Profit Mania, SWA’s Woes, Supply-Chain Bottlenecks, and our Brittle Economy

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Despite its many virtues, the United States is now a brittle society. In several ways, it’s coming apart under stress.

One reason is something that most economists and many pols have long bragged about: the profit motive. In practice, as in much of our political and economic theory, we have made profit one of our most fundamental values.

The value we put on profit is one reason for our legendary distrust in our own government. Public servants, many think, aren’t as smart and don’t work as hard as those in private industry. Why? They don’t make as much money and don’t have as much personal skin in the game. If all those government bureaucrats were really smart, they would work in the private sector and get rich.

We can pass over the moral dimension of this claim. Not only does it assume a level of selfishness that beggars the values of human religions. Most, at least implicitly, recognize our chief biological-evolutionary advantages over other species: our ability to communicate, empathize, and cooperate.

Profit is not even close to the sole driver of human striving. It’s not the primary motivation for military folk, poets, artists, scientists, doctors, teachers or athletes. These folk choose their work because they love it, or because they think it’s important or useful (or at least entertaining) to others. Try to imagine how theater or sports, let alone medicine and nursing, might work without empathy.

Some in these groups do get rich by happenstance, or as a result of excellence, popularity, or a long career of hard work. Yet for most warriors, poets, teachers, government regulators, and government scientists, the chances of getting rich are minuscule. Nevertheless they carry on, even during a pandemic.

So the notion of private profit as the primary motivator for human striving is, as Mark Twain might say, greatly exaggerated. This essay is about another problem that hasn’t gotten much press. When you design your whole society around profit, and when profit is measured in the short term (by quarterly reports) for thousands of individuals and companies separately, your system runs too lean. It lacks flexibility. It lacks any general plan. It skimps on contingency planning and the long game, sometimes ignoring them entirely. So your culture becomes brittle and prone to shattering under stress.

That’s the story of our nation’s decline over the last generation. Let’s look at a few examples.

First and foremost, our owners sold our nation’s factories and jobs abroad for profit. The motivation was clear. Foreign workers in China, Mexico, Vietnam and Bangladesh had a much lower standard of living than ours and so would work for much less pay. Transferring our factories to these nations cut labor costs and made more profit for the owners at home.

With lower labor costs, the owners could still make a profit while offering lower prices for their goods and services. So they could beat both foreign and domestic competition. Their foreign factories came to dominate global commerce—but not from home, from abroad.

As we are slowly discovering, that change put production under the control of the nations—principally China—where the factories are located. So we lost control over our supply chain right from the source.

Is it really any wonder that, today, China’s politics, energy problems, endemic corruption and radically different socio-economic system are now causing us economic problems, in addition to those caused by our own shortage of truck drivers? We have little or no control over basic production and can’t even seem to manage shipment from the Far East to our distribution centers, stores and population.

This, in a nutshell, is a big reason for China’s meteoric rise and our nation’s corresponding decline. As I wrote in an earlier essay, our own factories don’t even make enough nuts and bolts for our own domestic use anymore, let alone more sophisticated products like computer chips and subassemblies. Mostly China does.

So how, pray tell, are we going to win a war with China over Taiwan, where most of our computer chips are made? Even if we make our military stuff mostly here, an embargo by China could strangle our domestic civilian economy and bring us to our knees. So it had better be a short war—for military and economic reasons as well as humane ones.

A second example—and a classic one!—is Texas’ electricity market. Texas divorced itself from national regulation and the national electricity grid on purpose. It wanted to set up a localized and isolated market for electricity as an experiment in “pure” free marketry. It wanted “spot” prices to rule the electricity market, from millisecond to millisecond. The goal: let the profit motive cut prices to the bone and, at the same time, increase private profit.

That strategy worked well until the recent cold snap, aka “polar vortex.” That rare but increasingly likely weather event froze key equipment, peaked demand, and broke the system. Spot prices rose astronomically, leaving factories and people not just stalled and frozen in the dark, but left to contend with ridiculous energy bills afterward. Now Texas is fighting an uphill battle against free-market cant to fix its system to withstand the next polar vortex. Good luck with that!

