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From LeverNews.com — Lever Time is the flagship podcast from the investigative news outlet The Lever. Hosted by award-winning journalist, Oscar-nominated writer, and Bernie Sanders' 2020 speechwriter David Sirota, Lever Time features exclusive reporting from The Lever’s newsroom, high-profile guest interviews, and expert analysis from the sharpest minds in media and politics.
From the Lever’s reader supported newsroom. This is Lever Time.
I’m David Sirota.
Inflation is one of the pundit classes favorite words. For years, we were deluged with theories that it was rising workers wages or too much government spending that was forcing up the costs of goods.
But rarely did any of them ever consider that it wasn’t workers or public programs that were the culprit — in fact, the real target of their ire should’ve been the corporations themselves who control pricing.
But don’t take it from me. That’s what the CEOs of major corporations have literally told their shareholders. That inflation has been good, and in fact has given them cover to raise prices on unexpecting consumers.
And it’s not just the CEOs saying it. In a new study by the Federal Reserve Bank of Boston, researchers found that prices grew faster than labor costs.
So, no. It’s not workers wages. It’s corporate profiteering. But the story goes even deeper than that. Corporate profiteering is behind what kicked off the inflation crisis to begin with.
Today on Lever Time, we’re going to go to senior podcast producer Arjun Singh. He’ll first look at just how far corporations went to price gouge consumers recently. Then, he sits down with reporter Peter Goodman to understand how this crisis began: with a broken supply chain that was controlled by 3 mega corporations.
That’s here on Lever Time.
In 2021, The leaders of the Kroger company, the largest supermarket operator in the United States had a conference call with their shareholders.
McMullen: While the COVID-19 health crisis has not ended this is the first quarter where we saw significant signs of a recovery and the return of what we hope is a new normal.
That’s the voice of Rodney McMullen the CEO of Kroger, and that summer he was feeling pretty optimistic about the state of the company. According to McMullen profits were strong, they had weathered a supply chain crisis, and more shoppers were trickling back to their stores in person.
Then, someone brought up inflation.
Shareholder: Can you maybe just give us an update on the inflation front, maybe more importantly how do you feel about the ability to pass through higher prices in historic periods.
This was in June of 2021. Before inflation would reach historic highs and become deeply embedded in the public psyche — at that time though, McMullen wasn’t too worried.
McMullen: As you know if you look at over the years Kroger has been able to operate in high inflation environments and low inflation environments. If you look at the fresh department inflation a lot of supply disruptions because of COVID caused it so it’s hard to tell. We would expect to operate well in any environment, and we would expect to pass those costs to customers.
McMullen wasn’t too concerned about inflation. His plan was to just raise prices and have consumers make up the extra cost. And That’s a pretty normal part of doing business, as frustrating as it might be for consumers.
But it was what McMullen said next that was a little bit…surprising.
McMullen: We view a little bit of inflation as always good in our business and we would expect to be able to pass those costs through to customers on things that are permanent in nature.
[Music in]
At this point, I’m sure many of you listening are familiar with inflation — the rise of prices for goods and services. A year after Kroger’s CEO had this call, inflation was at a historic high. In June of 2022, prices had risen 9.1% from the previous year – and it was something a lot of people were beginning to notice.
[News montage]
A lot of people fixated on the rise in workers wages as the reason for inflation. The logic went that workers had gained too many wage increases since 2021, and it was overheating the economy.
[stephanie ruhle clip]
But that wasn’t the entire story. In fact, it may not have been most of the story. Now that the dust is starting to settle on the inflationary surge of the past few years, fresh research and reporting has pinpointed another reason prices shot up so fast.
Corporate greed.
Lindsay Owens: inflation provided a lot of cover for them to go bigger on prices. The consumer thought that this was a phenomenon that they were responding to and not just initially, uh, profiteering or greed, whatever you want to call it, but the evidence now, uh, as we look back on this period of high inflation.
is really considerable that profiteering played a sizable role in the high prices that Americans suffered through over this period
Lindsay Owens is the executive director of the Groundwork Collaborative, a think tank that initially surfaced McMullen’s comments about inflation.
One thing they found is McMullen wasn’t unique. Across sectors, but particularly in the food industry, corporations took advantage of the moment to price gouge consumers.
