The World's Most Profitable Traffic Jam
Clogging up the ports is a $150 billion business, but a bipartisan bill to re-regulate the sector is moving through Congress. Why is Congress about to do the right thing?
Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Today’s issue is on an unusual type of story - it’s about how politics can work to fix a major social problem. Ten days ago, the House of Representatives passed a bill called the Ocean Shipping Reform Act of 2021, which will re-regulate the shipping industry. I’m going to explain what this law does and why it’s necessary to address the supply chain problems at the ports. The most interesting question I hope to answer is this. Why did Congress do the right thing here?
In a hot labor market, workers are showing the same disloyalty to big business that they’ve been shown for forty years.
Is there an oligopoly in the obscure corner of the legal world that controls dispute resolution?
There’s a battle over all the money in the world as anti-monopolists and Wall Street fight over bank mergers.
First, some house-keeping. I was on the podcast What Bitcoin Did to debate a telecom turned crypto lobbyist, as well as Rising to talk about why I think crypto is a scam. I was also on the Off-Kilter podcast on the topic of inflation and monopoles.
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Halloween Costumes Still Coming Through the Ports
It’s a weird moment for economic discourse. The news is dominated by macro-economists panicking about inflation, while supply chain experts panic about transportation bottlenecks. The panic on both sides is warranted; 6.8% inflation is a political crisis, and the supply chain situation that is in part causing the problem is still really bad. “Believe it or not, Halloween costumes are still coming through the ports,” said Noah Hoffman, retail expert and vice president of North American Surface Transportation for C.H. Robinson in Freightwaves. “That’s how backed up things still are.”
We are continually hearing about such problems, along with the magical words ‘supply chains,’ which is a catch-call term to hand-waive away everything from a lack of cream cheese to shortages of cat food. And the problem is actually getting worse, with import volumes at the Port of LA/Long Beach falling below 2018 levels.
In fact, what supply chain disruptions really mean are a series of bottlenecks in an opaque set of commercial relationships, which leads to unpredictable clogging up of the arteries of commerce. I’ve explained how in a monopolized economy, one person’s bottleneck is another person’s toll booth, which means that actual shock of Covid has turned into what we see today. This is perhaps most obvious in the ocean carrier industry, which is a highly consolidated cartel of Too Big to Sail Ships, all unleashed by a set of laws passed in the 1980s and 1990s to get rid of government involvement in shipping.
Tetris Plus A Traffic Jam
Today, as Sal Mercogliano notes, the consolidation of incoming freight into the Port of Los Angeles/Long Beach complex is leading to a massive glut of empty containers clogging up the terminals. Like a game of Tetris, the containers are stacked in ways that make it hard for gantry cranes to get to the right box. Trucks have a hard time getting into the yard because they have nowhere to unload their containers, which means ships can’t unload their containers as quickly since there’s nowhere to put the boxes from the ship, which means that trucks have an even harder time getting into the yard. It’s a downward spiral, which is one reason import volumes at our busiest port are declining.
Our supply chain crisis at the ports is, in essence, a very large global traffic jam. But unlike a normal traffic jam, this one has economic incentives that are driving it. The gist of the incentive problem in shipping is that a small number of ocean carriers are doing quite well, with $150 billion in profits this year alone, even though goods aren’t moving quickly enough. And no one has the overall authority to manage the system to force more ‘fluidity,’ which is say, getting stuff to move faster. This global traffic jam, in other words, is profitable to a few, while screwing everyone else in the economy.
Fortunately, Congress and government regulators at the Federal Maritime Commission are actually starting to address the problem.
To understand the situation, let’s start with the ‘trucker shortage,’ which is a commonly used semi-myth about why things are so backed up.
Why Do We Take 40% of Trucks Off the Road?
If you’ve read any stories about the supply chain crisis, you’ve probably heard the phrase ‘trucker shortage.’ People just don’t want to drive trucks, so goes the theory, and so it’s hard to get enough people on the road to haul stuff. The American Trucking Association, which is a lobbying group for large trucking firms, likes to assert such a claim, alleging we have a ‘shortage’ of 80,000 truck drivers in the pandemic. The solutions to this shortage are things like more training, recruiting younger drivers, accelerating commercial license approvals, and education to show that truck driving is a great career. The White House released a trucking action plan based on these assumptions, including training, apprenticeships, faster licensing, and recruitment.
