of industries that had to deal with massive demand spikes and did not end up being long term bottlenecks, in spite of being pretty brutally managed by markets, like grocery supplies or telecom and internet access providers.
The main difference IMO is the growth orientation. In tech there was already a large expectation of strong long-term demand growth, so there was already a structure in place to deal with capacity growth. Industries that did not have this expectation, like maritime transportation and port infrastructure, do not have the ability to start increasing the capacity on a dime.
When the profit growth expectation isn't there, evidence is the private founder businesses don't invest either. I would believe the argument more of I heard a lot more of the likes of Bezos, Gates, Page, Musk etc. investing their private money into the kind of massive infrastructure upgrades needed to solve the world's logistics bottlenecks. Until then I call BS on the argument that we should just wait for them to invest their money to solve it.
Governments might as well take it and upgrade infrastructure if the money's just parked. With the modern "golden share" structures, that shouldn't actually take a lot of control away from founders...
An overall valid argument, but there are also other vantage points to consider.
Take for instance providers' backlogs. Anyone having studied process scheduling knows how the size of your tasks, precedence, interruptibility, number of processors, and scheduling algorithm make a huge difference. The covid disruption affected all those factors.
We operated with little head room in a very very big system for a long time without these issues, and the major change was online shopping, which really took off during the pandemic.
This worked, mostly because there was suddenly slack in the system to accommodate this changed purchasing pattern, caused by a slow-down in practically everything else.
Now that the everything else is back online though, there is massive contention for space on ships etc, so retailers hoard more in warehouses, and that backs up into container yards, and then into the parking lot at the dock.
Adding more capacity in the middle (stacking some containers) doesn't do anything to materially solve this problem.
While I agree that a lot of companies have been screwing up the supply chains and their providers (cough automotive cough), maybe we should not build extra widgets just to support events that happen 1 out of every 100 years.
Not every system is a critical system, not all systems require spare capacity.
Maybe we should not build extra widgets just to support events that happen 1 out of every 100 years.
Except the COVID pandemic is probably not a 1 in 100 year event, the last SARS epidemic was less than 20 years ago (and fortunately was not as disruptive as the current one). I wouldn't be surprised if the next one is within a decade. And we've done little to prepare for it.
These posts raise some interesting points I hadn't thought about (I don't see any problem with Next-in accounting). But it seems that lack of inventory isn't the only problem, throughput at ports is also an issue, and the ports themselves are limited at what changes they can make to fix these issues, partly due to profits (no one will want to operate a huge port that's profitable 5% of the time), but also partly due to limits put on ports and shipping by the government.
It's true but just looking at supply chains or 'the economy' misses that this isn't just how we do business, our entire culture runs on fumes.
People during the pandemic didn't just learn that their toilet paper is delivered just on time, people learned that's how their friends and family are organized. The amount of people who were basically alone during the last two years with no actual communal support if there even is still such a thing as a community at all was staggering.
The founder of flexport thinking that giving founders more control isn't exactly surprising but misses the point that the problem he's talking about has already infiltrated just about everything.
Honestly I think we have been getting through the pandemic with surprisingly little problems regarding supply chains, at least as far as I am personally concerned. Anything I have heard has been basically minor inconvenience or higher prices.
I have lived in a major city when all the country's truck drivers went on strike and supermarket shelves were empty within a day. I can tell you that was an all together different feeling. Of course truckers would probably not have let the population starve, but it showed me how fragile life in a big city really is. Not getting my new car delivered on time because of a chip shortage is extremely low in the range of potential bad outcomes.
This is the inevitable result of globalization and prioritizing profits and efficiency among all else. Redundancy and reserve capacity are costly. When you create a supply chain that is designed for maximum efficiency and minimum cost, by definition you are creating a supply chain that is fragile and incredibly interdependent. This is not a system that is built to withstand serious disruption, it is a system built to maximize profits. Whether it comes to masks, drugs, food or toilet paper, I hope these supply chain issues (and resulting shortages) will wake people up to the threats we face from our fragile trade system.
Anyone who has played Factorio knows that "just in time" is far superior to actually holding reserves. If you buffer things up, you don't know where the problems in your production are.
People are saying "why didn't we buffer up more" ? Well, there we go. Play Factorio. You'll see just how bad buffers are in a simulated factory.
Well at the same time, Factorio teaches you that you need some buffers to build a fault tolerant factory.
Factorio often has implicit buffers through its belts (or bot network). If you build an inserter-only factory you'll become painfully aware how important they are to to the smooth operation of the factory. Otherwise it's very easy to get rolling waves of cascading backpressure, where the entire factory is only able to produce at good efficiency as long as you have fully saturated input as well as complete consumption of every product you produce.
That's a throughput problem. Inserters have 1/20th the throughput of a belt. When you go truly just in time _WITH_ good throughput (aka: Logistic Bots), its so effective that a huge subset of the community thinks that its cheating.
Leaving 1000 items on a belt (aka: a belt of length 70) is just less effective than bots flying to fetch an item _just_ when you need it. The buffer is counter-productive.
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The only time you want to "buffer" in Factorio is to provide 12-items to stack inserters, to maximize UPS (updates per second). If your stack inserters are moving 12-items every swing, that's using less CPU power than if they're moving 6 or 5 items per swing.
And as we all know: the expert's biggest problem in Factorio is when you've built such a large factory that your own CPU starts to slow down (aka: UPS problems). So buffers of size 50 come to the rescue (the smallest buffer available, and just enough to take advantage of 12-item stack inserters).
Bots still buffer items. Bot based factories produce when those buffers are low, not strictly when items are needed.
A true on-demand factory would take ages to produce anything, it would basically not be much faster than handcrafting because the iron plates wouldn't start being created until the pipe is needed, and the pipe wouldn't be needed until the steam engine is needed. But it's much slower to make iron plates than pipes, and much slower to make 10 pipes than make a steam engine. Which is why you absolutely need those buffers.
That means that Ford had a 2-month buffer __in practice__.
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When you go bot-based, you have full control over the size of your buffers at all steps of your Factorio design. At that point, you realize that smaller buffers are more efficient, and that larger-buffers don't do anything.
Ex: if you achieve maximum throughput with buffer-size 20, you leave it at 20-sized buffers. There's no reason to buffer-up 1000x items when 20-sized buffers work out fine.
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Belts force you to buffer everywhere... and proportionally to the size of the belt. A long belt 1000 tiles long would force you to buffer up 7000 (one side) or 14,000 items (double-sided). The size of these buffers are grossly larger than what anyone needs.
The key buffer size is usually 12 (the stack-inserter's grab size). Maybe 24 or 36 so that you have enough buffering to handle 2 or 3 swings of the stack inserter in case those items don't arrive on time (bots "seemingly randomly" run out of power, from the perspective of that assembly machine)... but anything more than that is redundant. Buffer size 50 (minimum size allowed on chests) are used in practice.
> Just in time doesn't mean "buffer free". It means eliminating unnecessary buffers.
this is sort of tautological, or at least hinges on how you interpret "necessary". certainly no one would implement a buffer knowing at the time that it was unnecessary!
but even in factorio, it can be worth maintaining a buffer deeper than what's needed to keep the factory running at 100% under optimal conditions. you don't want to find out that you're out of stone when your bots stop autoreplacing your walls and the biters flood in, or discover that you've exhausted all your uranium patches when your base goes dark. it's a real pain to reseed your kovarex enrichment in a power crisis. I usually maintain fairly deep buffers of critical defense items and monitor them periodically (or set up alarms). especially with fuel cells, I like to have at least a two hour supply, in case setting up the next mine is nontrivial.
disclaimer: I have played several hundred hours of factorio, but I have never built a base so large that my PC itself became the bottleneck.
> you don't want to find out that you're out of stone when your bots stop autoreplacing your walls and the biters flood in
But stone is used in more than just walls. You also use stone to make concrete.
So what do you buffer? Do you buffer stone? Cause buffering stone didn't actually solve anything (your "stone reserves" are the mine itself. If you really wanted to see "how good" your reserves are, you check how many stone mines you have left).
Do you buffer concrete? No. That wastes stone unnecessarily. Maybe you need the stone for the biter attack.
Do you buffer walls? No. That wastes stone. Maybe you need the stone to make concrete.
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So here's our 4 potential buffers:
* Buffer Stone -- Inferior to just running by your stone mines every few minutes and checking to see how many stone is left in the mine. The __MINES__ itself are your buffer.
* Buffer Concrete -- Wastes walls.
* Buffer Walls -- Wastes concrete.
* Buffer Concrete AND Walls -- Wastes furnaces, pumpjacks, and oil refineries. All of which require stone to make (and can't be made out of Concrete or Walls).
This type of buffering actually leads to the sort of supply chain bottlenecks we are experiencing. If the demand for stone suddenly rises to a point where much more walls and concrete is demanded, you get a massive delay in the production line because the stone needs to get mined and transported and crushed and transported &c before it even reaches the wall factory.
It's not entirely dissimilar to the chip shortage we are seeing. Our processes require a long lead time, which depends on accurate forecasting to work well. When the forecasts fail, you additionally get huge knock-on effects because downstream products also get delayed, which delays additional products.
It's incredibly efficient, nobody is denying that, but what can also not be denied is that incredibly fragile.
> If the demand for stone suddenly rises to a point where much more walls and concrete is demanded, you get a massive delay in the production line because the stone needs to get mined and transported and crushed and transported &c before it even reaches the wall factory.
That doesn't take long. And you'd have enough walls as a finished product to wait out that small delay. (A tiny percent of what you'd have if you tried to buffer the full supply.)
> It's not entirely dissimilar to the chip shortage we are seeing. Our processes require a long lead time, which depends on accurate forecasting to work well.
The thing making the chip shortages so bad and hard to catch up is that we don't have enough manufacturing capacity. For both chips and the supplies they need. Buffers would not help much, because all the spare capacity we had wouldn't have filled them very far, and then they would have quickly drained back to leave us exactly where we are.
If you want to handle longer term disruptions then you need to have more factories, not more warehouses.
I argue that your style of buffering causes the delays we see.
If Ford hoarded 1 year of chips, not only would Ford not be making cars, nor would anyone else be making cars. Every single chip made last year went into a car: and pretty much every car was sold.
We are limited at the chip manufacturing level. The only solution is to make more chips. This process of spinning up chip production takes months to years.
Blaming JIT for showing us the answer is backwards.
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That being said: we do have substantial buffers where it counts: dealership lots. We don't actually have a car shortage yet, just a dramatic increase in car prices. We're all looking ahead to the future to see a lack of production because we're actually more forward looking than we give ourselves credit for.
> A shortage in real life causes critical issues for real people. A shortage in Factorio does not.
An iron shortage in Factorio causes my iron plates to run out. My iron plates feed the steel furnaces. The steel furnaces build ammo. My ammo is automatically belted to my defensive garrisons. Then the bugs completely wipe out my base, because I was out of ammo.
Going backwards: Understanding why I'm out of ammo requires me to understand why I'm out of steel, which requires me to understand why I'm out of iron, which requires me to walk over to the mines and realize the mine is out.
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Now lets see what happens with buffers.
Understanding why I'm out of ammo: wait, I'm not out of ammo. I've got thousands of ammo buffered up right now. As such, I don't fix the problem for 2 or 3 hours.
2 or 3 hours later: my ammo runs out. I then begin the process of figuring out that I'm out of iron. When you have buffers, its hard to tell where your bottlenecks are: buffers make it _seem_ like you have plenty of supply, when in reality, the iron mine ran out a long time ago.