Lindsay: companies have told us that this is what they are doing. This is one of those, this is one of those things which is like really frustrating as someone who talks about this a lot and gets like a lot of tough questions about the data. And you know, it's sort of rare that you have a smoking gun, but we have a smoking gun here, right?
Um, when we look at the earnings calls over this period of high inflation, CEOs, CTOs, CMOs, all of the big boys, they're mostly boys. All of the chief executive officers at these companies have let us know that they were able to pass along their rising costs and go for more. They told their investors this on earnings calls.
They told analysts this on earnings calls. And it was really great. They, uh, talked about it because it was fundamental to the profit margins and quarterly profits that they were turning around and that they expected to keep turning around and they were letting their investors know, uh, how they were bringing in these record profits.
It’s true that most companies did have to confront rising costs in the period after the peak of the pandemic, but what stood out to Lindsay and the folks at the Groundwork Collaborative is that profits were outpacing those costs.
The math didn’t seem to add up….unless these companies were raising prices simply to charge more.
Owens: I think it is important for us to understand that the CEOs were telling the truth when they said that they were. Raising their prices, uh, beyond what they needed to, to cover their rising costs. So that's a piece of evidence. Bucket number one, bucket number two is the hard data. When we look at the past few years, we see a couple of things.
The first is that by the end of 2023, the last quarter of 2023, uh, corporate profits hit their all time record high, not a post pandemic record high and all time record high. How are they doing that if rising costs are eating into their bottom line? Well, they're passing along their rising costs, but then going for more, right?
Uh, padding, padding their bottom line, but more important than just corporate profits, although that's an interesting piece of data, but your profits could go up just cause you're selling more stuff, right? You sell more glasses of lemonade at the lemonade stand. Your profits go up. That doesn't necessarily mean you're making more per glass of lemonade.
The piece of evidence that we have that suggests that companies were making more per glass of lemonade is that their profit margins were going up too. And what we saw during this incredible period, post pandemic period, where there were supply chain issues, uh, and rising costs, commodities costs going up, energy costs coming up after the war in Ukraine.
Is that profit margins were increasing as well. And in 2023, we got to 70 year high profit margins. And so this tells us that they're not just selling more glasses of lemonade. They're selling each glass of lemonade, uh, at a higher profit.
One area that was glaringly obvious was in the fast food sector. Fast food prices have steadily been going up for the last decade — and in general their price hikes have far outpaced the rate of inflation.
Take Subway, once the home of the five dollar footlong sub
[Subway commercial]
Not only is that off the menu, but since 2014 they’ve raised their prices 39 percent, eight percent higher than the rate of inflation in the same period.
But perhaps the worst culprit has been Mcdonalds. In 2014, they Mcdonalds was selling burgers for a dollar.
They even had Donald Trump go out and boast about it.
Trump: A big and tasty for just a dollar? How do you do it?
10 years later some of their menu items had more than doubled in prices. Then customers revolted.
Losing sales, Mcdonalds decided to drop back to their old ways. They started offering a $5 dollar value menu.
It looked like customers had finally called McDonalds bluff, and said the prices were nonsensical.
Here’s Lindsay Owens again.
Lindsay: Yeah, no, that's exactly what happened. And the McDonald's CEO has basically said as much in his earnings calls, um, where he's basically told investors, you know, he didn't use this exact phrasing, but that like they finally broke us. Right. And, um, you know, they got to the breaking point. They were starting to see some fall off, um, uh, of, you know, a volume, um, you know, this during this period, we had what's called price over volume where they weren't that worried about how many folks they were bringing in the door because they were able to charge so much for each person who came in the door.
Um, they were focused on price. And, um, part of the reason that you do that is because sticking with those higher price points is nice because hopefully you can continue to stick with them over time, right? Um, you don't want to give any of your pricing back to use the kind of wall street jargon. Um, but the, the McDonald's CEO and other fast food CEOs, and by the way, folks like Walmart and target who, um, tend to be at discounters and, and do see a lot of lower income consumers.
have all basically started to acknowledge that they've, they've really, uh, gotten to the breaking point with the low end consumer.
If the price hikes weren’t bad enough. Other fast food places like Wendy’s had toyed with the idea of using “dynamic pricing” a nice sounding term for what could also be called price gouging.
