We Ain’t Seen Nothing Yet

tarpit

This sobering article in The Economist last year outlined the consequences to expect from a Brexit-without-a-deal. Most of it still applies, but to me, a non-economist, the diversity and magnitude of malign consequences suggests that Brexit could be a more interesting experiment than anyone thinks.

It’s not that we’ve lacked for economic turmoil since the age of inter-networking for business and the general public took off in the late 1980’s, but the problems have been fairly conventional in economic terms. Recessions, bubbles, the CMO meltdown, and so on; none of it has been greatly different from the trouble we’d gotten into for many decades previous.

Brexit brings up the possibility of a truly modern meltdown—an economic calamity that as yet has no name.

Allow Four to Eight Weeks For Delivery

Since the 1980’s, computers, networks, and cellular technology have revolutionized the manufacturing and distribution of goods with robotics, enhanced design and manufacturing capabilities such CAD and CAM, fancy cargo handling equipment and procedures, and awesome improvements in the capability of machine tools, but possibly the most significant efficiencies have been in the humble area of scheduling.

This scheduling revolution first became famous as just-in-time manufacturing, known in many versions as JIT, Toyota Production System (TPS), Kaban, Demand Flow Manufacturing (DFM), and a host of other names for aspects of a general movement that enhances efficiency by using computer and communications techniques to eliminate waste, error, and the need to commit large amounts of money to banking up inventories of products.

In JIT manufacturing, careful orchestration of the arrival of parts and materials from suppliers on the input side of the plant, and reducing the need for storage at the output side by tuning production to demand from customers greatly reduced plant size and the number of people required.  Enhanced visibility of the manufacturing process facilitated by computers is used to catch problems before they happen, thereby eliminating delays that would otherwise ripple downstream. Everything happens “just in time” and virtually every aspect of the methodology takes advantage of computers, data, and communications.

You could fill a library with the details of JIT, but it’s a spirit that’s everywhere today, and has spread far beyond manufacturing. Logistics simultaneously underwent much the same revolution, taking advantage data processing, networks. RFID chips, and dirt-cheap communications to track shipments at a level of detail that was previously impossible for everything from bulk materials shipment right down to FedEx and UPS.

If you’re over fifty, you certainly remember the phrase “allow four to eight weeks for delivery.”  Today, it’s common to order something online and have it show up the next day. It’s much the same with industry, except that the supplier is paying strict attention to the consumers, algorithmically predicting what demand will be, and when, in order to tune the manufacturing process exactly to the anticipated demand.

Fifty years ago, manufacturers operated in the dark, as did their suppliers and their customers, and in consequence, warehouses were everywhere because they were needed to hold the excess supply necessary to ensure availability at every step of the supply chain.

Today, one rarely sees a warehouse.  Walmart doesn’t have a giant store room in the back of the store; deliveries from as far away as China are coordinated so that container-loads of goods come off the ship in Los Angeles and onto a truck from which they are ultimately unloaded directly onto Walmart’s predictably emptying shelves. The Chinese supplier likewise anticipated needs of consumers in the US and Europe and scheduled production in such a way that goods could go from production line to shipping container thence to a container carrier the presence of which in port was assured by a shipping company in close coordination with hundreds of companies planning shipments to LA.

Ford Motor company doesn’t keep huge warehouses filled with the four or five thousand different parts from all over the world that go into a modern vehicle. That’s what they once did because a shortage of any one of those thousands of parts could bring the entire production line to a halt but today, container-loads of parts arrive continually within hours of need, with container-loads of parts often coming off the trucks directly onto the plant floor.

It’s the same in nearly every industry, even in your grocery store, which typically buffers only about a day-and-a-half supply of heavily used goods. Here in the north-east, even the disruption of a snowstorm causes empty shelves within hours.

It’s an incredibly complex world-wide process, but the bottom line is that the expense of intermediate storage all along the supply chain—e.g. warehouses— has all but vanished. Today, the typical “warehouse” is virtual. Clever scheduling of goods in motion on ships and rolling down the highway has obviated much of our need for physical warehouses, the workers to run them, the need to keep capital tied up for months in the form of goods idling in storage, and the thousand kinds of wastage and spoilage that goods sitting in a warehouse are heir to. More subtly, the JIT spirit bakes a default efficiency in the entire process, as the ability to deliver goods on time with no excuses is critical for every participant.

Unfairness about how the dividend is shared in society notwithstanding, this has created a dramatic increase in overall productivity, relentlessly driving down the cost of producing and distributing goods.

That’s The Good Part

Seen close-up or over a small to medium time-scale, this technological revolution has been a miracle, but a more pessimistic view of what we’ve been doing can be summed up as “optimizing for a sunny day.” What’s alarming that it’s happened so quickly that the developed world hasn’t ever had a real rainy day yet.

Consider Germany, which in the 1940’s was one of the most technologically advanced nations on earth (as it remains today.) Starting in 1943, the Allies bombed Germany relentlessly, raining millions of tons of high-explosive bombs on factories, roads, ports, and rail-lines. Now that’s what I call a rainy day but incredibly, the mayhem went on for two years before seriously impairing the German’s ability to manufacture weapons.

With that level of interruption, JIT manufacturing would have collapsed like a house of cards but in the 1940’s, materials and parts were stored up and down the line in warehouses.  A bombed railroad bridge or a few five-hundred-pound bombs through the roof of manufacturer’s suppliers was a nuisance, to be sure, but with months of parts banked up in warehouses, it was usually an inconvenience rather than a disaster.