> Understanding why I'm out of ammo: wait, I'm not out of ammo. I've got thousands of ammo buffered up right now. As such, I don't fix the problem for 2 or 3 hours.
We don't live in a centrally planned (by a single person) economy where companies are run by simple automation.
Companies are run by people. These people notice when their suppliers are disrupted. They notice when they can't refill their buffers even before the buffers run out. And suppliers of raw materials certainly notice raw material shortages.
We didn't find out about the chip shortage from the article you linked when Toyota's buffer of chips ran out.
I've not played Factorio but love your argument. Very thought provoking.
What happens if something in the middle breaks and you don't have a buffer? What happens if there is no iron shortage but the steel furnace blows up? Aren't buffers important in such situations?
> What happens if something in the middle breaks and you don't have a buffer? What happens if there is no iron shortage but the steel furnace blows up? Aren't buffers important in such situations?
Okay, lets have two factories that convert 5-iron into 1-steel (Factorio ratio):
* "Buffer Factory": requiring 7000 steel to buffer up / 35000 iron before working at full capacity.
* "JIT Factory" : requires 200 steel to buffer / 1000 iron before working at full capacity.
The JIT-factory can sustain for 5-seconds without any inputs. (Belts in the game pull 40-items per second). The Buffer-factory can sustain for 175 seconds. You're seeing this as a good thing. It is not.
When you hook up a new source of iron to the JIT-factory, it only needs 5-seconds (assuming 5-belts of iron: 200 iron/second) before it starts up to full capacity.
When you hook up a new source of iron to the Buffer-factory, it needs 175 seconds before it goes back into full capacity. (The 175 seconds of buffering "need to be paid" at some point. In the case of Buffer-factories, that payment is done _before_ your end product is even finished).
JIT-factory is more useful. You shutdown when you run out of material (aka: using less electricity. Using fewer resources. Using fewer items).
The Buffer-factory needs 175-seconds to shutdown after running out of material. It also needs 175-seconds of "booting up" once you hook up new sources of material to it. That's electricity you're spending, resources you're using on BUFFERING that's completely a waste.
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Yeah, it sucks to be a worker in the JIT-factory, because your managers want to fire you during these low periods. But you can't deny the underlying efficiency of the strategy. Of course workers want the 175-seconds of buffering periods (aka: to be paid even when the factory is unproductive). But that's short-sighted.
I'm not saying that workers "Deserve" to get screwed here. But fundamentally speaking, the JIT-factory is clearly more efficient. What we need to discuss politically is how to protect the livelihoods of the workers during these periods when supplies run out.
But building systems where you have long periods of "boot up" and "shut down" just so that workers have something to do? That's not useful at all. And anyone who has played Factorio will see this instantly when thinking about buffers.
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Now I don't know the "ratios" of chips to cars. But lets say 100 chips create 1 car for simplicity.
Lets say Ford gets a shipment of 100,000 chips next month. Should Ford build 1000 vehicles? Or should Ford build 500 vehicles (and buffer up 50,000 chips) ??
Think about what the buffer actually means. Obviously, building 1000 vehicles is the answer. The sooner the vehicles are done, the better. The buffer only wastes time and energy.
Your initial example is not making an argument against buffers in the supply chain, but against large production runs requiring large inputs. In the context of logistics, I think of a buffer as a system that slowly fills up due to excess capacity greater than demand, which can be drawn down in times when demand exceeds production. You seem to be referring to a buffer as a process which requires large inputs to get start producing. Ironically, a buffer as I use the term would decrease the 175s startup time for your "buffered" factory.
In real life, factories/farms/hospitals are not designed to agilely shut down and start up again while awaiting inputs, or when there is no demand for the output. Upon a drop in inputs the company goes bankrupt, the crop doesn't get planted, or the patient dies. Upon a drop in demand the company goes bankrupt, the crop gets thrown out, or the travel nurses go elsewhere. Where flexibility in supplies is not an option, the solution is to have a buffer of money (or credit), seed, or medical supplies to smooth out anticipated supply shocks, and we buffer against demand shocks with money/credit, features markets, storage facilities, and some hospital inefficiency.
> You seem to be referring to a buffer as a process which requires large inputs to get start producing.
No.
> I think of a buffer as a system that slowly fills up due to excess capacity greater than demand, which can be drawn down in times when demand exceeds production.
Yes. That's what I mean.
The steel furnaces __use iron__. This means that during the buffering process, the steel furnaces are "saving up iron", and preventing the rest of your factory from using iron.
That is to say: the 35,000 iron you put into the steel furnace __COULD HAVE BEEN USED__ in the yellow-belt portion of your factory, and could have instead made 23333 yellow belts.
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Its not worthwhile to save up 7000 steel (aka: 35,000 effective iron) when that iron could have been used to make _OTHER_ parts of your factory do important things.
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It doesn't matter if you "buffer up" that 35,000 iron slowly, quickly, all at once or over anything. Any such buffering means your "steel portion" has arbitrarily decided that the iron should be saved here, in a box unused. While shortages propagate outward to all the other parts of your Factorio where you __COULD__ have been using the iron instead.
Ok. So the problem is that your furnaces are too greedy. They are buffering up in the absence of oversupply. There are many in-game solutions to that, but in reality we use price signals. When price signals are not available, we shame people for being greedy and hoarding.
Well, what if some of us think that the cryptominers are being too greedy, and maybe they should cut back on their chip orders so that car companies get more chips?
This chip shortage thing was foreseen in March: 7 months ago. That was more than enough time for a new batch of chips to be made or for production runs to be reallocated.
EDIT: Taiwan seems to think some hoarding is going on: https://www.taiwannews.com.tw/en/news/4306366. We know that all chip-manufacturers are using more wafers and creating more chips than ever before. Yes, even this year (even as Texas got that cold-snap and frozen power plants). So why do we have a chip shortage?
The cost of some shortages is measured in lives. With such shortages, preventing the shortage is better than mitigating the shortage. Mitigating the shortage is in turn better than not mitigating the shortage.
A buffer gives us time. That time can be used to save lives.
A buffer absorbs a short term disruption in a supplier which prevents the shortage. A buffer gives time to look for another supplier in a long term disruption. A buffer delays a shortage when no other supplier is feasible.
the short answer is the real world is a lot more complicated and random than factorio. factorio is pretty complex for a video game, but trivial compared to a real world supply chain. most of the game mechanics are deterministic, and latencies are measured in minutes rather than weeks. you can analytically solve for how much iron ore you will need in the next hour, what the optimal ratio of copper wire to plastic bar assemblers is for a circuit factory, etc. unless you play with friends, there are no pesky humans to interfere with your perfectly optimized design.
I haven't played Factorio, so maybe I'm missing something... but if you don't have buffers and suddenly whatever that produces something essentially goes away, what happens to all your just in time pieces? Seems pretty certain that they'll all end up idle.
Yes. Iron mines run out in Factorio. That then causes the player to search for new sources of iron to fix your supply chain issue.
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In contrast, if you buffered up... you end up running out of Iron 10 hours ago. Then your buffers deplete and you're back in the same position, except you've built out your supply chain to be even more fragile than before (because you had an additional 10 hours of expansion).
That's because you're not setting up alerts to warn you when your buffers are depleting. In a simple system like Factorio, adding a buffer to catch oversupply should never stop production more than not having a buffer at all. (A related problem in Factorio is that the available buffers tend to fill themselves based on the topology of the belt network rather than actual oversupply, and then tend to not empty into where they are needed until the logistics network is developed. In the real world there are price signals and communication between factories, so supplies are not allocated to factories on a first-come first-serve basis (inserters serving themselves).
Every chip that was allocated to cars has been used to make more cars. Saving up more chips in 2020, 2019, or 2018 would have only resulted in fewer cars being built compared to today.
In real life, one could build dashboards to measure and alert on rates of buffer depletion to anticipate and fix bottlenecks before the buffer runs out.
In factorio, setting up some cable, chest readers and an alarm - but Factorio unmodded can't alert on rate of chest depletion IIRC.
> In factorio, setting up some cable, chest readers and an alarm - but Factorio unmodded can't alert on rate of chest depletion IIRC.
Unmodded can do it for sure. All you need is a clock and a divisor circuit.
Clock circuits are a constant circuit (+1) applied to a flip-flop, so that the flip-flop counts +1 per tick. (+60 per second).
With a second flip-flop circuit, you can read-and-save the looping time. You subtract the saved time from the current clock to see how much time has passed.
You have a 3rd flip-flop save the value of the chest, and calculate (chest - (flip-flop of chest) / (current-clock - saved-clock)).
Blast that value onto a decider circuit (X > Y) hooked up to a simple alarm. Bam. Fully vanilla factorio solution.
I'm not proposing we cut off Hospital / school funding to make our mega-dense utopia with maximum tax $$$$ per population here. (Yes, I too have played lots of Sim City. I'm well aware of the unrealistic corners of the game).
I'm simply pointing out that Factorio has a factory-like system that has the "buffering" problem innate to the game mechanics. As far as I can tell, the problem of buffering in real life is closely modeled by Factorio correctly.
Sim City is on the unrealistic side. But Factorio / Hearts of Iron / OpenTTD seem to do a good job of making the "real world issues translate well into a game". I think most people would benefit if they played those games and learned from them.
I'm making the general point that results from optimizing for any model are going to depend entirely on the assumptions baked into the model. I haven't played Factorio, but based on your description it sounds like it leaves out price signals because the player has omniscience. If a supply chain is directed by a centralized entity, then yes, keeping intermediate inventory doesn't do much. But our actual economy is based on distributed decision making coordinating through price signals. And so what inventory buffers allow a company to do is see that an in/out buffer is getting depleted, and then gradually raise bids/prices to compensate.
FWIW I think there's way too much discussion focus on the keeping of inventory, as it is just one of many ways that the system can have slack. Things like having some extra machinery so it's not all running 24/7, having enough employees so that there is no overtime on a regular week, or treating your employees well so that they'll go the extra mile - these are all ways that production can be ramped up quickly when needed, that don't exist if a business is trying to optimize every last bit of short term profit.
I agree that more people should learn system dynamics and modeling though, whether through games or otherwise.
In Factorio, the part where the human "interacts" with the factory is given a name, called "The Mall". (You ship all of the products that the human intends to use to a central location).
You do have a nominal amount of supplies buffered up in the mall, but only as much as you ever expect the human (ie: yourself) to ever use at any given time.
Let me discuss the Belt hiearchy. Belts are used to move items around the factory, but are used relatively unpredictably.
Iron makes gears. Iron + Gears make Yellow Belts (slow). Yellow belts + Gears make Red Belts. Red Belts + Lubricant + Gears make Blue belts (fastest belts).
Lets say you're at endgame, so you'll only be using blue belts (very expensive, but useful to the human to have fewer "SKUs" so to speak to think about. Yellow/Red belts save on material but blue belts are best, so you end up just "eating the cost" in most cases).
There's really only one item you should buffer: blue belts. All other components (gears, yellow-belts, red belts, and lubrican) should be made on a "just in time", 0-buffer solution if at all possible.
Yellow-belts and Gears are furthermore used in other items: such as underground belts, splitters (for belts), or inserters / assembly machines / automated turrets (gears). Buffering up gears "at your belt factory" starves your other factories (ie: buffering up 1000 gears at the belt-factory means that your turret-factory will be starved and idle)
It only takes like 2 hits for a biter to destroy your chests (aka: buffers) and everything inside of them.