Their idea was to use digital boards to alter prices based on the time of day or the weather, or the popularity of a certain item. For the customer, that could have amounted to a higher price because it was raining or that they had the bad luck of having the same lunch break as everyone else in their area.
Lindsay: The motive is as old as capitalism itself. Companies are trying to make a buck that that isn't new. That didn't change in the pandemic period. The means is the market power that these companies have amassed over decades. And what that market power translates into is pricing power. Uh, you don't have to worry about the guy over your shoulder undercutting you if there's no one left over your shoulder, cause you've gobbled up all the competition and across every sector.
Of our economy. Companies have gotten bigger and bigger and bigger and more and more and more concentrated. And that means, uh, is a key feature of what we see right now. But even means was not enough, right? These companies have been getting bigger for decades. We haven't seen this type of pricing, um, rolled out, uh, really until this post pandemic period.
And that's because we finally had the final piece of the trifecta, which is the opportunity. Inflation itself really provided the cover that companies needed to roll out some of these most mercenary pricing strategies.
The tale of corporate consolidation is not new, but as Lindsay said there was a perfect storm brewing these last couple of years, and that began back in the peak of the pandemic.
After the break, we’ll hear from veteran New York Times journalist Peter Goodman about what he learned when he set to find out how the supply chain broke down and kicked off a global economic crisis.
Peter: Yeah, so I was already writing a lot about the supply chain, but I really wanted to follow one container, you know, these sort of workhorses of the global supply chain, one container from a factory town in China across the Pacific, and then look at all the industries that touched it. Progressed across the U.S.
Peter Goodman is a New York Times reporter and the author of the book How the World Ran out of Everything: Inside the Global Supply Chain.
I sat down with Peter to discuss one of the roots of this inflationary period. The supply chain crisis. You may remember back in 2020 there were shortages of a lot of things, and one reason was because the pandemic had disrupted the supply chain.
Peter: so I, I met this guy, Hagen Walker, who's the founder of a company based in Mississippi called glow. Uh, he's an interesting guy. He's a tinkerer by nature, uh, who, you know, had an internship at Tesla turned down a full time job there cause he wanted to go back to his college town of Starkville, Mississippi, uh, where he, uh, Started this company that makes these novelty plastic cubes that light up when you drop them in water.
Um, and then somebody figured out that beyond, you know, the obvious application that like, you could stick this in a cocktail and the bartender could look down the bar and figure out when it was time to refill glasses because the light would go out. Turned out that this was useful to, to kids who had autism.
Uh, parents found that bath time was a nightmare. And once they dropped in this Glow Cube, uh, kids were really soothed. And this turned into a deal that Hagen Walker got to make Elmo themed bath toys for Sesame Street. And I followed the most important shipment in the life of Hagen Walker's company. Uh, he had placed this order for the first, uh, batch of these Elmo toys with his factory in Ningbo, China.
Um, and then every conceivable difficult thing we now associate with the great supply chain disruption hit. Uh, and so by following the path of that container, I came to understand all the forces that were making the supply chain that we count on extremely vulnerable.
Arjun (02:54.755)
Yeah, you know, and this might sound like a very sort of simplistic question, but what is the actual supply chain? It's a term that I hear all the time and it kind of gives this impression that there is a global assembly line and everything's very neat and in order. But I think it's a little bit more complicated than that. So, you know, when we talk about how does something get from point A to point B and the big supply chain, what exactly are we talking about?
Peter Goodman (03:23.191)
no, that's a great question and I'm glad you asked it because, you know, contrary to what we might imagine when we hear global supply chain, you know, as if like some wizards went to the top of a mountain and conjured, you know, an efficient way to make stuff and deliver it to our doors. This is very much an ad hoc system that is built up over decades. It's a bunch of systems really. It's a bunch of different transportation systems that work together, that overlap, that sometimes collide.
Some parts are regulated some parts are not regulated for Americans You know some of this is tied up in domestic policy and domestic transportation But then it turns out we're largely dependent upon this international cartel of shipping companies none of which are American companies and and
Arjun (04:03.233)
Mm -hmm.
Peter Goodman (04:12.847)
really excessive deregulation has put us at the mercy of three alliances that dominate traffic across the Pacific Ocean. They control something like 95 % of that trade. So the supply chain essentially means how do we make things, how do we get things to where they're supposed to go? And there's a lot of complexity in that simple little phrase.