A third example appears to be what happened to Southwest Airlines (SWA) last weekend. SWA has long been investors’ darling in a cyclic and highly volatile industry. Why? It runs lean and therefore profitably. It has a highly efficient hub-and-spoke flight system. Single planes often fly in big circles, so that flight crews can sleep in their own beds and avoid jet lag. SWA doesn’t employ a lot of idle pilots or flight attendants against the chance that some might get sick. It doesn’t have a lot of airplanes sitting on the tarmac as spares. It’s a lean machine.

When all went well and according to plan, SWA made good profits and worked well. So what likely happened this week? There was bad weather in the South, but that didn’t seem to decimate other airlines. The Airline Pilots Association insists it didn’t call for a sickout. So why were thousands of SWA flights canceled and tens of thousands of customers left stranded during a holiday weekend?

Some think that a small cohort of pilots, especially in Texas, pulled an “unauthorized” sickout on their own—what used to be called a “wildcat strike.” Texas is a hotbed of politically motivated vaccine resistance, with a governor to match, and SWA recently announced a vaccine mandate for workers. The pilots’ union denies that and claims that SWA’s lean operations made it “brittle and subject to massive failures under the slightest pressure[.]“

In either case, “brittle” is the right word. With an operation that lean, just a dozen or so pilots calling in sick could produce the same result.

How long will the pain last? How many of those tens of thousands of passengers left stranded last weekend will never, or rarely, fly SWA again? For reasons of location and price transparency, SWA used to be my own preferred domestic airline. Now, probably not so much.

A fourth example of inflexibility is developing right now. Prices of used cars have been high in part because of a shortage of new cars. Some of our own car-production lines have halted because they lack the computer chips that all cars, whether or not electric, need to run. The chips are mostly made in the Far East. China makes some, but a single company in Taiwan (TSMC) makes many of the most sophisticated.

What caused the shortage? The current story is that lockdowns and slowdowns due to Covid-19 have cut the production of chips abroad. But China is a global seller and a strategic thinker. Couldn’t part of the reason be that China is subtly diverting its output toward less adversarial nations, including developing ones?

And again, what happens if we and China go to war over Taiwan? What happens if Taiwan’s huge chip factories get bombed—whether by design or by accident—or the power plants supplying them do? Our own domestic car-makers stay idle, maiming an important sector of our economy for months or years while plants half a world away get rebuilt.

You might say that this is just one of many unintended consequences of our thoughtless shedding of factories and jobs for greater profit over the last thirty years. But there is a difference: the pandemic. To the extent that conventional wisdom is right—and the slowdown in chip production is mostly pandemic-driven—it illustrates the folly of believing that a “service” economy, which ultimately makes nothing, can survive, let alone prosper, on its own in hard times.

As recent near-pandemics (MERS, SARS and Ebola) show, Covid-19 will not be the last pandemic, nor necessarily the worst. As and if production continues to drift from our homeland in a search of ever-lower wages and ever-higher profit, our logistics, goods economy and economic fate will increasingly fall into others’ hands. Where will our high-sounding rhetoric of “freedom” and “self-reliance” be then?

The moral of these stories is simple to state but hard to resolve. Individual selfishness by way of profit can be a powerful motivator—hence the comparative success of capitalism. But in a highly complex, advanced society under stress, letting individuals and thousands of private companies all go their own way doesn’t always produce optimal outcomes. No less than a high priest of capitalism—Alan Greenspan—so confessed after the Crash of 2008 broke the US economy.

Our own current, domestic supply-chain mess illustrates the problem. President Biden just announced that the Port of Los Angeles will soon start working 24/7 to reduce the backlog of cargo stuck in containers in the port or on ships in the harbor awaiting open berths. But as an expert recently opined, the Port Authority doesn’t operate the derricks and cranes that unload the cargo, let alone the trucks needed to carry it away. The derrick owners have to see profit ahead to work the derricks. Then a number of private trucking companies, plus thousands of independent truckers, have to see it in their interests to load their trucks with cargo at 2:00 a.m., without a place to unload it until well after dawn.

The point here is simple. Our supply chain is geographically, structurally and institutionally diverse and mind-bogglingly complex. Each little part of it is focused on his, her or its own profit. So when it breaks, as it has just now, organizing a fix is a Herculean task. The expert on the PBS NewsHour suggested it might take months, if not a year or more.

A letter writer to the NYT suggested a much simpler solution. Take desperate Haitians waiting for asylum at our southern border, give them temporary working visas, and train them as truck drivers. This could be done in maybe six weeks, before the crucial holiday season. Then (and this is my extrapolation) the US government could use the Defense Production Act to commandeer idle trucks and get the cargo moving.