If anything, buffer-free is more resilient than buffers when we think of the biter attacks. But this is a "gamey" aspect of the game. Not really representative of real life. (Its not like the items inside of a real-life warehouse just disappear into /dev/null under random circumstances)
All well and good but no company ever had multiple years of stock and in most cases you had more stock of some things than others so companies might have felt the bite later but they would still have felt it.
Lean manufacturing isn't just about minimizing book inventory and cash tied in inventory. It helps keep production flexible and responsive, and helps identify bottlenecks and inefficiencies. And it reduces risk -- a car manufacturer holding several months of chips is going to lose that investment every time its chip stock gets obsoleted.
I expect that increasing buffers of material work in progress to levels indifferent to the current mess would be very expensive, very risky and have all sorts of secondary effects.
What I am curious about is if the unrealized gains tax will lead to more and more company boards being run by massive retirement / hedge funds such as black rock. All these companies will then be essentially forced to the ROE / share price over all model as all the BlackRock's of the world care about is share value because that's what their customers want from them. When that scenario is combined with a massive economic shock, what happens?
What comes to mind is The Big Short. That is, following the herd - to the point of negligence - is an advantage, until it's not. Where and when did Wall Street and Finance get the reputation as geniuses? What's so genius about rubber stamping herd mentality ideas?
That aside, have there been any winners? Companies or industries that were less RoE driven? Or does the economy completely lack "bio" diversity?
Really? Forced shutdowns -> things not being made -> not enough things...
It's basic supply/demand. If demand stays the same but supply is interrupted, production needs to increase for the same amount of time just to satisfy the demand that went unfulfilled. If supply is interrupted and 'reopening' simply means going back to initial production, you'll always be playing catch up.
It's not that simple. Modern (just-in-time) practices have created a situation where a single change in customer demand leads to widespread supply shocks.
Take a look at the beer game[0] for a smaller version of real life.
That's what happened here - lockdowns led to a single change in customer demand for a wide variety of goods both on the personal side(more people at home -> snacks, food, toiletpaper that would have been used up at work started being needed at home), and on the commercial side (no people in the office: no ongoing bulk papertowels/toiletpaper/vending machines/office supplies).
The goods stuck on ships waiting to be unloaded don't help the overall situation. Containers sitting loaded on ships and ships waiting in an anchorage are containers and ships that can't pick up newly manufactured items elsewhere.
It's fallacious to suggest that 10% capacity everywhere would have abnegated the supply chain issues.
That said, shipping in particular is problematic in how they externalize costs. They can get away with shenanigans because they use international loopholes etc..
I say we need to dump this 'flagging in exotic country ABC' and require that any ship landing in country ABC has to abide by all the regulations of ABC.
What? If this is manipulation then I'm a manipulator as is every other parent (and teacher, and every customer service worth their salt) aren't we?
Yep, we simplify. Yes, we tell stories. We don't lie. (No, teaching Newtonian mechanics without mentioning Relativity isn't a lie, and neither is simplifying the container explanations until even bureaucrats can understand it ;-)
That said, having
1. seen the email that circulated with my customers ten years ago about how container ships transport goods from Asia to US and American air back
2. and having recently listened to "The Goal" by Eliyahu M. Goldratt
I've heard Ryan speak at a dozen or so company meetings. He's genuine, knowledgeable, and has a long term focus not just on Flexport but on the whole freight industry and the global economy.
I'm not saying he's right about everything, but trusting his integrity and industry knowledge is a very safe first step.
Seriously, it's looking like he pretty quickly is looking to start an influence/propaganda channel.
Following the exact same playbook. A bunch of easily agreeable "Rah, Rah bad Wall st. Short term over long term bad" to get everyone nodding, then an incredible leap to push his actual argument.
This guy is falling very quickly from "interesting how he got that thread picked up everywhere", to "somethings fishy here".
The logic presented is "The cause for the port slowdown is a future policy proposal I want people to oppose."
Obviously he isn't literally saying that, but that's the logic path he walks the reader down.
This is communication 101. If you start internalizing that form of storytelling, you'll see it everywhere - literally all of our public discourse has this structure, from the Build Back Better plan to "Immigrants are taking our jobs" to "Flatten the curve" to the right-wing school-board stuff to fluff pieces on local restaurants to top-ranked HN comments. It's so prevalent because it works - it taps into fundamental cognitive & emotional biases that humans hold, so the ideas that spread are the ones expressed in that form.
If you want to be rational about this, judge the plan (and this one too) on its own merits rather than on the fact you're being manipulated. You're being manipulated - you are always being manipulated, every time someone communicates with you, and you can't escape that. It's good to understand how, but then your job is to tease out the rhetoric and understand the underlying proposal enough to judge it on its own merits.
While this answers the question of why we couldn't respond to the bottlenecks, I guess I'm still missing the piece of what caused them in the first place. Like sure, "this silly little global pandemic thing" but it's not really an enlightening answer without more detail as to what the pandemic caused that shocked the system.
Basically - complex systems behave in complex ways. When you have a small shift in consumer demand, it gets amplified up the supply chain, such that you need potentially big shifts in the production of intermediate components. We had a big shift in consumer demand. The supply chain basically can't cope, and so we get chaotic behavior until consumer demand normalizes and revised sales forecasts get propagated up the supply chain.
People were locked down so they stopped spending money on services (hotels, restaurants, travel, massage, etc) and instead bought more goods. This happened at the same time governments printed trillions and pumped it into the hands of consumers and businesses. The result was a 20% surge in container volumes, which our supply chain infra just wasn't ready for.
As well as rolling labor blackouts as factories had to shut down (repeatedly) because people got sick and they couldn't risk everyone getting sick. And distribution centers. And retail. Etc etc.
Since a bottleneck implies a vessel with fluid passing through, I'll stay with that analogy. There's actually no bottleneck; the pipe is basically the same size as ever. (Actually just slightly smaller because of capacity that was destroyed, rather than taken temporarily offline, during the slowdown.[0]) But the pipe in the first place was only exactly as big as it needed to be, because of the "maximizing ROE" stuff he mentions early in the thread. So when the fluid volume suddenly expands (slingshot effect following the slowdown), the whole system becomes a bottleneck.
[0] Capacity destruction: "Nobody's buying our stuff, we can't afford to keep this one ship/plant/facility/machine running anymore or we'll go out of business." But since every other player in their industry who might've bought it is in the same boat, maybe they're forced to sell to a scrapper, who promptly disassembles the ship/plant/facility/machine. I got my house this way. It was a rental property owned by a company that could no longer afford to keep it, so I bought it, took it off the rental market, and thereby slightly reduced rental capacity in this town. Compare this to an airline temporarily parking a slew of their planes in a densely-packed parking pattern at an un-busy airfield near a nice runway.
In normal times, people mostly shrug off biological transfer with other people. Maybe you avoid the odd symptomatic person who comes to work anyway, but you don't act as if everyone else is trying to get you sick. This allows for close working conditions, less sanitary practices, etc. The pandemic invalidated this assumption, requiring workers to become less efficient in response. This is the fundamental dynamic - the secondary effects of denial/overcompensation created additional problems.
It also didn't help that everyone was expecting an economic slowdown, and then the government gave trillions of dollars to corporations to juice the stonk market. The resulting price signals induced a ton of aggregate demand for production capacity that simply wasn't there.
Have you seen the YouTube video where a waterwheel [1] demonstrates predictable behavior under one set of conditions, but with a small change, the system moves into chaotic behavior?
I figure the supply chain is like that. Under certain conditions, JIT is fine. Given sufficient disruptions, the system descends into chaos. Note that we have humans in the loop, too, so expect non-linearities.
I can speak from a trucking perspective. it was a cascade failure for professional drivers.
when covid first hit, supply chains either had too much or too little almost instantly. Things like raw supplies based on JIT ordering either ground to a halt because demand died and so did the modelling, or because demand was too high for the computer model (think a bell curve.) low-boy trucks shipping things like construction equipment and preform concrete werent affected as governments in most cases stepped in with works projects to keep people employed, but trucks in the supply-side chain of things like toilet paper and frozen pizzas ran into trouble in almost the first few hours of the pandemic.
It helps to keep in mind all these things in JIT are connected. they work like a slinky, and anything that holds up the line will only amplify problems later.
frozen pizza is the best example. for example if things like bell peppers and onions could be delivered, but dough could not, then trucks for dough would idle in the yard until their yard-pay expired and they moved to the next job. yard-pay is the money you earn idling after X minutes in a lot waiting for a hookup, and it can be rather substantial. Anyhow, once dough can be shipped again, peppers cannot because the peppers have spent too much time in transit and now theres loss. pepper trucks then go offline for cleanup and you have too much dough and surprise, the onion trucks just automatically dropped you as a customer because you didnt meet a monthly required minimum.
this doesnt even cover the hell of intermodal port shipping. containers full of perishables rot because cranes are frantically unloading COVID masks, and now those containers are offline for cleaning. containers full of COVID masks cant be unloaded because theres a backlog of Hydrogen Peroxide for a floor tile company in Sheboygan that went out of business eight minutes ago due to shipping constraints, and if its not unloaded and chilled the entire port will explode into flames. in the yard, eighty-one trucks have been on yard-time for nearly 3 hours and a third of the trucking companies paying that yard time will be bankrupt because of it by the end of the day, but they have no choice. Trucks and drivers that went unpaid for weeks are now just taking up lot space until someone figures out how to remove them and the city will likely have to foot the tow.
Later in COVID as cities enacted mass casualty plans they basically absorbed any and all refrigerated 53' trailers they could find as a temporary morgue. now it doesnt matter how many pizzas you wanna sell, the toilet paper company has bought up all your transport market and the city just left you with no refrigerated trailers to use. Once cities are done, you generally scrap those trailers as they cant be used for food again.
Finally, you have trucking firms that went belly-up during the shutdown for any number of reasons, including over-leveraged in JIT style software or a single customer. these truck drivers either left the job to do something else because professional driving is a pretty thankless gig, or retired because the average age of a professional driver is in the 50's. now that we need drivers we have no one to perform necessary training, so it doesnt matter how much cash we throw at highschool kids.
yard conditions also play a role. factories that manufacture bacon might be running at 10% capacity due to covid infections, so trucks show up and idle because the past 3 logistics managers either died or went home sick and nobody in the front office knows what to do. these factories cant or wont shut down because theyre considered supply chain critical (s/bacon/disinfectant/), with "hero" workers and whatnot. shipping companies might also decide to drop you as a customer due to insufficient COVID precautions or an overwhelming amount of COVID infection.
>it was a cascade failure for professional drivers.
California ports suffered from AB5 and EPA rules more than other states, and with California controlling like 40% of the containers, they shot themselves.
Older trucks banned on roads and ports (CARB) and Owner Operator trucks (AB5) gig workers banned, they relocated their llc's outside california to keep their businesses running.
The CA EPA/DOL CARB rules also expanded fire seasons, as older logging companies closed down due to the state not renewing licenses on trucks. Mom/pop companies couldn't afford to buy very expensive trucks, new engines, or licenses. Less companies logging = more fuel.
CA just banned gas generators, as most construction sites use them power their tools. Work arounds will be people buying ford f150's with onboard generators as a quick work around, and most likely will raise costs even further.
Rules and heuristics built for normal times and a specific set of expectations and constraints fail when those expectations and constraints are no longer valid.