Arjun (04:25.889)
Wow.
Arjun (04:35.233)
we get to the point that you have three non -American companies controlling 95 % of our supply chain, what would you say was kind of the transition moment for the global economy to get into the hands of this? Because I think at this point, many at least developed nations like the United States are heavily reliant on this kind of globalized supply system right now.
Peter Goodman (05:01.04)
Yeah, for sure. It's a story that's steeped in deregulation. If you go back decades, we had antitrust exemptions for shipping companies that served to the states so that they could coordinate their schedules, so that they could coordinate prices in some cases, which we thought was OK, provided that some government regulator was making sure that every
place that needed to be served was served. And then there were price caps and there was transparency in pricing. And then we had two landmarks, one in the 80s and then one in the 90s where we essentially kept the antitrust exemption, but we allowed companies to start negotiating deals in secret. So, you know, previously it's like if you were shipping one container from anywhere to somewhere in the States, you got the same.
tariff that was quoted to any company. But this was an open invitation for, obviously, Walmart, Amazon, Target to get sweetheart deals. And so we kind of optimized the supply chain for them and their investor interests. And if you wanted to make stuff at scale and drive down the price, this was a pretty good deal in many instances. But it drove a lot of competition out. Then in terms of the shipping question,
You had a bunch of things happen. First of all, container shipping became the standard. So, you know, I tell the story of how before 1950, shipping was slow. It was extremely dangerous. It was unreliable. Loading and unloading a ship tended to take days and days. And it was there was no template. It's like human beings had to go down into the hull and figure out, you know, I'm going to stick this side of cattle here.
Arjun (06:54.684)
Mm -hmm.
Peter Goodman (06:54.735)
this drum of paint there, casks of liquor over here, and fit it all together like this crazy jigsaw puzzle. There were a lot of accidents, there was a lot of corruption, there was a lot of waste, and along comes the shipping container, the standard size box where you can pack stuff into the box at the factory. You can move this stuff around from rail to truck, onto ship, using standardized equipment. So that dropped the price of shipping dramatically.
then you have China enter the WTO. I'm kind of shotgunning some of this stuff. But you get China into the WTO, you get the capacity to move stuff around very quickly, you get mass assembly, I mean, going all the way back to Henry Ford. And so that's a prescription for supply chains to jump oceans. And then back to your question about shipping, you get governments in South Korea, Taiwan, China, subsidizing...
Arjun (07:36.124)
Mm -hmm.
Peter Goodman (07:50.095)
ocean carriers as a way to boost their exports and no one else can compete. Competitors are driven out of business. You combine that with deregulation and here we are. We have a handful of giant shipping companies that dominate the trade.
Arjun (08:05.756)
Wow. I mean, and that's, I think a story that you actually also see in the way that Asian countries like South Korea also invested in, you know, microchips, which also became part of the kind of supply chain crisis that we saw. So what happened? You know, I remember being back during that period, the peak of the pandemic, but even a little bit after, you know, you're seeing pictures and videos of whole containers just sitting at dock.
There's issues going along with truck drivers, but I feel like I never actually kind of got a sense of What actually had happened that disrupted the supply chain so badly? What did you discover in your reporting?
Peter Goodman (08:48.015)
Well, there's a lot packed into this question. First of all, it's important to note that there's a lot of monopoly power in this supply chain. So there's what I call engineered scarcity, where it is not a coincidence that every time there's some disruption to the system, consumer goods go up, we suddenly can't get really important things, whether we're talking about computer chips, medical devices, ventilators, more frivolous things like bath toys, which we can obviously live without.
Arjun (08:51.386)
Hmm.
Peter Goodman (09:17.583)
infant formula, toilet paper. At the end of every one of my chapters is this unfunny punchline that then some industry celebrated record profits. And these two things are not coincidental. But what happened, I mean, I view the pandemic disruption as much more a reveal of problems that had been there all along and that had popped up previously than the cause. But the direct cause of the shortages that I'm writing about,
Arjun (09:28.505)
Right.