So here’s what’s interesting about Brexit. Traffic within the EU travels freely across borders without inspections. Between Britain and the continent, much freight travels by roll-on/roll-off transport, i.e., the entire truck travels by ship from France to Dover or other ports just as it would drive through the Chunnel. The rest of the freight travels mostly by containers that are lifted on and off trucks that line up to deliver or receive them as fast as the cranes can do the transfer. Without free-passage across international borders, the goods have to be inspected by customs services at both ends and as The Economist points out, even two minutes of additional time for each container snowballs into 47 kilometer traffic backups for ports in both Britain and the EU.  Needless to say, nobody is guaranteeing the delays will be limited to two minutes.

Economic downturns, stock-market crashes, and the like are big events but we understand the dynamics of these things pretty well. We may not know why consumer confidence is down, but when it goes down, you know less will be bought, factories will curtail production, etc.  We know why stock markets crash, and what the consequences are. The effects tend to be diverse, but predictable.

What’s different about Brexit is the unprecedented diversity of shocks the British economy will be subjected to all at once.  When many different things go wrong at the same time, nobody really knows at what point the effects will cease add up linearly and start to follow some less predictable and undoubtedly highly unfavorable curve.  Supply chains disrupted by epic traffic slowdowns are just the beginning.  Agricultural products moving in both directions will be crippled, driving up food prices and killing jobs at the same time. There will be uncertainties in the legal/economic basis for coordinating electrical grids, shortages of all kinds of goods, mismatches between available worker skills and economic need, breakdown of the ability to detect crime and catch criminals, drug and food shortages, and a hundred other problems. Moreover, when it begins to snowball, the countless economic mechanisms of risk-mitigation must deal with the increasing uncertainty, driving up the cost of every dollar of business. In some cases, legal uncertainties may entirely block certain strategies.

It’s not as if Britain can simply revert to the old way of doing things. The infrastructure of business has changed greatly since Britain joined the EU. The warehouses have been torn down or repurposed. Today, there is only a small percentage of surplus warehouse space in Britain (or anywhere, really) so there literally is no way to store things the way we used to and even if you could, it would hardly be competitive—efficiency is why these things went away in the first place.

With factory shutdowns, epic traffic jams, soaring prices, electrical brown-outs, and the like, nobody knows at what point the childish British public will lose patience and begin to strike and riot, multiplying the malign effects of Brexit proper. Worse, instead of crawling back to the EU repentant and contrite, they could opt to double down and elect some Trump-like ignoramus who convinces them that not Brexit but the Jews or the Illuminati, or some other fantasy villain caused the mess, and only he can fix it by bringing back the gold standard or blaming everything on Argentina and going back for Falklands II, or some other wacky fantasy.  It’s not that far fetched—the mob has already demonstrated their capacity for foolishness by voting for Brexit in the first place, and seems to be standing fast even as the magnitude of the looming disaster becomes more clear. 

The Tar Pit

Clearly, as some point, you can monkey things up so badly that the problems start to cascade and the entire system bogs down like a mastodon in the tar pit, but where is that point?

There’s this feeling abroad that the economists must understand it and if it were as dangerous as all that, surely there’d be a hue and cry, but I don’t believe they do know, or even think about it much. If they do, it would be almost unique in history. We generally only understand these things in hindsight after history rubs our noses in it.

There were countless smart people around in August 1914 but only a handful of people foresaw the magnitude of the looming war even though the facts of the situation were well known. Most thought it would be over by Christmas (it was, but by Christmas of 1918, not of 1914.)  Most analysts got the implications of war backwards. It was widely believed that war between interdependent economies the size of Germany, France, and Britain would be economically impractical and therefore end quickly. What actually happened was that the economies were so large and robust that it was impossible to knock them out a few battles; modern nations would and could fight for years until they were utterly exhausted. Likewise, few foresaw in 1929 that the economy would continue to decline for four of five years before we found the bottom of the ensuing Great Depression. There had never been economies so large before.

More recently, we have plenty of reason today to see the unprecedented magnitude of the looming climate disasters but most analysts dwell on minor effects such as the economic effects of flooding coastal areas. Bad as these things are, they will be as nothing compared to the wars that will result from dislocated populations, competition for water, and so on. Think Syria, but for billions of people instead of for a few million. Yet we do almost nothing because in our heart of hearts, we don’t really believe in anything that hasn’t happened before.

So if March 29 rolls around without an exit deal, and Britain simply walks away from the EU, things could get interesting indeed.  We may need a new word for a phenomenon that is a sort of multi-dimensional depression in which collapse and the failure to recover are caused by a systemic breakdown of the ability to participate in a trans-national economy based on just-in-time. Brexit may or may not be enough, but many similar phenomena could cause a snowballing disaster. Earthquakes and tsunamis in the right spot could do it, as could terrorist attacks on power grids or even sunspots. We simply don’t know what kinds of shocks could do it. Meanwhile, it’s not inconceivable that Brexit could cause an out-of-proportion economic collapse that could serve as a useful benchmark in understanding this new species of economic calamity. In the worst case, Britain could find itself in a situation much like the lean years of post-War rationing that went on well into the 1950’s, a decade after the end of World War II.

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