Odd, that.
In my household, we started making our own pizza, from scratch (save canned / bottled Pizza sauce). Flour keeps and is shelf-stable. Most toppings survive refrigeration. Those best served fresh are bought as available, menu rotated as needed.
If your supply chain can't guarantee delivery of complex sets of fresh time-sensitive product, drop constraints such that the product mix is less time-sensitive. Sourdough substituted for dry yeast, unavailable at any price.
(This works well at the household level. It works less well at industrial-scale production where flexibility is greatly reduced.)
> Sheboygan that went out of business eight minutes ago due to shipping
Even before covid I used to read about consumer companies that have a shipping problem right before Christmas and go out of business. So I can believe that shipping problems on a scale this large will take time to fix. Thank you for your comment.
When the climate crisis begins to hit, this kind of a system will rapidly collapse the world economy way before climate change even starts to wipe humans out.
I propose YC create a series of clases on business and economics.
Every time I read through a business discussion on HN I cringe. The lack of understanding is, at times, astounding. And yet everyone thinks they "know" what's going on and base a bunch of conclusions and opinions on exactly nothing.
Sometimes I wonder how it is that people rationalize having these opinions and reaching these conclusions when it is obvious they have not taken a single business class and they have never run a non-trivial business.
I hate to bring-up Dunning-Kruger. Yes, I know, some call it controversial. OK, I won't. I'll call it "talking out of your ass". Because, frankly, to someone with real business experience, this is almost exactly what it all sounds like. People talking about stuff they know nothing about. Not sure why some feel compelled to do that, yet, they do.
If you are a software developer, imagine someone posting a bunch of opinions on a relevant subject and you instantly knowing they have no clue what they are talking about. I don't know, scaling Django. Pick anything you really know and imagine a person "talking out of their ass". Well, that's what it looks like in these business/economics discussions most of the time. You can count the number of people who actually know what they are talking about with one or two hands most of the time. The rest is noise.
I don't know where it comes from, but it is in a range between funny, silly and sad.
I think this misses a lot. I suppose it's because it has to support the pro-billionaire-founder conclusion.
First: monetary policy. This was half the shock, not just the pandemic - it was on a scale similar to World War II. In hindsight, you can say that the pandemic was a signal to increase production, but that's a bit ridiculous. If vaccines took longer, if governments didn't spend more than WW2, we would be in a much different situation. Not to mention all the retail bankruptcies that happened anyway.
Second: structural changes in the labor market. Huge numbers of Baby Boomer retirements [1], for example, which disproportionately affect the sorts of manufacturing and transport jobs that are relevant here.
Third: operational effects. Lots of spare capacity can mean operating at normal rates after accounting for things like social distancing, quarantines, and government forced shutdowns. Examples include mass factory closures in Vietnam the last few months, huge outbreaks at meatpacking plants, forced quarantine of air crew, and Amazon employees waiting taking 20-60 minutes to pass screening before work.
Once a stable dynamic system goes out of whack due to capacity constraints, there is a chance that it goes into an oscillating mode, even when the capacity is returned.
If this is to happen with the distribution system, we'll have to deal with the aftermath for years to come.
Author argues that a wealth tax will encourage short-term over long-term growth. But a wealth tax is also a disincentive for public ownership. And some argue that short-term thinking prevails to satisfy the whims of the public market.
This is also why cyber security and infosec has been avoided, ceos don't want to spend the money, until something bad happens and they have no choice, and then its way more expensive to fix after the intrusion.
The interconnected supply chain is a headache right now, but on balance it’s still a good thing for the world if it prevents some country from starting a global war.
The global interconnected supply chain is a relatively recent phenomenon. It's far too early to make any claims about its ability to prevent physical war and so far seems to have created the necessity for fiscal and cyber war.
How big of a spike and a spike in what? Consider the size of the import market in its entirety and how much of a spike would be needed to disrupt it. Don't think more PPE is clogging up ports.
If service sector is and was disrupted by lockdowns it is logical that goods spiked in demand. Demand shifted from services/goods to only goods or only goods and little bit of services. I'm speaking about aggregate demand. Goods like consumer electronics, home appliance etc.
(I'm in the USA, so my comment is in that context)
It's very easy to blame this on various proxies for "capitalism" (like “return on equity”), but I think that misunderstands capitalism. It's assumed that capitalism prefers being "lean" or being "efficient" over alternatives, but it's actually circumstances that prefer being lean or efficient.
And when the circumstances change (such as when disasters or war or politics disrupt the supply chain), then other strategies might be preferred. So those businesses that have excess supply or who are able to manufacture domestically (or on site!) might have the advantage. And that will help keep products available to consumers and reduce the economic shock of changes in the circumstances we find ourselves in.
But when government decides to overwhelmingly favor "lean" businesses through policy, business incentives become perverted.
Here in Texas, businesses pay taxes on excess inventory. Its called “Personal Property Tax” and you are required, as a retailer or manufacturer, to render a value and consequently pay a tax for all of the property the business owns at the end of the year. That includes whatever inventory or materials you might own - so whatever you might be holding for reserves or disaster mitigation. So you are incentivized to make sure, at least on Dec 31, that you have as little excess inventory and supplies as possible on your sales floor or in your warehouse.
Government subsidizes overseas shipments, thus encouraging manufacturing and retail over domestic manufacturing and retail.
Government makes domestic employees and manufacturing very expensive (via wage minimums and taxes and regulation and so on) but does not extract tariffs on imported goods - especially lower-priced commodities. That makes it significantly cheaper to offshore manufacturing and warehousing and take advantage of cheap (slave?) foreign labor, environmentally harmful practices allowed by foreign government, etc. Don't get confused - I'm not saying we should have no wage minimums or employment taxes or regulations. Just that the government favors manufacturing and warehousing overseas to domestic manufacturing and warehousing.
So while there are circumstances that favor a business environment that is “efficient” and “lean”, there are tax and legal incentives that don't change as quickly as the circumstances do.
We've enjoyed a robust, dependable supply chain and robust economic growth for a long time. Lots of bad policy has taken root during that time. That bad policy is going to impede the economy’s ability to adapt to the sudden changes we've experienced. And we will all suffer for it.
> Only founder led companies and family owned businesses can stand up to the immense pressure from the dogmas of modern finance.
> The proposed tax on unrealized capital gains will force founders to sell larger and larger pieces of their companies to pay the tax, until eventually they lose control of their businesses and turn them over to the Wall Street sharks to run their disastrous playbook.
I agree with this argument. Love him or hate him, with a tax on unrealized capital gains someone such as Elon Musk would not have been able to drive Tesla to profits thus forcing the automotive industry towards EV's. Moreover, we would have fallen behind decades in the space race.
> Love him or hate him, with a tax on capital gains someone such as Elon Musk would not have been able to drive Tesla to profits thus forcing the automotive industry towards EV's.
Yes he would have. One, because there is a tax on capital gains, and he did; you probably mean an unrealized capital gains tax, but... Two, it is quite possible (and explicitly a motivation of the proposed law, so impossible for any honest critic to overlook) to borrow against public tradable assets, and if they are gaining value fast enough that a 20% tax on unrealized gains would significantly erode your holdings you can do so at interest rates far below the value growth, essentially without limit (that's how people fund lavish lifestyles without taxes on unrealized gains already), so he would be able to use that method to pay taxes without any dilution of ownership.
You think he would have doubled down on the risk? Perhaps, but I know it would have been another obstacle in the road for him. At what point does it stop being worth it for him? I do not like his social media antics, and hate to even bring him up as an example since I am tired of hearing of him. However, the guy works like a madman for goals that mainly benefit all of humanity to whom he owes nothing. History will look kindly on him and down on all of us that did so much to hold him back.
Edit: thank you for pointing out I missed the "unrealized" bit.
He's right to point out that the obsession with RoE is a big part of the problem.
He's wrong to suggest that the billionaire class and founders will solve the problem if we only trust them and let them keep their money. Founders have just as much incentive to optimize the excess out of the system, they just call it "disruptive innovation" by which they mean tweaking how the system works so that they can squeeze out profit for themselves.
Yep, the capital owning class just doesn't care if their businesses go into shock because they already have their cash in hand. They'll never go back to pre-ROE days because they'd have to live with less money and worse less control. While they still have personal reserves in the billions they can decide the fate of their ventures but if say 20% of their current cash was on the balance sheets of corporations with boards that don't vote their way most of the time then they're forced in the medium to long term acceptance of their policies. This isn't an argument for a return to traditional corporate power because they bungled so many things (GM and the rest of Detroit got their rear ends handed to them by the Japanese and their application of JIT).
Rather, it seems like to me the reliance of having a few owners or a few institutions with consolidated power in the form of money or assets is a recipe for disaster. If anything, it's time to disperse the wealth and responsibility of production to as many firms as reasonably as possible. I'd rather have 20 smaller companies making the same thing than 3 big ones that supposedly make them cheaper due to scales of economy which imo is wrong and that most big firms are in diseconomy of said scales now (prices imo reflect this). Basically, we need to both economically and politically Switzerfy the economy (more dispersed institutions, less central control where reasonably possible).
>Yep, the capital owning class just doesn't care if their businesses go into shock because they already have their cash in hand.
You do realize when we talk about jeff bezos being a billionaire, it doesn't mean he has his billions in gold/cash in a vault somewhere? The overwhelming majority of his wealth is tied in various financial assets (eg. equities) that certainly do get affected when "businesses go into shock". Sure, he'll be in a much better position to weather such "shocks", but it's still in his best interest to ensure that the economy doesn't crash.
>it's still in his best interest to ensure that the economy doesn't crash
Technically, yeah! Functionally, though, if the Even Greater Depression arrived tomorrow? He'd still be the richest man alive, and probably even more powerful than he already is right now thanks to how Amazon and AWS would get to take over more failing social institutions.
Sure, a falling tide lowers all boats, but Bezos will still comfortably afford his gigayacht. It's a setback for Bezos, and maybe he wants to avoid it in order to maximize profit and utility and whatever, but it's an existential threat to him in the same way spilling a glass of milk or losing a round in a video game are. Even extreme social unrest has been priced in, at however much a luxury bunker in New Zealand costs.
Other people, when the Big Crash arrives, will -- in a totally economically rational way! -- commit suicide in order to ensure their spouses and children aren't bankrupted by their medical bills. Uh, in greater numbers than they already do. Many will starve, or at least go very hungry. In greater numbers, I mean. Should be a good time for the owner class to buy up all the housing stock for cheap, too.
I don't think the owner class is worried about it. I think they actually might be excited.
None of this is the point, though. The point is that Amazon wouldn't have achieved what it has if Bezos was forced to slowly divest control of his company over the last two decades.
Bezos does not have his cash in hand, for the most part. To the extent that he does have cash in hand, he has already paid taxes on that cash. To the extent that he has not paid taxes on his wealth, he is fully incentivized by the share price of AMZN.
> Bezos does not have his cash in hand, for the most part. To the extent that he does have cash in hand, he has already paid taxes on that cash.
What a lot of high wealthy individuals are doing is using their portfolios as collateral against lines of credit. The LOCs give them cash to fund their lifestyle, and they don't have to liquidate their portfolios and take the capital gains charges (at least in the short-term).
Someone can have both holdings and cash in this situation.
This has been possible lately because rates are so low, so the interest doesn't cost borrowers that much.
Pretty sure many in the middle class do the exact same thing. That's the whole idea behind mortgages, auto loans, etc -- to fund consumption on credit and pay the interest with income.