Peter Goodman (09:47.311)
during the worst of the pandemic was that forecasts were wildly off about how the economic consequences of the pandemic would play out. So economists, people running big companies said, okay, we've seen this movie before, people are gonna be confined to their homes. I mean, we hadn't seen that part, but we'd seen what was assumed to be a plunge in demand. People were gonna lose their jobs, that would take spending power out of the economy.
factories would be disrupted, so we wouldn't have as much stuff to make, which meant we wouldn't have as much need for container ships, for rail cars, for workers. And so lots of companies cut orders. And I'm sure we'll get to this, but it's worth noting that for decades, large companies have been governed by this mantra, just in time. Let's not build excess inventory. We can come back to the permutations of that later. But basically,
Arjun (10:37.463)
Yeah
Peter Goodman (10:45.391)
anybody in control of factory operations assumed they'd need less stuff. And then what happened was while we didn't go to the gym, we bought exercise bikes and put them in our basements. We didn't go to the office. And so the sandwich place down the street from our office lost a lot of business. But suddenly those of us with children are cooking, you know, twenty seven meals a day for children cooped up with distance learning. We're outfitting our offices or our bedrooms into offices.
We're trying to entertain children with trampolines, we're buying barbecues so we can have some semblance of leisure time. And all of these things, or many of these things, are made in factories in Asia. And the container shipping industry was at first overwhelmed, then the ports themselves were overwhelmed. I mean, my book starts with the mother of all traffic jams, you know, 50 plus container vessels floating off the ports of LA and Long Beach.
Arjun (11:26.71)
Mm -hmm.
Arjun (11:41.686)
Yeah.
Peter Goodman (11:41.743)
These two ports are the gateway for 40 % of imported products reaching the United States by container ship. And they're swamped in part because there aren't enough truck drivers. Truck drivers are sick. We've downgraded trucking to the point where lots of people are leaving. Dock workers are sick. The warehouses are low staffed and people are falling ill there. There's stuff to the rafters with goods. So the whole system just kind of buckles in the face of this tremendous surge of imports.
Arjun (12:09.462)
I'm really glad that you you brought up the the ports and the truck drivers in particular because what I really enjoyed about your book is how human centric the book is and at one point you actually write about the impact of I think decades of kind of the degradation of worker empowerment essentially and particularly for the dock workers and truck drivers. How does labor?
fit into this story and what we saw happen and what has sort of been the evolution of the humans who go behind the supply chain, whether that's truck drivers, warehouse workers or dock workers. How does that play a role in what we eventually saw manifest a couple of years ago?
Peter Goodman (12:54.383)
Yeah, you know, I really appreciate that question because I think we're so steeped in the notion that the internet, container shipping, if we think about it at all, but globalization has made transportation, production, it's all pretty seamless. You know, we don't agree on very much today, but most of us think that we have faith that if we click on, you know, an Amazon site,
Within hours in some cases, some truck will show up at our door and we're kind of invited to not think about the army of human beings who are behind all of this. Working in factories, often on the other side of oceans, working on the docks, maintaining rail. I spent a lot of time with traveling rail crews who were dealing with the indignity of a potential strike over no...
Arjun (13:28.147)
Mm -hmm.
Peter Goodman (13:43.951)
paid sick leave, they're away from their families for weeks and months at a time because of just in time, their jobs have been made very flexible, which is a euphemism for they have no idea when they're coming home, they're missing the births of children, the deaths of relatives. And so when this breaks down, we are forced to realize that we are dependent upon this unseen army of people whose jobs have indeed been downgraded to the point where,
Once there's an alternative to these jobs, I mean, you know, I rode for three days with a truck driver through the midsection of the US in the middle of winter from Kansas City down to Dallas and back, slept in the cab for a couple of nights. And boy, my takeaway was if you've got another way to make a living, you're going to do it. These are it's always been a tough job. But back it back before deregulation, the teamsters were in charge. The teamsters are a controversial outfit, but they demonstrate.
Arjun (14:33.169)
Yeah.
Peter Goodman (14:40.943)
the value of having a union, making sure that workers get a piece of the action. And, you know, I'll tell you this. I mean, I tell the story of Henry Ford in the book. Henry Ford is obviously a highly problematic character. He smashed organized labor. He was a virulent racist and anti -Semite, but he knew a thing or two about supply chains. And in the nineteen teens, he doubled wages for his workers when he was desperately trying to fill out two giant factories engaged in mass assembly. People called him a communist and he said,
I just want to make things and sell my product at a low price and know that I can make my products when I need to. And he specifically said any business that's built on low wage labor is inherently unreliable. And that is something that I hope people will take away from my book.