But what if we could wave a magic wand and increase the number of experienced, competent truckers, as well as all associated equipment like trucks and chassis, by two thirds? As it turns out, we can. It’s called paying truckers for their time. You see, right now, truckers are paid by the mile, and this creates the incentive to waste their time. If a trucker gets to a distribution center, he never knows if he’ll be there for 2 hours or 12 hours. The determining factor is whether the receiver needs what’s in the trailer at that moment. Those 2 hours or 12 hours, to the customer, are free. But to the system as a whole, that’s a lot of time where that experienced trucker and all his equipment isn’t on the road.
Currently, we have about 1.85 million truck drivers, and the current ‘shortage,’ according to the ATA, is 80,000 truckers. That means we need a boost in productivity of just 4.3% for truckers to ‘fill’ this shortage. In fact, as MIT researcher David Correll notes, truckers average only 6.5 hours of driving a day, but are legally allowed to drive 11 hours a day. “This implies,” Correll told Congress a few weeks ago, “that 40% of America’s trucking capacity is left on the table every day.”
The reason for this state of affairs is simple. Deregulation. In the 1970s, pricing and routes were set by the Interstate Commerce Commission, and truckers usually had regular routes and were paid for their time. Under that regulated system, the customer couldn’t use their bargaining leverage to force truckers to waste their time waiting around. Large shippers might want to find a different trucking firm that would let them pay per mile, but regulators upheld a pricing regime barring such destructive competition. The ICC’s regulated system was brittle, but it also ensured that the equipment and labor actually was put into use, instead of kept off the road because of this bargaining asymmetry.
When Congress and Jimmy Carter passed the Federal Motor Carrier Act of 1980, the system reoriented around bargaining asymmetries. Trucking firms immediately started putting pressure on truckers over compensation so they could underprice each other. They generally stopped employing truckers or giving them guaranteed wages, and started paying them by the mile. With a globalized just-in-time delivery model, truckers lost massive amounts of power in setting their terms of service, which means a lot less time driving and a lot more time waiting around. As one person in the industry told me, “just in time delivery means that the trucker-trailer is the ‘rolling warehouse.’”
Instead of defending the inefficient and low wage dynamics of trucking on the merits, lobbyists changed the subject. Enter the ‘trucker shortage’ myth, which the ATA invented in the 1980s so that firms would be able to have more truckers to choose from.
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Demurrage, Detention, and Drayage
Now, what does this have to do with the mess at the ports? Two things. First, it underscores the basic dynamic of our supply chain, which is that the airlines, trucks, railroads, and ocean carriers, etc. base their behavior not on what maximizes the fluidity of stuff, but on their relative bargaining power against one another. Second, truckers matter in ports, because a specialty known as ‘drayage truckers’ drive container boxes from the ships to warehouses of customers, and back. Drayage truckers are paid per trip to the port, not for their time. And right now, the truckers are being forced to waste most of their time, because no private actor has a particularly strong incentive or the authority to make the whole system work more fluidly.
This is, in part, because of the economic structure of the industry. When an ocean carrier unloads a box, the importer/exporter has a certain amount of time to get it out of the terminal. If it isn’t moved, there’s a “demurrage” or “storage” fee. Similarly, there’s a certain amount of time to return the empty box, and if the importer/exporter doesn’t return it in that window, there’s a “detention” or “perdiem” fee. Such fees make a certain amount of economic sense. The ocean carriers want their container boxes back, and the terminals want the boxes off valuable port space. So charging what are essentially late fees gets stuff where it needs to go quicker.
These fees are supposed to create incentives to make the system work, they are not supposed to be revenue generating in and of themselves. Yet they are now a real source of revenue for the ocean carriers, and this dynamic creates bad incentives. For instance, what happens if it becomes difficult to move stuff out of the ports, or to return empty containers? That’s what happened in the middle of the 2010s, when the ocean carrier industry was in the midst of a vast expansion of mega-ship capacity combined with near insolvency. Carriers created the three modern container alliances, where different steamship lines would collaborate to make sure mega-ships were fully loaded. (There have long been alliances, but the most recent ones are the most consolidated). The carriers also got rid of their own equipment, like the chassis needed for trucks to move boxes, to move it off their balance sheet, selling these to chassis leasing companies.
These trends both consolidated the ocean carriers horizontally, while fragmenting the supply chain. It also disrupted the efficiency of the system. When the ocean carriers were weak, large powerful importers or exporters negotiated heavily to get more ‘free days,’ so they could waste more slack in the system. Today, as carriers have power, they make money on fees, rather than just using those fees as a mechanism to get their equipment back.