I think a lot of middle class people roll over their debt, too, no? Say buying a new car when the warranty expires on the old car. Or buying a new house every 10 years (US average).
But I don't feel like digging around SCF data, so this is just a hunch. Having said that, my hunch is that middle class households are much more indebted than wealthy households.
> What a lot of high wealthy individuals are doing is using their portfolios as collateral against lines of credit. The LOCs give them cash to fund their lifestyle, and they don't have to liquidate their portfolios and take the capital gains charges (at least in the short-term).
> Someone can have both holdings and cash in this situation.
Ya, I understand this. This is exactly my point, though. If he's taken out loans against his shares, he is even more incentivized by the value of those shares than if he had not done so.
To the extent that he has pure (unencumbered) cash positions, he's paid taxes. To the extent that he has unrealized gains or loans against unrealized gains, he is incentivized by share price appreciation.
This was in response to the a comment suggesting that because Bezos had already cashed out, he didn't care about the value of his shares anymore.
For a billionaire it's not about the absolute dollar value of their wealth.
It's about the fraction of global wealth that they control.
That's how they benefit from crisis and catastrophe.
Maybe the dollar value of their pile declines, but the percentage of global wealth they control increases, as the poor and less wealthy get hurt proportionately more.
Don't they have to payback the loans at some point? And at that point do they not liquidate some assets to do so and pay taxes on that? (Serious question.)
You don't use all your assets as a collateral – you loan out, say, 1%, for the needs you have. If the creditor demands a repayment for some reason – and if you're still solvent, it's not like your IOU can't be treated as money in itself – then you can get a loan on some other 1% of your now-appreciated assets, use that to repay the first loan. All without liquidating any assets and accruing any “income”. Then pass the bucket to whoever inherits your assets.
You can presumably go a layer deeper and use the loaned cash to build an investment portfolio with a rate of return sufficient to fund your lifestyle, pay the interest on the original loan, and pay for the management of the whole thing.
> Don't they have to payback the loans at some point?
LOCs are often open-ended, so as long as they're at minimum paying the interest, the lender doesn't care. Presumably it will be cleared up eventually on death with the estate.
In large portions of the united states people who own homes have their property taxes go up most every year based on the value of their home. Seems a bit strange to me to treat, in this respect, peoples homes differently.
That’s because you pay those taxes in exchange for services from your municipality. And let’s admit it, it’s stupid that your payment is proportional to the value of your house. How is the city budget correlated with house values?
And they pay taxes in exchange for services as well. And it isn't stupid as if the cost was, for example, divided up equally between all residents a very large portion of them would be unable to live in cities due to the increase in cost.
I’m willing to bet he has more cash on hand than we will make in our entire lifetimes… what’s the point of arguing how much it is? the point is that he has so much money that nothing really matters.
The point is exactly what I said in the rest of the comment. He has already paid taxes on the cash he has in hand. The only assets he has not paid taxes on are the shares in AMZN that he has not realized the gains on.
Yes, but your property tax rate is a much lower recurring rate than the capital gains tax rate. In fact, a tax like that on unrealized gains would probably be a much better way to structure things. You pay 1% a year on unrealized gains until they are realized, at which point you can deduct what you've already paid. I guess this would be annoying to calculate, though.
You're right about that. My point isn't about his overall wealth, or whether it's socially good that he has it. A few comments up the tree, someone asserted that Bezos wasn't strongly incentivized by the value of his Amzn shares because he had already "cashed out", though. That's what I responding to.
Fortunately, you don’t get to decide that. Contrary to popular sentiment on HN, Amazon is one of the most favorably perceived brand by Americans, ranked top 4 in 2020. When you go against Amazon, you go against something that Americans like more than Netflix.
> When you go against Amazon, you go against something that Americans like more than Netflix.
That just gives more reason to go against, there's quite a few Western comforts that could use a bit more opposition, Amazon being one of them.
You're making the case that it is virtuous to be aligned with popular sentiments on issues, which is a position that dissolves any ethical or political principles in the name of conformity.
if you're measuring outcomes by relative income/wealth, then you can also argue that the "Even Greater Depression" wouldn't affect the average person either, because everyone would stay in the same place (on average).
>probably even more powerful than he already is right now thanks to how Amazon and AWS would get to take over more failing social institutions.
We just had a huge pandemic and recession. Did he take over "failing social institutions" did he "take over"?
>It's a setback for Bezos, and maybe he wants to avoid it in order to maximize profit and utility and whatever, but it's an existential threat to him in the same way spilling a glass of milk or losing a round in a video game are. Even extreme social unrest has been priced in, at however much a bunker in New Zealand costs.
Surely he'd prefer to be the leader of a global megacorp, travel anywhere in the world, partake in various space-related adventures, and not be trapped in a bunker? You're right he won't ever have to worry about his basic needs, but I wouldn't characterize it as "spilling a glass of milk or losing a round in a video game". I'd be pretty pissed if the US government somehow revoked by right to leave the country.
>Other people, when the Big Crash arrives, will -- in a totally economically rational way! -- commit suicide in order to ensure their spouses and children aren't bankrupted by their medical bills. Uh, in greater numbers than they already do.
I'm not sure why this is being brought up, other than for the shock value.
>I mean. Should be a good time for the owner class to buy up all the housing stock for cheap, too.
Similar to your fears about amazon taking over, this seems to be unsupported by the data. The great recession lasted from Q1 2008 to Q3 2009, according to the fed. However, this doesn't seem to correlate with institutions buying up houses?
>I'm not sure why this is being brought up, other than for the shock value.
I suspect that you don't understand why I'm bringing up the human consequences for the same reason you've claimed that "the "Even Greater Depression" wouldn't affect the average person either, because everyone would stay in the same place (on average)". Bezos and his peers can lose hundreds of thousands of dollars of abstract net worth every day for decades before they even notice, let alone have the material conditions of their lives change in the least; the modal person will be dead of exposure in a few days. It's somewhat incredible that you'd even try to make the argument, actually.
>Surely he'd prefer to be the leader of a global megacorp, travel anywhere in the world, partake in various space-related adventures, and not be trapped in a bunker?
Aww, shucks, I'm confident Bezos will be able to continue his worldly lifestyle until things go very poorly indeed. That said, the very existence of the owner class's anxiety-bunkers is a sign that they're not entirely behind keeping the global economy running and serving the people, don't you think? If there's only one escape pod and it's for the command staff, only us crew need suffer the consequences of their tactical decisions.
>I'd be pretty pissed if the US government somehow revoked by right to leave the country.
I never mentioned this, and I'm not sure what relevance this has to anything either of us has said. I'm beginning to believe you're not arguing in good faith.
>Similar to your fears about amazon taking over, this seems to be unsupported by the data
AWS didn't even need a pandemic to achieve running most of the DoD. Not sure if you've been following the housing market, but Zillow didn't need an economic crash to go all in to rent(al)-seeking behaviour. At least they seem to be dropping the ball on that one, but think of how much more effective buying up all the houses will be once everyone's underwater on their mortgage and unemployed? I'm also a little surprised that you'd show me a chart that shows that this historical low of landlord house purchasing represents a fall to 20%. Since you're so familiar with CoreLogic's data sets regarding this, I'm sure you're aware that in 2000 it was between 5 and 10%, and trended upward until only recently. Unsupported by the data, my eye; you're just closing yours to the important parts of the story.
>The great recession lasted from Q1 2008 to Q3 2009, according to the fed. However, this doesn't seem to correlate with institutions buying up houses?
The other way to phrase this, of course, is "having ballooned in the past eight years, the proportion of home sales to landlords snaffling up housing stock continued to rise, even during an economic crisis, and rose precipitously after the crisis was 'over'".
> He'd still be the richest man alive, and probably even more powerful than he already is right now thanks to how Amazon and AWS would get to take over more failing social institutions.
Bezos isn't even the richest person alive today. That would be Musk.
Feh, you're right -- I hadn't looked at the leaderboards lately. While that mistake makes me look stupid, I don't think it detracts significantly from what I was trying to say.
I guess my read is that if Bezos got his title from a company that didn't exist, in modern, sell-everything form, until 22 years ago... (and in +AWS form, until 19 years ago)
And if the current holder got his title from a company that didn't have a physical product until 12 years ago...
It's probably a bad bet to say "Obviously, these people are going to be the richest forever."
>It's probably a bad bet to say "Obviously, these people are going to be the richest forever."
Obviously, but again, the point isn't who's at the very top of the leaderboard. The point is that the material situations of the top, say, 500 richest easily allow for what we plebes would parse as insane economic loss in real wealth, and they'd be basically OK with it. Perhaps they'd no longer be in the top two digits, but they have only really lost in the sense of a high score, not lost in the sense of total dispossession and now your life's over.
If SpaceX was somehow destroyed, reputationally and materially, Musk would still have Tesla, and all his other ventures and economic instruments. Likewise Amazon could go belly-up due to a sudden locavore craze and a drone uprising, and AWS would continue making money hand over fist. My point is that the owner class is thus not actually seriously incentivized to prevent an economic crash, and in fact their apocalypse-bunkers indicate that they're pricing in the clearly non-zero chance of it happening.
Lastly, the numbers you're using about the ages of these mega-corps? Good point about that -- the Hudson's Bay Company once owned more land than any other company ever, acted as first contact to uncontacted Natives, and now they are a department store. That said, I don't think Amazon or Tesla will fall from grace in the near term. Blithely assuming that the HBC, like many a corporation, would have a 20 year lifespan or even just wane in power in 20 years, would have been a bad bet in 1700.
He didn't seem to freak out then and kept chugging along.
Short of the (zombie) apocalypse happening, I doubt it will ever drop that much again, and so I doubt Bezos would care about any kind of draw down that could realistically happen.
Genuine question: 2020 feels like the biggest shock to the economy in a while yet it was one of the best years for most big businesses. If Jeff Bezos didn't feel the shock from 2020 then when will he feel the shock?
This shock benefitted the particular industry in which he invested. A different kind of shock such a total internet meltdown for anything but basic services, would render his wealth down to just a couple billion while other billionaires would win the top position.
How does this have anything to do with the claim that it was "best years for most big businesses"? Do "most big businesses" do better when that happens?
There were two quantified subjects in the quote you referenced - "biggest shock to economy" and "best years for most big businesses". My guess is he was replying about the first subject.
You mean how S&P 500 was up 35% compared to the start of the pandemic? That's more of a reflection of the stock market getting inflated 35%, than the constituent companies getting 35% better.
It should not be a shock that a company that provides a wide variety of goods delivered for relatively little money would do well during a global quarantine.
There was an article yesterday pointing out the perverse incentive that freight companies have to allow the supply chain problems top get worse.
If you own a shipping port, it's in your best interests for thing to get worse right now and not better. You end up being able to charge premiums to jump queues, and end up making more profit by doing less work. Those guys are incentivised to ride the crashing economy all the way to the bottom, and not to lift a finger to slow it down.
And Bezos might be as well. Amazon quite likely could profit handsomely off a freight crunch that sees container prices go through the roof. There are very few retailers or wholesalers who'd have the bargaining power to get those queue jumping premium services for lower prices than their competitors, and when Amazon Prime becomes the only way to buy manufactured goods out of China, they can push the margins higher that other importers who either can't negotiate rates the way Amazon can, or who just can't get stock into the country at all.
My point is not to nitpick (I actually agree with your post) , but to show that even in a tiny country like Switzerland (smaller than Chicago), it is hard to do that.
