A response to Flexport CEO Ryan Petersen’s argument calling for government intervention.
A response to Flexport CEO Ryan Petersen’s argument calling for government intervention.
O n January 2, Ryan Petersen was interviewed by Noah Smith about the supply-chain crisis. Petersen is the CEO of Flexport, a company founded in 2013 that uses and develops new technologies to modernize American logistics.
Modernization is exactly what American logistics needs, and Flexport is doing great work toward that end. Scroll down to the bottom of the interview, and you’ll find a list of all the new technologies that Flexport and companies like it are developing. Petersen is a very smart entrepreneur, and the logistics sector needs more people like him and more companies like Flexport.
It’s because Petersen gets so much right that it’s worth pointing out something he gets wrong. He calls port congestion a “market failure.”
Here’s the part of the interview where he makes that claim, with his comments immediately preceding it as context:
I think many of us imagined that we live in a world where there’s a wizard behind the box. That there’s actually somebody in charge of all of this, and that that somebody must have made a mistake. And of course, it must be the president of the United States. But that’s not actually the world that we live in. It’s a market-based system. We’re lucky to live in an economy that’s built on the principles of free enterprise, and so while it’s easy to cast blame and point fingers at the administration, we have to recognize that they’re not really in charge of all of these things. They didn’t create this situation and I’m not 100% convinced that they’re the ones that are going to be best equipped to solve the problem.
That said, there’s a very clear role for our government to intervene in markets when you have systemic failures. As much as we love the idea of a free enterprise system, the reality is that markets often fail. And when they do, we need our leadership to step in and help resolve problems. I think what we’re observing at West Coast ports right now can best be described as a market failure. So there must be some role for government to step in here.
Most of the things he says in this excerpt are spot-on. Many people likely did believe supply chains were more centrally coordinated than they actually are. Many people also likely believe that the president can fix the problem because, as Kevin Williamson has written countless times, the president is viewed by many as an emperor who can effect change in the economy at will. Neither of those things is true, and supply chains are indeed a market-based system. As NR’s editors have noted, and as I have noted multiple times before, there is not much the Biden administration can do to improve the situation.
It’s also true, though, that markets are not perfect, and sometimes government intervention is justified. But Petersen jumps from saying that sometimes governments should intervene, as a general statement, to saying that the government should intervene in West Coast ports, as a specific call to action.
Just because markets are not delivering a perfect result does not mean that it’s a market failure that justifies a government intervention. We don’t have much reason to believe that more government involvement would improve the situation in San Pedro Bay.
Petersen proves that he understands the bad incentives politicians face when they make decisions. He says, “For example, I live in San Francisco and our main port is the Port of Oakland, which is owned by the City of Oakland. The mayor of Oakland has a lot of local issues to focus on and probably won’t prioritize multi-billion-dollar investments in their port as the city simply can’t afford it.”
He’s exactly right about the incentives the mayor of Oakland faces, and he’s exactly right that given those incentives, the port will be ignored. What he describes, though, is a textbook case of government failure. The political structure created the bad incentives that caused underinvestment.
Petersen says that instead, ports need to be “managed as a strategic national asset” and talks about how the national government in the Netherlands owns the port of Rotterdam, which is much more efficient than any American port. But the U.S. federal government faces many of the same bad incentives that local governments do. The president also has a lot of other issues to focus on — more than the mayor of Oakland does — and Petersen never says why the president would be more likely to prioritize port investment than the mayor.
He says, “The Dutch government has pushed for infrastructure innovation for decades and has a great working relationship with unions and employers through a polder model, which is based on consensus.” But American labor-relations law is not based on consensus. As Oren Cass points out in his book The Once and Future Worker, the National Labor Relations Act of 1935 still applies today, and it’s based on the outdated idea that employers and employees are enemies. He writes, “The NLRA’s model of hyperadversarialism offers [workers and labor organizers] much less upside than it once did and lots more downside, guaranteeing a conflict-ridden relationship with their employers and producing only short-term ‘gains’ that over time reduce workers’ value and opportunities.”
We’ve seen that play out with the International Longshore and Warehouse Union on the West Coast. ILWU members get the short-term gains that Cass described (six-figure salaries and generous benefits), but ILWU membership continues to dwindle, and our ports have become some of the least efficient in the world. The ILWU doesn’t look for consensus; negotiations are an ordeal every six years, and its president told his members late last year that “there may be battle in 2022,” so “be prepared.”
Repeal or reform the NLRA then, you might say — but then you’re implicitly saying that this is a government failure because the government’s rules are standing in the way of a better outcome.
When the federal government does give ports attention, as it did in the bipartisan infrastructure law, it didn’t see ports as “strategic national assets.” As Eric Boehm wrote for Reason in November, “The subsidies doled out as part of President Joe Biden’s bipartisan infrastructure deal are expressly forbidden from being used to automate operations at American ports. Instead, taxpayers will spend billions to upgrade existing cranes with lower-emissions alternatives that won’t actually work any faster or cheaper.” More efficiency means fewer union jobs, and politicians prized pleasing the unions above increasing efficiency. That’s what federal government intervention looks like in practice.