Arjun (15:26.512)
Hmm.
Arjun (15:30.127)
It's that's an interesting point to kind of end on that part because now today I feel like in the era of Silicon Valley everybody is talking about robots and kind of the Ro I guess the word is automation But I wanted to say the word robotification of the economy but you see that everywhere from Elon Musk vowing that Tesla is going to Automate the entire trucking industry and then even inside warehouses We're gonna have these you know, r2d2 star wars style droids moving everywhere. I
At one point, you yourself actually, I think you went to a trade show, right? And you saw some of these robots. How realistic of a premise is that? And I guess, you know, what is your perspective on the idea that is sort of being sold by a lot of companies, frankly, to gin up investment that says, look, we're just going to be able to replace humans on the supply chain with robots. Will that even actually solve any problems that we have? Is that a solution in search of a problem?
Peter Goodman (16:28.528)
I mean, it might be the solution to some problems in that robots don't go on strike, they don't have children to take care of, they don't have to go to the bathroom. I mean, if your idea of utopia running a business is that you don't ever have to answer to human demands, then the pull to automate is great. And you don't have to be a Luddite, by the way, to embrace automation. I mean,
There is this innovation because for as long as people have been around, we've thought about ways to lessen our burden and to stop doing things that are dangerous and grueling and hand those tasks over to machines. The problem is that we've done a very poor job, especially in this country, of compensating the people whose jobs are on the line. I mean, I remember years ago I went to this mine in Sweden.
and I talked to workers who were threatened by self -driving trucks and I was really struck by how they all said, yeah, we're fine with it because...
that could make our company more profitable and if our company's more profitable, then our wages will go up. And this was not some idealistic flight of fancy. This was their lived experience. I mean, they live in Sweden where there are high taxes that pay for national healthcare, so if they lost their job, they wouldn't be without healthcare, where there are very generous and pretty effective job training programs for people who are affected by trade. So they had every confidence that if they lost their jobs, they'd be trained for another. Whereas American workers,
and workers in many major economies have every legitimate reason to look at automation as the latest way in which the shareholder class is trying to squeeze them out of the equation so that investors get more, so that margins get fatter, you reduce cost, and they know from their lived experience that, boy, it's a long way down. If you lose a factory or warehouse job in the United States, you don't have health care necessarily.
Peter Goodman (18:29.232)
Maybe your spouse has it. Maybe you can qualify for something like Medicaid. Maybe you can afford to buy a cheap policy on one of these state exchanges. But you could easily end up in a situation where you'll be lucky to take a job at half of your previous wages. And so that resistance to automation comes from a collective policy failure and really the triumph of the investor class over social good.
Arjun (18:59.723)
is something that you brought up earlier that I do want to kind of understand a little bit more is this concept of just in time. What is just in time and how does it fit into the, you know, the story that you've been telling so far?
Peter Goodman (19:11.44)
Yeah, it's a super important question. So just in time was this notion pioneered by Toyota at the end of the Second World War that was very sensible and very successful. Toyota said, well,
We're dealing with the devastation of the war. We've got limited capital. Japan has lots of islands, so there isn't that much developable land. We can't just emulate Henry Ford's version of mass assembly where we just crank out as much product as we can manage and figure out how to sell it later. We're just going to make as many cars as we need to replenish the ones that have just been sold. And we're going to look at our supply chain too. We're going to say to our suppliers, just bring us as many parts.
as we need in real time on the assembly line to keep us going. Well, this idea helps Toyota become by many measures the most successful toy company, car company, excuse me, on earth. But I indict McKinsey in the book, but really the whole consulting class is on the line for serving the interest of the investor class. They take this sensible idea about reducing waste and they turn it into this very crude mantra to,
Arjun (20:12.809)
Yeah.
Peter Goodman (20:23.856)
Eliminate inventory. Don't fill your warehouses with parts and products and raw materials as a hedge against the inevitable troubles that pop up. Take the savings and give it to yourselves, corporate CEO, as a reward for being brilliant enough to hire McKinsey. Give it to your investors through share buybacks and dividends. They'll love it. Your share price will go up. And that actually works pretty well if you're an investor.