No, my point about Switzerfy is to mean that we need to distribute power and assets more evenly just as the Swiss distribute power more evenly politically. We've left too much to float to the top of the economy where those who have enough wealth which they can roll over interest with little effort on their part.
> GM and the rest of Detroit got their rear ends handed to them by the Japanese and their application of JIT
GM and the rest of Detroit got their rear ends handed to them because they'd underinvested in fuel-efficient engine designs (the lost 70s) and grown lazy in reliability.
Lean manufacturing may have allowed Japanese manufacturers to price more competitively and be more agile, but at the end of the day, they increased their sales because they made better cars.
>"GM and the rest of Detroit got their rear ends handed to them because they'd underinvested in fuel-efficient engine designs (the lost 70s) and grown lazy in reliability."
You're leaving out some pressures which caused Detroit to be un-competitive in the small car space, including high labor costs.
I owned a 79 Ford Mustang in 1986. By 1988 and 88k miles the engine was shot because it was an underpowered 2liter 4 cylinder with a turbo. Detroit was uncompetitive because they made sucky cars. To this day I haven’t owned another Ford and never will.
R&D in 20 small companies is less effective than in 3 big ones due to less diverse teams and more inefficient double spending, e.g. twenty $5M microscopes utilized at 15% versus three at 90%.
If only we could overcome the negatives of the bureaucracy of a large company with a mere double-spend on equipment. It would be cheap at 10x that price.
The whole point of the startup culture is that they can do things better than a large company.
And, quite often, they can. But not always.
A semiconductor plant, for example, is not a startup thing because the capital cost is so gigantic.
However, most fields are not that bad. Even bio equipment just isn't that expensive relative to the cost of the people to use that equipment.
The bigger problem, right now, is that investors don't want to fund anything which requires more than 18 months before flameout/unicorn. That blocks startups that have a 5+ year horizon.
Inflation generally helps big business and its owners. They get to raise prices, and they usually get to raise prices more than the average firm does because they have little competition. You're seeing this now with record-high corporate earnings.
As long as the capital-owning class is holding equity (stocks, real estate) they benefit from inflation.
> Inflation generally helps big business and its owners.
I'm not sure that follows in extreme cases. I don't even think it follows in baseline cases (2% inflation yoy).
Raising prices leaves customers with limited resources, as wages do not follow at anywhere near the same rate.
If inflation brings prices up, consumers can only spend on specific items, prioritizing necessities over entire verticals of goods. For the vast majority of companies, it's bad.
That effect is true, but the vast majority of big (top-100 in S&P 500) businesses are in relative necessities. That's how you get to be big: position yourself as a critical component in a key consumer value chain.
Take a look at a sampling of the top 50 or so companies by market cap. There's computing & telecom (Apple, Google, Facebook, Microsoft, NVidia, Intel, Comcast, AT&T, Verizon, Broadcom, Cisco), which is fundamental to obtaining products & services these days. Retail (Amazon, Walmart, Costco, Target, Home Depot, and Lowe's). Financial services, necessary for paying for things (JPMorgan Chase, Wells Fargo, Visa, Mastercard, Bank of America). Critical enterprise software (Oracle, Salesforce). Health care (United Health, Johnson & Johnson, Eli Lilly, Pfizer, Abbott Labs, Merck). Oil (Exxon and Chevron).
Of the top 50, the only ones that I think would be seriously vulnerable are Tesla, Netflix, and possibly branded foodstuffs (Coke/Pepsi/McDonalds). Sure, it'll be devastating to the vast majority of companies - but it's companies like restaurants, niche hobby stores, luxury activities, etc, not the staples that make up the S&P 500.
> Yep, the capital owning class just doesn't care if their businesses go into shock because they already have their cash in hand.
Billionaires have relatively very little cash in hand. Their billions typically are in form of business equity, and so they very much care of the businesses go into shock.
“ In 2014, for example, Oracle cofounder Larry Ellison disclosed he had used 250 million of his Oracle shares as collateral to secure a $9.7 billion personal line of credit.”
I would not call that 'cash in hand'. I get why you see it that way but to compare it to the little guy:
A credit card with a $5000 limit is not $5000 cash in hand. It's a 'line of credit' for $5000 and whether I actually have the cash to pay that back is a different story. I might actually have $0 cash in hand to pay that back and many people don't until their next paycheck arrives.
Any guesses how far the Oracle share price (of ~$100) has to drop before the bank will actually use that collateral to get their cash?
That's where collateral comes in. I guess the credit card analogy only works in the likening it to cash aspect. For the other aspects a mortgage might be a better analogy.
The little guy had cash in hand for maybe 24 hours (and even then probably just a certified check). Maybe a little later, say 10 years in they get a home equity line of credit and the bank takes back the previously paid off part of the house as collateral again.
I don't doubt repossession of the little guy's house is easier and happens more often than a Bezos loosing his collateral :) and for every Bezos there are probably quite a few small and medium business owners that put their businesses as collateral to get that line of credit and that did get repossessed.
Which is kind of to the point, they have more money on hand than a small country’s budget and even if they lose it all it almost doesn’t make a dent in their net worth.
In this situation it is almost reasonable to want a small crisis to shake out your upcoming competitors and buy some more land or other things of real value at a discount.
> Which is kind of to the point, they have more money on hand than a small country’s budget
They don’t, though, that’s the entire point.
> and even if they lose it all it almost doesn’t make a dent in their net worth.
> In this situation it is almost reasonable to want a small crisis to shake out your upcoming competitors and buy some more land or other things of real value at a discount.
A small crisis will in fact not cause them to lose significant amount of cash, but will cause them to lose significant amount of their net worth. Nobody wants that.
Unless the billionaire in question is extremely vain, they should absolutely want some of their paper wealth to vanish temporarily since it is an opportunity to accrue more real value stuff at a discount for those that have large amounts of either cash or cash equivalents on hand.
All of their paper wealth will appear again in the next upswing.
I’m not sure this is the case. The problem is that RoE is a metric that can be gamed for short term gains while incurring long term risks. This is more likely to be an issue with short term career-oriented leadership. Founders are more likely to have a concern for the long-term success of the business. Simply put, founders are not the people sacrificing their own companies’ long term success in exchange for enhancing their personal careers.
A lot of the JIT fashion came from Toyota, and yet Toyota doesn’t seem to suffer from these issues as much as others. I don’t think it’s any coincidence that most of the senior executives of Toyota have all been at Toyota for longer than many of us have been alive, and that the company president is the grandson of the company founder.
Toyota has over the years adjusted how their JIT operates, and are now known to stockpile certain critical parts.
This is pure speculation, but I also wonder if Japan’s geography + slightly more diverse economic landscape (lots of small businesses that do nothing but make components) help make their JIT more resilient to shocks. With Osaka, Tokyo, and Nagoya all within an area less than the length of California, it’s far easier to “in-time” material.
Toyota became significantly less JIT after the 2011 earthquake and tsunami, which severely disrupted their supply chain. That said, JIT involves many useful lessons for organizations with higher inventory levels as well.
JIT works just fine with stuff that's simple to make or close by geographically. Car seat covers? Many textile firms around you? Sure, do it JIT... if one of them fails or gets wiped out by a tsunami, there are ten more than can take over the production.
Computer chips? Made only in one company in china? Trying to get someone else to make them, means weeks or months of production line changes + waiting time + other customers... good luck. If they're far away (eg. china), and the transport system is fucked up, you're basically fucked up too. Even a huge company like toyota can't make a chip factory "overnight" anywhere.
JIT works nicely in isolation--when everyone relies on it is when it starts to break down. It basically offloads the responsibility of forecasting your inventory needs to the supplier, who has absolutely no knowledge of your inventory needs.
This is exactly right. It's about the term length of incentive alignment. Most founders have a long term reputational stake in the company they founded. Hired CEOs generally do not.
I think a lot of people just read emotional language and turn off their minds. So let's expand out what you said to make it a bit easier for others to reason about what you said.
We're talking about founder owned companies owned by billionaires. So let's use an example of one: SpaceX. You're maligning "disruptive innovation" so let's expand out your claim with the specific example: an order of magnitude reduction in the cost of space flight and the introduction of competition in rural internet service.
So you're saying enabling access to other planets and the moon while providing people in isolated areas with internet service is an example of squeezing out profits and you're saying that you think it is rent seeking. Rent seeking is defined as an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs. We already had programs to access space. They were an order of magnitude more expensive. We already had programs to provide internet. They didn't serve well the subset of people that are in remote areas. So in both cases it just isn't the case that the company is doing rent seeking.
In other words, you are completely wrong when we use a specific example.
This applies to more specific examples. Lets use the specific example of Flexport. It is owned by a founder and you're replying to things posted by them so it's even less of a reach than before.
They are introducing computers to an industry that has competitors from the 1400s era. These competitors sometimes have legacy processes built on physical paper and for some of them excel is an example of the use of cutting edge technology. You're saying that doing better than that for people using modern technology is an example of rent seeking.
That part of the Twitter thread actually made me laugh out loud. In the middle of talking about how modern finance is messed up he has a kind of unprompted little aside about how “taxes are bad!!!”
Dear lord the amount of smug “wE aRe ThE mOSt EfFicIEnt wAY Of AllOCaTinG CaPitAl” arguments from very wealthy founders that would prefer to become more wealthy is frankly ridiculous. I get it, you went to Stanford and they taught you some fancy words to trick people into giving you money instead of investing in public infrastructure and services.
Especially since it's easy for founders of such large companies to sell their shares, but give themselves fewer shares with greater voting rights… thereby maintaining control while spreading the wealth.
> “wE aRe ThE mOSt EfFicIEnt wAY Of AllOCaTinG CaPitAl” arguments from very wealthy founders
"most" does a lot of work here since it's a relative term. I'm not sure I'd exactly call them efficient but I'm not sure there's a _more_ efficient way that I've seen.
There was a book published a couple of years ago (before the pandemic) which was "demonstrating" (so to speak) that going back through history real financial/economic levelling at a reasonable scale only happened as a result of violent means (wars, revolutions etc).
I think what those violent means do (among other, more nasty things like people getting killed) is that (in some cases) they obliterate the societal/institutional structures on which a specific rent-seeking system is based, which gives the majority of the people a chance to "level up" until a new rent-seeking system takes shape.
You don't need a book on economics to understand this. Just read some real, actual history books to see that after a war or revolution of any kind _nobody_ is better off. Start with the French revolution and just go over all of them in order. A hundred million people who died at the hands of the fascist or communist governments in the past century are, one would hope, a sufficient proof of that.
I think that many of us still believe that real, wide-scale economic levelling is still possible in normal times, there aren't that many history books that actively refute that (or at least I haven't read that many), that's why I mentioned that book and its conclusions.
No, it's Piketty's controversial book, one of his points was his analysis of historical data showed that the only time the ratio of wealth between capital and labour R decreased was during wartime, especially the two World Wars when incredible amounts of wealth was destroyed, seized or simply reverted to states because there was nobody left who could claim it.
This would be true if lockdowns didn't happen. As it is most of the wealth-owning class was told to shut themselves inside, isolate, then we got the vaccine and they manage to live on and keep their wealth. So not even plagues can save us anymore.
The obsession with RoE is really just a major form of efficiency. Having things sitting around unused is a huge reason that US car companies got their asses handed to them by Toyota and their TQM/LEAN system they developed.