The fragmentation shifted the industry, especially in Long Beach/Los Angeles, which is the center of the traffic jam. It used to be that if you were a drayage trucker, you would bring a Maersk box on a Maersk chassis to a Maersk-run terminal to load onto a Maersk ship. And then the trucker would pick up a new Maersk box to bring back. But after the sale of the chassis and the creation of today’s alliance structure, a Maersk box might need to be loaded onto an MSC ship at a third party terminal on a chassis run by a leasing company, and no one would communicate with anyone else, least of all the trucker. As Mercogliano explains, the boxes - which are all functionally identical but with different corporate logos and colors - should be interchangeable but for legal reasons are not. The result is, again, the most complex traffic jam you can imagine.
A trucker might try to drop off an empty Maersk box, but the port might not give them permission to enter, because, say, the terminal claimed there were already too many Maersk container boxes in the terminal, even though the trucker had gotten permission from Maersk to load their box onto an MSC ship. Or the trucker wouldn’t be allowed to take the chassis back with them, which means the trip wouldn’t be profitable on the way out of the port. Or the trucker can arrive with his own chassis to pick up a box, only to find that the box is already loaded onto a chassis, which then means he has to pay a ‘flip fee.’ Or the trucker can take the Maersk box to a terminal where Maersk usually does business, only to find that this particular box is going to a different terminal where the Maersk alliance ship run by MSC is loading.
In other words, there is an endless permutation of possible coordinating issues - trucking firms have become ‘shipment managers’, far beyond what they are paid to do. And the economics of the industry mean there is no incentive to solve these issues, and plenty of incentives not to. While the drayage trucker has to jump through an endless number of hoops (which can include security delays), he isn’t being paid for much of it. His time is being wasted, as is the time of the equipment he’s using. But the entity with control over whether to waste his time isn’t him, but the terminal operator or ocean carrier (or even worse, no one at all has control over all the moving parts). And sometimes, a terminal or ocean carrier will be able to make money on these delays by levy demurrage or detention fees, even as the carrier refused to let the customer return the boxes. Trucking firm Orange Avenue Express (OAE) is now suing one of the ocean giants, Hapag-Lloyd, over precisely this situation.
In other words, despite the chatter about how everyone’s working hard to move more stuff through the supply chain, the incentives don’t line up. In some ways, the ocean carrier cartel has an economic incentives to make the system less fluid, less efficient. To some extent this is also true about the terminals, the ports, and the leasing companies, though the ocean carriers are the ones with the $150B in profits this year. It’s not that the carriers are causing the traffic jam to profit, it’s just that even if they had the authority to fix the situation, they have little incentive to do so. Meanwhile, the drayage truckers are bearing the brunt of the situation, often unable to get into the ports to pick up or drop off boxes, with a myth of a ‘trucker shortage’ as the popular explanation for what is going wrong.
Why do truckers in particular have so little power to fix this predicament? Since deregulation, the underlying bargaining code of the industry has been governed by the Uniform Intermodal Interchange and Facilities Access Agreement, or UIIA, which is the “standard industry contract between truckers, drayage companies or other motor carriers that use chassis, containers or other intermodal equipment (users), on the one part, and ocean carriers, rail carriers or leasing companies that provide such intermodal equipment (providers), on the other part.”
All the top railroads and ocean carriers use this agreement, so if you are a trucker who wants to use a box that has been on a railroad or ship, you must be a party to the UIIA. The agreement is heavily tilted to the interests of equipment providers and ocean carriers, and includes a provision mandating binding arbitration in case of any disputes. Truckers must accept the UIIA, but have very little power over its terms. If truckers don’t pay charges immediately, they get cut off from pulling equipment, which kills their business, so they have little leverage. That means they have no ability to address the giant traffic jam.
So what is to be done?
The Ocean Shipping Reform Act of 2021
A large interlinked system operating inefficiently because of poor coordination of information flows and bargaining asymmetries among the different players is a classic area for regulation. But since the deregulation of shipping in 1984 and then 1998, the Federal Maritime Commission, which should regulate the industry, has been defanged.
Enter Democratic Congressman John Garamendi and Republican Congressman Dusty Johnson, who introduced a bill called the Ocean Shipping Reform Act of 2021. which Dave Dayen appropriately titled the The Inflation-Fighting Bill You Don’t Know About. Their legislation is supported by dozens of trade associations, from the National Retail Federation to the American Chemistry Council to the U.S. Pea and Lentil Trade Association to the National Industrial Transportation League. The only opponents is the cartel of ocean carriers, who are all foreign-owned. The bill passed the House a week and a half ago, overwhelmingly.