The point is not that this could or even should happen. There are obvious non-economic considerations. And there are simpler solutions still: recruiting the National Guard to drive the trucks.

The point is that our economic system—with a thousand points of profit and over a thousand human egos to match—is simply incapable of organizing such an effort in a reasonable time, at least without strong external pressure. By the time all the derrick operators, trucking companies and individual truckers finished their profit analyses and marketing plans—and negotiated a nationwide agreement—the holiday season would have passed, with dismal results. A herd of cats just can’t respond expeditiously.

The problem is not just our own global competition with China. Something similar is happening inside China, too. China’s own internal economy is just now slowing rapidly because there isn’t enough reliable electric power for its factories. Why is that? Most of China’s power comes from coal, and it has stopped buying coal from its erstwhile principal supplier, Australia, for political reasons. So China’s heavy-handed quest for global political supremacy is now at odds with its maintaining and growing its domestic economy as it recovers from Covid-19.

Thus imperium is no panacea, either. Nazi Germany, the Soviet Union, and China proved that—at least before Deng Xiaoping and now increasingly under Xi Jinping. No single leader, or even a small group, can possibly master all the skills and specialties required to run an impossibly complex modern nation well. And single leaders are far more likely to let extraneous geopolitical concerns interfere with a good plan for economic success.

Yet extreme capitalism, as reigns in our country now (more so in Texas), also doesn’t provide good large-scale, long-term contingency planning. Somehow, human societies have to find a middle ground between the rampant individualism among people and corporations that now prevails in the US (and especially in Texas) and the stifling central control that once prevailed in Communist China and Russia and is now making a resurgence there.

The US under FDR, and China after Deng Xiaoping but before Xi, are good places to start looking. The quest for a proper balance will—if our species survives global warming and nuclear proliferation—probably take most of our new century.

One of the most interesting articles I’ve read on the subject was published by the Economist about two years ago. It noted the last century’s grand political battles over free markets and central planning. It referred to the well-recognized failure of centrally-planned economies like the old Soviet Union’s and “Red” China’s before Deng Xiaoping.

But it also made two crucial points of recent history and technology. First, Russian and Chinese central planning had failed before the computer revolution came of age and before the advent of Big Data, the Internet and artificial intelligence. (Deng Xiaoping came to power in 1978, and the Soviet Union fell in 1991, while the Internet didn’t begin public operation until 1996). Maybe central planning might work better in the age of super-computers and massive online collection of Big Data in real time, with AI to help in analysis.

Second, and equally important, the article pointed out that individual corporations, including mammoth ones like Wal-Mart and Amazon, are already taking advantage of these new computer capabilities. With the aid of modern computers, Big Data and AI, they have independently developed highly successful central planning for what amount to nation-sized economies.

So why couldn’t competent government, which uses already uses supercomputers to predict the weather and the paths of hurricanes, and to study the three-billion-base-pair human genome, also do some useful planning when markets fail, as in the current supply-chain crisis?

Of course the best solution would be government and private planners working together to solve a problem, perhaps with closely linked computers. But in the meantime, with each corporation and many oligarchs focused on the isolated parts of the economy that affect their own bottom lines, no one is minding the store. In this case, the “store” is what our Founders, in our Constitution, called the “general welfare.”

If we wish to “promote the general welfare,” as our Constitution commands, we had better start developing some stronger institutions to do so. In a postwar effort to avoid another World War II, our own nation took a leading role in promoting international institutions like the International Monetary Fund, World Bank, World Trade Organization and the United Nations. Maybe what we need now is to focus on institutions that can fill the planning gap between those global institutions and the computer systems of Wal-Mart and Amazon.

In any event, our planning at the national and state levels self-evidently needs improvement. That’s the plain message of our lackluster response to the Covid-10 pandemic, the Texas Freeze-Out, the current supply-chain bottlenecks, the resulting inflation, and the SWA’s recent weekend debacle.

We need fewer ideologues and fewer people with preconceived points to prove. We need more competent technocratic experts, endowed with the latest technology, who just want to make our economy work. The latter are what we occasionally call “technocrats,” mostly in developing countries, and what so-called “conservative” ideologues deride as “bureaucrats.” But to paraphrase Mark Twain again, I don’t care what you call them, as long as they get the plan right.

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