Another way the federal government prioritizes special interests over nationwide efficiency is on the issue of chassis, the trailers used to carry containers. Petersen correctly says that “we have a real shortage of chassis and without them, you can’t clear the bottleneck.” But he fails to mention the approximately 250 percent tariff on importing them. Countless industry groups told the federal government that this tariff was preventing them from acquiring more chassis when the Department of Transportation put out a notice of request for information in September. But the federal government has left it in place as part of the domestic manufacturing push that began under President Trump and has continued under President Biden. U.S. manufacturers haven’t been able to pick up the slack, and now we have a chassis shortage. Government failure, yet again.
Petersen’s strongest case for a market failure is this:
In my opinion, what’s caused all the supply chain bottlenecks is modern finance’s obsession with Return on Equity (ROE). To show great ROE, almost every CEO stripped their company of all but the bare minimum of assets. “Just-in-time” everything with no excess capacity, no strategic reserves, no cash on the balance sheet and minimal investment in R&D. We stripped the shock absorbers out of the economy in pursuit of better short-term metrics. Large businesses are supposed to be more stable and resilient than small ones, and an economy built around giant corporations like America’s should be more resilient to shocks. However, the obsession with ROE means that no company was prepared for the inevitable hundred-year storms. Now as we’re facing a hundred-year storm of demand, our infrastructure simply can’t keep up.
Here, he is pointing to decisions that businesses made that have contributed to our present problems, so it’s a possible market failure. It is true that businesses run leaner than they used to, and just-in-time isn’t very well designed to respond to “hundred-year storms.”
But remember, just pointing to a situation where the market isn’t perfect doesn’t on its own justify government intervention. What is government supposed to do instead on this issue? Should it mandate which suppliers companies can use? Should it require different supply-chain practices? What reason do we have to believe that government would manage supply chains better?
Crediting the shift to just-in-time to greedy shareholders isn’t quite right, either. American business-management conventional wisdom in the ’80s saw Japan as the future, and Japanese business practices, such as just-in-time, were emulated all over the country. And as Petersen says elsewhere in the interview, “The globalized supply chain and shipping containers have brought down the cost of shipping goods and manufacturing by close to 90% over the last 50 years.” Bad as our current situation is, it doesn’t wipe out 50 years of progress.
To Petersen’s credit, he doesn’t propose domestic-content requirements or a general retreat from globalization as some have done in response to the crisis. His idea of government intervention is to “put a team in charge.” He says, “Right now, there isn’t a dedicated team within the federal government to coordinate all public and private sector activities to help resolve the supply chain crisis. It’s spread across multiple regulatory agencies, jurisdictions and levels of government.” He wants that team to be “calling in favors and asking people to do their part on behalf of their country.”
But there has been a White House Supply Chain Disruptions Task Force since June 2021. It has a ports envoy, John Porcari, who has been leading conference calls with industry stakeholders for months now. And the line of ships waiting for berths at Los Angeles/Long Beach is at an all-time high.
Of course, the task force is spread across multiple regulatory agencies, as Petersen says, but such is the nature of the federal government. The commerce, agriculture, and transportation secretaries all have legitimate interests in the functioning of our supply chains. So do many other agencies, offices, and commissions. If you’re looking for streamlined leadership, the federal government is not the place to go.
Back in October, Petersen toured the Port of Long Beach, and based on that experience, he recommended waiving Long Beach’s container-stacking regulations. That was the right call, and it demonstrated the right attitude when approaching this crisis: Take in the evidence and propose measures to address each problem, one at a time. Simple and obvious as that may sound, government will never approach a problem in that way. It has too many interest groups to satiate, too many bureaucrats to placate, and too many politicians who want to get credit for coming up with the grand plan that ended the crisis.
How are we going to get out of this crisis? People and companies such as Petersen and Flexport are an excellent start. It won’t happen all at once, and it won’t be centrally coordinated. But it’s already happening, with record levels of private investment flowing into the supply-chain sector and more attention on inefficient processes than ever before.
The government failures that Petersen identifies in his interview should give him pause before calling for government intervention. Beyond the ones he mentions, there are also the environmental regulations that prevented BNSF from expanding rail capacity at Long Beach, the regulatory process for fuel-efficiency standards that left truck-trailer manufacturers in limbo for five years, and the Jones Act and Foreign Dredge Act that combine to make new port construction cost prohibitive. And government hasn’t learned its lesson, either: Federal regulators are looking at introducing new inefficiencies to supply chains right now.
Port congestion isn’t a market failure that justifies a government response. What we need is more markets, more innovation, more technology — and less government.