People writing articles like this forget that it's not just Wall Street, but competitors who created the huge pressures for adopting JIT inventory systems. There's also the consumer. Are you willing to spend the additional money required to buy a car from a company who wastes tons of $ on excess inventory?
> Having things sitting around unused is a huge reason that US car companies got their asses handed to them by Toyota and their TQM/LEAN system they developed.
It didn’t help but I think that’s more of a symptom of building shoddy products: part of why inventory backed up is that Detroit was producing cars which simply weren’t as good. Toyota didn’t have a shortage of demand, and neither did Saturn. If you make shoddy, poor-handling gas guzzlers, yes, you’ll underperform on sales. That doesn’t meant the only option is less inventory.
There's an entire book (I've read it) about this called "The Machine That Changed The World" published in the early 90's. It goes into great depth as to the issues that were plaguing GM/Ford etc. The excess inventory was absolutely not driven by too little demand. It was simply inefficiency in the manufacturing process and inability to rapidly reconfigure the shop floor or reallocate labor towards bottlenecks.
The book is a deep, academic examination of the roots of lean production, and is a must read for any engineer who wants to get the Agile cultists to shut up and go away. I'm a hardcore believer in the ACTUAL Agile philosophy, which is rooted in lean, and I despise the cult of clerics that have risen up around it and turned it into management consulting BS. That book helps to know real agile from consultant billing hours agile.
I'm a fan of anything that is rooted in reality and has been battle-tested. If it's theoretical, I don't care about it. Toyota didn't will lean into thin air out of nothing. It was evolved, tested, and refined in the harsh economic realities of post WW2 Japan. Bullshit wasn't capable of surviving that environment, just things that actually worked.
A lot of the Demming types are pure theory, or just garbage in the modern age.
The Toyota system got a lot of attention in the DevOps world because basic principles such as empowering workers resonated with the movement. Reducing waste throughout the system doesn't get as much attention--given that computer software doesn't really have inventory as such (at least not literally)--but inventory/WIP reduction was an important motivation behind Toyota's system.
This. Also, the tweets complain about not having excess capacity due to the "obsession with return on investment", but that's really just an abstraction around the fact that extra capacity means using more limited real-world resources to supply people with the same amount of stuff - more land, more steel and concrete and construction labour and equipment to build the extra factory and shipping capacity that goes unused - which then can't be used for other things. The tweets frame it as though it's only finance types and investors that benefitted from this, but in reality everyone was better off in real, "what can I afford to buy with my money" terms due to it.
Indeed. It blows my mind how many intelligent, articulate, and privileged people in our modern society fail to realize how much their privilege insulates them from understanding the basics of supply and demand. Anyone who has ever worked on a factory floor, or a construction site, or even a kitchen (I doubt the tweeter has ever worked a job like this in their entire life) intuitively understands excess inventory as waste. They also intuitively understand that this waste translates to money needlessly spent earlier than it needed to be, or even worse, spent and then lost due to reality changing, demand shifts, etc.
It really feels like a lot of these folks go to university, embrace a quasi-religious ideology where large companies are the devil and are therefore the root of all things bad, and profits are a sign of greed. Meanwhile, the douchenozzle is sitting there writing that tweet on a piece of electronics that was made possible by the things he's complaining about.
I think his statement is that founder (and family) led businesses are the only businesses capable of building the shock absorbers necessary to weather hundred-year storms; not that they always will. By comparison, committee-appointed CEOs rarely, if ever, will, because they cannot.
It's not that they cannot. They don't have an incentive to do it.
If I'm being paid for my performance while I'm a CEO, why would I spend money today (and hurt my performance today) to fix a problem that MIGHT affect the company in 20 years
It just that it is more likely that founders genuinely care about their baby, so they have more incentive to make the company more resilient to long term risks. I don't think this is an absurd claim. It's not that every founder is the same, there are founders who behave just like most CEOs.
No, they literally cannot. Because if they try to, they will be fired by the board for failing to perform and replaced with someone who will undo their work.
Because you aren't actually being paid for your performance as CEO. You are being "paid" by increasing the value of the company you mostly own. Its up to you to play the long game or the short game. Ivy MBAs don't even have the option.
> He's wrong to suggest that the billionaire class and founders
What? How did you get billionaire class and founders? He specifically says founder led companies and family owned businesses. Unless you reduce that group to the Waltons, how does family owned businesses equate to the billionaire class?
"Only founder led companies and family owned businesses can stand up to the immense pressure from the dogmas of modern finance."[1]
You have it backwards. Rents are revenue accrued due to the ownership of a resource, such as grants, subsidies, tax breaks and loaning or leasing an asset. Optimising out excesses is minimising the holding of assets, so it’s directly antithetical to rent seeking strategies.
In the terms "economic rent" and "rent seeking", the concept of rent is not specific to assets. Rent paid to landowners was the original inspiration for the terminology, but in actual usage it refers to any economic behavior that extracts value without creating new value.
Notably, this usage does not include "providing liquidity", so most of what hedge funds and private equity do for a living is rent seeking, by definition.
So the parent commenter's usage appears to be correct... If it's any consolation, I was under the same mistaken impression as you for a long time.
It's not about whether something is immediately valuae to somebody... It's about whether the total net effect on society produces new value, or if it's just shifting value from someone to another. Per the overwhelming opinion of economists, providing liquidity is rent seeking, because the benefit it provides to one person is exactly offset by the value it takes away from someone else.
Liquidity is a service customers pay for. It’s not clear to me that’s unproductive work. More efficiently allocating capital can absolutely improve productivity.
Some activities classed as renty can be economically beneficial. It’s not all pure usury, but activities that seek to increase rent revenue without increasing the value provided are a problem and that’s the ‘rent seeking’ part. I’ve no problem with fair value rents, but rents should be as low as the market can reasonably bear as excess rents are essentially a tax on production.
I'm not arguing whether the definition is valid, just correcting the previous poster's misuse of some well-established economics jargon.
Re: Liquidity... The fact that a service is immediately useful to somebody (and has a willing customer) does not prove that it's a net productive behavior for the society, as a whole. That's just how the field of economics defines it, and the practioners widely agree that "providing liquidity" falls into that category.
Now, it sounds like you may be trying to defend the morality of rent-seeking behavior... If that's the case, I wish you good luck in your argument, with somebody besides me. I have no dog in that fight.
Car hire companies are built on a renting business model, but I don't hate Avis. I don't curse every time I need to hire a skip at the evils of the skip hire company. What am I going to do, buy a skip? Start a local skip share collective? As long as the 'landlord' or owner is improving the efficient allocation or utilisation of resources there really isn't a problem.
The real issue is when owners seek benefits of ownership that are not correlated with efficiency or productivity. For example grants and subsidies, inflation of rents though monopolistic practices or opportunism. In fact all monopolistic profit inflation is renty in a way, regardless of what the business model is, because it's extracting extra profits from simply exercising control of something in excess of the economic value provided. It's exercising the power of incumbency that's the problem.
Rent-seeking practices are not the same as a traditional Rent or Lease arrangement. They get the term because instead of buying a product that you know own and can do with as you wish, they still maintain control as if you were a renter.
A topical example is consumer electronics companies designing devices to only last so long and actively suppressing the after market through DRM, difficult or dangerous to repair designs, restricting owner autonomy through software patents and IP law and other methods to ensure you must come back to them and purchase another one.
Another more direct example is the slow conversion of all paid as a product software into subscription services. You can't buy the adobe suite anymore. You have to subscribe to it. Sooner or later you wont be able to buy your operating system either.
DRM is rent seeking through control of digital assets. Patents and IP law manipulation, yes also rent seeking based on ownership of IP assets. Software subscriptions again, no question, that’s renting access to a software asset or service. These all meet the criteria I described.
Designed obsolescence is arguable though. The customer could always buy elsewhere.
Anyway tye case I was replying to is not rent seeking. Leaner businesses may be more fragile, but they are also more profitable and productive. It’s just being paid to do work.
The billionaires' tax he mentioned is dead anyway, so that part of the discussion is moot. It was floated a couple of days ago as a possible addition to the reconciliation bill, but it's not in the framework announced this morning.
If I estimate a model to predict an anomaly using data that never has any realized anomalies, how well will that model do out-of-sample? While framing this as a bad unrestricted ROE maximization problem is a nice simplification, it's not clear that having everyone move to a restricted ROE maximization subject to keeping assets large enough to insure against some unforecastable shock is welfare enhancing. That could be a lot of wasted insurance.
I will give him credit for cleverly spinning this logic all into a pitch to kill the unrealized cap gains tax proposal!
>> He's wrong to suggest that the billionaire class and founders will solve the problem if we only trust them and let them keep their money.
He didn't say they'd solve the problem. He said they're the only ones who can be resilient in hard times. OK I think he said the ARE resilient, I say "can be" because it's still a choice.
"I think economists call it rent-seeking." That's what the incumbents are after, and so are a lot of the startups - at least the startups seeking round after round of investment. If they're not seeking rent, they're trying to set up infrastructure (manufacturing or cloud this-or-that) and collecting returns (rent) on that investment. Nobody talks about profit on goods sold, they talk about return on capital (or RoE) and that seems a lot more like rent.
The problem isn't RoE itself, it's the focus on short-term RoE.
You can juice RoE in the short term by removing slack and shock absorbers, because increasing the brittleness of the supply chain probably won't show up in this quarter's returns.
The supply chain for fuel is brittle. There isn't sufficient inventory in tanks to buffer even short disruptions. A pipeline offline for a couple days is enough to make a crisis.
People catch wind of the crisis and start filling their tanks at three-quarters full instead of one-quarter full, and the brittle supply chain breaks with the accelerated demand.
Same thing we're seeing with the global supply chain which was already brittle, now individuals and companies are putting in bigger orders sooner to compensate, and it fails in the face of accelerated demand.
> Founders have just as much incentive to optimize the excess out of the system ... tweaking how the system works so that they can squeeze out profit for themselves.
So do workers, to be fair. The goal of workers in purchasing departments and HR isn't to make the business more efficient but to propagate a cushy lifestyle for themselves and their mates.
To an extent, that same misalignment exists in all classes of worker, including engineers.
SWEs are probably the worst at this; so many of the problems that we solve don't have anything to do with squeezing the most performance out of the hardware or reducing technical debt. Instead, a huge chunk of our time is spent on man-made bullshit that sysadmins don't solve properly because otherwise they'd be out of a job.
> Founders have just as much incentive to optimize the excess out of the system, they just call it "disruptive innovation" by which they mean tweaking how the system works so that they can squeeze out profit for themselves.
>I think economists call it rent-seeking.
Are you saying all "disruptive innovation" rent-seeking? Or only certain kinds? If a founder was able to "optimize the excess out of the system" by providing a better consumer-facing experience (eg. amazon), why shouldn't they be rewarded with profits? Is there any room for profits without being called a rent-seeker?
There are genuine "disruptive innovations" that are not rent seeking, but by and large that is not what we've seen.
Picking on Amazon for a moment, their original "innovation" was a sales and use tax dodge: based in Washington, they were able to sell books to California without having to charge the relevant sales tax upfront. That margin gave huge room to provide free shipping and other customer conveniences. Technically customers were supposed to pay a self-reported use tax but many did not.
The relevant laws have changed since then, but the general point still stands. Does mere tax and legal arbitrage count as rent-seeking? Absolutely.
>Picking on Amazon for a moment, their original "innovation" was a sales and use tax dodge: based in Washington, they were able to sell books to California without having to charge the relevant sales tax upfront. That margin gave huge room to provide free shipping and other customer conveniences.