The OSRA explicitly puts the FMC back into the trade regulator business. It restores the ability of the commission to inhibit unreasonable business practices and pricing and letting the FMC force carriers to have minimum requirements in their service contracts. It also beefs up enforcement tools, creates more transparency in pricing by authorizing the FMC to license shipping exchanges, and imposes a new set of common carrier obligations on ocean carriers (like prohibiting them from unreasonably declining export cargo bookings). There are anti-retaliation provisions and new mechanisms for stakeholders in the supply chain to complain and get awarded damages. The changes are simple, but also massive. And the thrust is that ocean carriers will now have to be more transparent and reasonable to everyone else in the supply chain.
The net effect of this law would be to create more ‘fluidity’ in the supply chain, which is to say, to force the ocean carriers to stop wasting everyone’s time with fee-generating obstacles. It wouldn’t transform trucking in general, though drayage truckers would probably find their lives much improved, as would exporters and importers. Indeed, to really get at every part of the industry, we’d have to do something similar for railroads and airlines, and then figure out how to force the payment system for truckers to be more rational. Still, this is not a small deal, and it would help fix some of the problems at our ports.
Now, a skeptic would say, all of this is great, but a bill passing the House isn’t the same thing as a bill passing Congress and being signed into law. But there’s momentum on that front as well. The Biden administration is now supportive of the bill, and a few weeks ago, the Senate held a hearing on supply chains, and Republican Senator John Thune announced he’ll be co-sponsoring a version of this bill with Amy Klobuchar. So if I had to guess, some variant of this bill will pass. Regardless, this is perhaps the first serious common carriage effort from Congress since the Cable Act of 1992. I suspect won’t be the last. There are serious bargaining imbalances across many of our transportation sectors.
What’s amazing about this story is that it is exactly how Congress and regulation is supposed to work. There’s a big social problem, regulators investigate, and then Congress passes a law to fix the problem. Why did Congress work well here when it rarely does elsewhere? Well one hint is that we don’t see much partisanship here, or culture warring. In fact, the conservative movement and the progressive movement have been almost entirely absent from this debate. The pressure to restructure this critical transportation sector through Federal regulation is coming from within the business community of importers and exporters who rely on it. The Cato Institute opposed the bill, and the American Economic Liberties Project (my org) supported it, but other than that, the ‘public interest community’ of nonprofits just wasn’t paying attention.
Who was paying attention? Well, the regulators and the industry. The roots of this law go back to industry discussions happening in the wake of the financial crisis of 2008, and Federal Maritime Commission Investigations that started in 2015. In what are called fact-finding studies 28 and 29, the FMC went to stakeholders in the industry and found out it was rife with inefficiencies and retaliation. In 2018, the FMC found concerns about “poor carrier customer service; carrier delays in correcting bills; lack of uniformity among dispute resolution procedures and free time policies; lack of advance notice or communication from marine terminal operators about closures and terminal ability to receive returned equipment; large demurrage and detention bills related to government cargo examinations; decreased free time; lack of ocean transportation intermediary involvement with shipper and ocean carrier arrangements; and congestion at rail yards … due to drayage trucking and chassis unavailability.” Basically the FMC saw there was the potential for a massive traffic jam.
A lot of the findings focused on the secrecy of the industry, with fees and availabilities to move cargo kept opaque. (Note that the key shift in deregulation in the 1990s was to facilitate such secrecy in an industry where cooperatives had been allowed as long as all pricing was public.) The FMC also found that no one really complained about the carriers in formal proceedings, due to fear of retaliation.
Because of the Covid crisis, earlier this year, the FMC dusted off its meager regulatory authority and started to act, promulgating a rule on unreasonable detention and demurrage charges. The basic idea behind this rule is that carriers can only charge fees if the fees are intended to get cargo moving the way it should. They cannot make money on a traffic jam. But there is a dispute over whether the FMC has the legal authority to act, and whether it has teeth should the carriers choose to disobey. To address this ambiguity, Congress is stepping in with the Ocean Shipping Reform Act, which not only codifies this rule into statute, but makes it clear that the FMC must become a real regulator again.
The political dynamic is a bit weird. Progressives fancy themselves fans of government and regulation, but they mostly did not notice this massive attempt at re-regulation. Conservatives think of themselves as pro-business but anti-government, so to have a pro-regulatory framework pushed by much of the business community is confusing. Meanwhile, the general disdain most feel for Congress is nowhere to be found; Congress is legislating, not fighting amongst themselves over symbolic nonsense. So nothing about this fits into any common narrative we have about politics.