Sales tax in california was 7.25%. While not having to charge tax was a competitive advantage, I'm skeptical that was the defining factor that led to amazon's success. This is further compounded by how prices work in the US (taxes are not included), so I doubt this even made a conscious difference to most people. Finally, the exemption isn't limited to e-commerce sites. According to wikipedia, it includes "companies doing mail order, online shopping, and home shopping by phone". Why did amazon dominate while sears languished?
> Finally, the exemption isn't limited to e-commerce sites.
It isn't really an exemption, anyway, it is a limitation under then-existing federal law on the power of states to impose taxes.
> According to wikipedia, it includes "companies doing mail order, online shopping, and home shopping by phone".
That's misleading.
What it actually applied to, at the time, was companies without physical presence in the state into which the sale was being made. So companies that exclusively did those things would be covered (except in the State they operated from, but they could operate in a no sales tax state), but companies that did them alongside physical operations would not, and before the web, those other models alone had so much less access to customers that the sales tax hack wasn't worthwhile.
> Why did amazon dominate while sears languished?
Because while Sears also had mail order business, it was a ubiquitous brick-and-mortar retailer, and thus was paying sales tax on its mail order sales, because they had retail everywhere.
1. What changed with the internet? When amazon was started in the 90s, was the ubiquity of computer+internet access anywhere close to the ubiquity of the sears catalog?
2. I'm not really convinced that "the sales tax hack wasn't worthwhile". How expensive would it be to spin off your mail order division? Lawyers might be expensive, but 7.25% of your revenue is also a lot of money.
Someone could click a link on an ad and be on your “catalog” and able to order with very low friction, rather than seeing an ad, ordering a catalog, getting the catalog, then calling in or mailing an order.
(Also, Amazon was initially specifically in books, and got started just after a few giants like B&N and Borders had crushed local independent bookstores and replaced them with giant, discounting, but more impersonal and on average more distant from the customer big box stores, so they were hitting a market uniquely (or at least particularly) primed for a convenient to access heavily discounting remote seller; not only was the internet a sea change
Is this even still true in a super low interest rate environment?
Yeah in the 80s and 90s, tying your resources into inventory would have cost a lot in terms of missed opportunity to invest the money elsewhere. But with financing rates near zero or even sometimes negative in real term, wouldn't even the wall street guy be like: sure keep some inventory, cash is cheap right now.
Economists would say that companies are willing to accept higher risk, the 'return on equity' isn't the only driving force. The question here is who shoulders the risk, the company or the consumer. With JIT, the consumer may bear more of the risk. It may not be a bad thing either.
New companies aren't all trying to be rent-seekers, they also try to dodge existing regulation or actually innovate.
Yeah, this guy has clearly read about the theory of constraints but his pivot into criticizing the wealth tax on the basis "founders will lose control of their company" is simply bullshit.
why blame the players rather than the game? It's the government's job to prioritize long term health of the nation
Plenty of people warned about the hazards of allowing these companies to outsource everything, government did nothing. Mostly because they are bought off by lobbyists. This could have pretty easily been prevented by putting tariffs on key industries to keep manufacturing here or at least in North America
Wow started decent and then went full stupid. We can't go back to earlier capitalism anymore than we can go back to feudalism.
Regulate minimum buffers, or create a state-run rail and warehousing system like industrial Amazon. It's a natural monopoly and much more efficient than a gazillion trucks.
Current supply chain model is largely based on the likes of Walmart. They are also the company that pushed to manufacture goods in China. Walmart destroyed the rust belt. Walmart destroyed small businesses across the country.
Walmart is the reason why US middle class got screwed. Walmart is the reason why we saw unabated rise in China. Walmart is boomer legacy.
Or maybe attempting to shut down large swaths of world economy for an indefinite amount of time wasn’t such a good idea? In the timescale of months to years all business becomes “essential”. Sure shut it down for “just two weeks” but a year or more?
We thought that if we didn't do that we'd run a very real risk of the entire healthcare system collapsing. We were trying to "flatten the curve" so that hospitals could deal with an ongoing roar instead of being hit with a massive explosion.
The entire lockdown/restriction/mask mandate set of policies has been based on managing hospital capacity. State and local governments are still using hospital capacity to decide when to lift or reimpose restrictions.
The wave of explainers we got last year about flattening the curve were wrong about how long it would take, but the fundamental strategy and the reasoning behind it never actually changed.
A fallacy that might be at work here is comparing the shutdowns that actually occurred with a counterfactual world where business activity remained essentially unchanged.
We'll never know for sure, but I doubt that's the correct comparison. Even without government-mandated shutdowns, many areas--especially major urban cores--would still have experienced massive shocks as people voluntarily shifted to working from home, stopped going out to eat, etc. In other words, much of what the government did through law would likely have happened anyway out of fear and individuals exercising their common sense.
Sure, it wouldn't have been exactly the same, but I think the counterfactual is much less rosy than you assume. And then there are the benefits of the shutdown which helped to direct the drop in activity towards less essential parts of the economy and increased predictability, to say nothing of the benefits of reduced viral transmission.
I really don't understand what you mean by this comment. The only swaths of the economy that I'm aware of that got shut down in the U.S. are things like bars, restaurants and movie theaters. These are not tightly connected to global supply chains, AFAIK, and if they were why would their shut down cause bottlenecks (it should lessen demand, not increase it)?
Thinking about it from the perspective of someone who thinks the shutdowns were net good but reviewing the comment in good faith:
Lessened demand in large sections of the economy can itself create shortages in the parts that take on the load or at least stress on the supply chain to redirect to those places now in extreme demand. Take restaurants for example, people didn't stop eating but vast swaths of food supply chains had to change pretty much overnight.
Then there is also the problem of the demand of certain things being highly uncertain, like cars towards the beginning.
Then there is the extreme induced demand on certain things like webcams, laptops, or other home electronics as everyone stays home. I'm sure that also isn't an easy overnight change to make and then swing back from since it was completely unplanned. I know the area I work immediately ran out of widgets based on orders of 10s of thousands instantly coming in and it has been backed up since that time to this day.
Finally during the initial portion of the pandemic lots of factories, both in the US and China, were getting shut down. China seemingly longer. When restaurants and whatnot started to open back up was about the time you saw those shutdowns stop happening too. So on top of the above concerns for the supply chain lots of non bars and movie theatres were also affected by shutdowns, just perhaps not as long.
May be more I'm missing but I don't think GP is an empty comment by any means.
Much of the problem with understanding what GP means is that 'the shutdowns' is a very hazy term. Implicit in the comment seems to be the idea that there was some small set of authority figures who decided to shut down the global economy and if only they hadn't done that things would be better.
e.g., The induced demand from work from home you mention I wouldn't count as part of any 'shutdown' at all. It has been largely driven organically by the decisions of individual firms and workers. My office was ordered to work from home by company HQ, not by any government authority, and at this point staying WFH is an individual voluntary choice. Does this count as part of the 'shutdown'? Certainly my sector of the economy (software development) was not shutdown, quite to the contrary.
I'm not sure the comment is implicit of who did the shutdowns but even taking it as so the widget orders by the 10s of thousands I referenced were mostly public school systems receiving mandates and associated COVID relief funding to compl,y not private enterprises. Particularly younger grades weren't normally assigned personal hardware and not every child had internet access at home. Though like you say the private sector remote work shift certainly happened too and exacerbated the ordering situation.
Sure, many (most?) schools went remote, but they didn't shut down, and they aren't really integrated into the "global economy."
It's certainly true that collectively, society pushed down in some places and things popped up in others, sometimes in obvious ways (going remote creates demand for laptops and cameras and office chairs) and sometimes in surprising ones (spiking rental car prices, yet internet providers were totally unfazed). I don't think "if only we hadn't been so foolish as to shutdown a large part of the global economy" is a useful or helpful way to think about these phenomena, though.
The idea of Sweden has no connection at all to the topic at hand. You are using the word "Sweden" to make an argument because you believe the connection between Sweden and conversations about lockdowns is so clear that the mere mention of the word is enough to bring the entire argument into someone else's mind.
So, this demonstrates that you believe everybody reading this comment knows what you mean. Which in turn means you know your comment is adding nothing at all to the conversation.
To belabor the point, if the connection between Sweden and lockdowns was an entirely convincing argument then everybody reading your comment would already agree with you, and there would be no reason for you to remind people of the connection with this comment. Since that doesn't appear to be true, you believe your peers need to be reminded of this argument, some elaboration on your part seems to be in order!
Hacker News is a lovely community where you can learn from a large variety of people, each knowledgeable in their own particular domain. The more thoughtful and substantial we make our comments, the nicer a place it becomes for everybody else.
That's not a fair comparison. Most covid deaths are from those already past the average life expectancy. There's a very good chance they were going to die soon anyways. Not to mention you have to account for cancer patient + covid, etc.
It's completely fair. There's always a cause of death, and averages aren't indicative of individual cases. If an old person gets shot by a gun tomorrow, we don't chalk that up as "well, they had their time."
I specifically said "death rate" and "per capita".
Your source here is comparing two countries, one of which has 67 million people and the other which has 10 million and showing totals and not per capita, which is a worthless comparison.
Additionally, I don't consider Great Britain a neighbor of Sweden.
Have you forgotten the state of Italy and New York (among others) at the start and middle of 2020? There were literal trucks full of dead bodies in the streets because they couldn't be buried fast enough.
How do you envision the time between march 2020 and the point where herd immunity through vaccines / infection would have been sufficient would have gone without a lockdown?
I'll take a lack of a few non-essential luxury goods for a year or two over a world where everywhere looked like that, any day of the week.
Which was insanely, criminally stupid, and absolutely contributed to a lot of deaths.
But New York also has a subway system that (approximately) everyone uses to get around. That turned out to be a perfect spreading ground for a respiratory virus. If I understand correctly, that's a big part of why New York got hit so hard. You can't just pin it on Cuomo's criminal irresponsibility.
That’s not a good argument. 1: damage done by shutdowns is still going on so we don’t even know the full cost. 2: the winter storm is not self inflicted. 3: I am not sure you are right that said winter storm did more damage. Would like a source though.
Gas producers not having themselves marked as critical infrastructure so ERCOT would not kill power to them and the failure of plants to winterize themselves are self-inflicted.
When analyzing the storm I'm not clear are we talking about the power grid alone or the normal organic effects of Texas just not operating well at those temperatures and pipes bursting, frost heave, exposure deaths, etc?
Where I live the vast majority of people were deemed "essential" for the purposes of working and then not "essential" for the purposes of receiving the vaccine.
The places which were closed were not producing things used in the supply chain.
It’s hard to write 20 consecutive blog posts without seeming extremely pretentious. To the average Twitter user, massive Tweet chains means the person has something really important to say. The fact that they’re getting around the max tweet size makes things very rebellious, adding to that counterculture feel you only get on Twitter.. Add in the blue checkmark next to the name and yeah, I guess you could say Twitter users are pretty cool for using Twitter.
The bottleneck was the 3 hour boat tour. Imagine how much time we could have saved if we had just cut to the chase?
Also, he took a real Gilligan's Island risk just going out on a 3 hour boat tour. We could still be stuck and he could be stranded on a desert isle somewhere in the South Pacific.
If the spending doesn't re-balance again as restrictions are lifted this is not a temporary supply chain issue caused by just-in-time methodology, it's just the new normal.
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