But that’s because we get the definition of politics wrong. Politics isn’t, or shouldn’t, be the annoying way that people yell at each other over cultural symbols on Thanksgiving. The true politics of the American state is about the underlying guts of commerce. And today, the people who move, make, and distribute stuff - regardless of whether they are a Democrat or Republican - simply can’t afford to let the system clog up the way it has. Ideologically, the moment is ripe for a new way of thinking about the relationship of commerce and the state. It turns out, all of us need a functional government and a functional Congress. And finally, in at least this corner of the world, it sounds like we are getting one.
Worker Anger: Disloyalty Flows Both Ways
I like to read the newsletter of the Society for Human Resource Management (SHRM), which is the big business trade association that focuses on employee management. Over the last six months, SHRM haas been freaking out over the ‘Great Resignation,’ where workers are quitting to get higher paid jobs. Unlike earlier eras of labor unrest, this one has little connection to organized labor. It is competitive dynamics enabling workers to make demands.
Here’s George Kelly, senior vice president at Milwaukee-based recruiting and staffing firm ManpowerGroup. “Wage growth in the U.S. has been incredibly slow over the last 30-plus years, but since the summer of 2020, wage growth has accelerated, driven by competition.” As it turns out, competitive for workers increases wages. One way to constrain wages is to force employees to sign non-compete agreements, but the Federal Trade Commission may act to make such contracts void.
SHRM has been reporting that employers have been resorting to hiring bonuses, so they wouldn’t have to raise wages. But that’s backfiring, as some HR specialists are finding “that workers are staying for a short period and then moving on to the next job, trying to snap up multiple signing bonuses.” That’s a bit sleazy, but it’s exactly the kind of arbitrage you’d expect from corporate America and private equity. Only this time, the American worker is the one taking advantage of the loophole.
It turns out, disloyalty flows both ways.
There are three significant providers of arbitration services, American Arbitration Association (AAA), National Arbitration and Mediation, and Judicial Arbitration and Mediation Services. What is arbitration? Good question! It’s basically a private judicial system that corporations pay for so they can limit the complaints that consumers, workers, and rivals can bring against them. Arbitration, except among powerful firms bargaining with each other, probably shouldn’t exist, or at the very least, should be limited so that one can’t give away fundamental rights in private forums. That’s why we have courts. But it’s nice to know even within a thoroughly corrupt system that shouldn’t exist, there’s likely market power. Something something snake eating its tail.
A Bank Merger Drama
Last week, Consumer Financial Protection Bureau chief Rohit Chopra proposed that a key bank regulator, the Federal Deposit Insurance Corporation, begin the process of tightening rules on bank mergers. What followed was regulatory high drama, the kind of fight that seems like boring petty squabbling among nerds, but actually involves who controls all the money in the world.
Here’s the context. America has been steadily losing banks for decades due to mergers, and regulators haven’t litigated to stop a bank merger since the mid-1990s. This created a lot of problems, including the dominance of Too Big to Fail mega-banks, as well as private equity filling in for the lack of commercial lending with high-cost capital. There’s increasing interest in addressing banking consolidation. For instance, financial Services Committee Chair Maxine Waters is calling for a moratorium on certain kinds of bank mergers.
So one would think that Chopra’s action - a basic request for information - made perfect sense. But the FDIC is run by a Trump holdover, Jelena McWilliams, and she refused to open such a comment period on bank mergers. McWilliams is a standard bank lawyer type who has never blocked a bank merger, and has tried to open the door to Amazon, Google, and Facebook themselves becoming banks.
But McWilliams has a boss, because the FDIC is a commission with a board of five members. So the three Democrats who are on the board of the FDIC - including Chopra - voted to overrule her. McWilliams, surprisingly, didn’t follow the will of the majority. Instead, she claimed that the FDIC board doesn’t have the authority to run the FDIC, and refused to let the FDIC staff work on it. Republican Senators got angry on McWilliam’s behalf, Elizabeth Warren went after McWilliams, and now the consensus among Democrats is that Joe Biden needs to fire the FDIC chief for refusing to honor the rule of law. (If you want to know the full story, Adam Levitin’s piece on the whole matter is well-written and persuasive.)
Then yesterday, the Department of Justice Antitrust chief Jonathan Kanter big-footed McWilliams entirely by opening up a comment period on the bank merger guidelines, over which the Antitrust Division has jurisdiction and which haven’t been updated since 1995. It’s a fascinating and nasty battle over bank regulation and merger law, and it’s also one of the few areas over which the Biden administration is really governing. Also, banks are where the money is. So there’s that.
Stories I’m Reading
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