It does help lower costs for all sorts of consumer goods, but it leaves us vulnerable every time there's a shock to the system. We run out of things. I mean, the first supply chain story I ever wrote was back in 1999 when there was an earthquake in Taiwan that knocked the semiconductor market down. And it plays a very key role in the pandemic disruptions because by the time this hits, inventory is so lean.
Arjun (21:07.687)
Yes.
Peter Goodman (21:18.545)
And by the way, the consultants didn't pay attention to a cardinal rule of the Toyota experience, which was you got to have your suppliers close to your factory. So now you've got factories separated by oceans from their supplier. I mean, Henry Ford, boy, he would have just spun in his grave. I walked the catwalk in early 2022 at Ford's River Rouge plant, which was this kind of monument to self -sufficiency. And
You know, it's early 2022, they're making Ford's F -150 pickup truck. It's their most popular vehicle. It's this kind of very impressive, you know, symphony of production. There are some robots. There's still people, but they're taking the finished vehicles and they're parking them in the shadow of Ford's corporate headquarters and across the street from Henry Ford Elementary School because they've left themselves vulnerable.
to this computer chip shortage and until the computer chips show up, these cars are just stuck there. They can't drive.
Arjun (22:19.174)
Yeah. You know, thinking about someone like Henry Ford, I think a theme I picked up from your book is sort of the dangers of the financialization of everything. And with this, it's the supply chain, whether it's food, whether it's toys, whether it's cars. Peter, do you feel that there is a difference between the Henry Ford era of industrialists and this kind of more modern financial?
hesitate to sometimes even call them industrialists. I mean really a lot of these people are finance people but you know is that a thread that something there that you know people like Henry Ford who ran their industries is different than what we're seeing now and in what ways and I'm harkening back to your previous book Davos man a little bit but how has what is the difference between those old school industrialists and the finance people of today?
Peter Goodman (22:58.572)
100%.
Peter Goodman (23:12.497)
I mean, today, the finance people have the upper hand. I mean, everything's done for the finance people. The publicly traded corporation is governed by its fiduciary responsibility to shareholders, which trumps all. I mean, I use Ford for many reasons. One of them is I tell the story of the Dodge Brothers lawsuit in, I believe it was 1918, where Ford's early investors look at the success of the Model T.
Arjun (23:33.06)
Mm -hmm.
Peter Goodman (23:39.536)
Ford wants to build the River Rouge factory as a way to make sure he can operate at such scale that he can make every part of a car under that one roof. And the Dodge brothers say, well, hold on, you have $15 million on your balance sheet. How about you kick some of that out to us in the form of dividends? And Ford says, well, but that's my capital that I'm going to use to expand. I want to grow. Well, the Dodge brothers follow the lawsuit. They win. Ford manages to build the River Rouge.
Arjun (24:02.244)
Yeah.
Peter Goodman (24:07.697)
nonetheless, but I argue in the book you can draw a straight line from that court case to modern day because from then on, I mean, the Ford's forebears in charge now, they're clearly answering to Wall Street. And part of the reason they run out of computer chips is because they spent so much on share buybacks and dividends, not as much as some companies, by the way, but enough to have been able to build more resilience into their supply chain.
than they did. Financialization is at the heart of this story and financialization seeks out monopoly power which seeks to make products scarce because you can raise the prices and you know a lot of the inflation that we're dealing with today is the result of supply chain disruption combined with market concentration.
Arjun (24:43.555)
Mm -hmm.
Arjun (24:56.547)
Yeah, and I think another thing about it is, you know, in thinking about the supply chain, I personally think a lot about what is imported, but did this globalization and also financialization put more pressure for people who needed to now export their goods? I mean, for a lot of, take American farmers, you talk about almond farmers at one point. You know, I imagine there was a fairly decent market for almonds in the United States. They're delicious. They go on ice cream and everything, but.
Once it became the norm that the whole economy is globalized, does that put pressure on these farmers to then say, well, we got to expand into these markets and we now have to work with these supply chain companies?
Peter Goodman (25:41.81)
Well, you know, I'll put it to you this way. Like 15 years ago, if you were trying to get your product on the shelves of a Walmart superstore, you know, huge channel, you'd fly down to Bentonville, Arkansas, they don't come to you, you go to see them like the Pope. And you'd go in and you'd sit opposite a buyer's rep for Walmart and they would ask you, where do you make your product? And if the answer was something other than China, you had a problem.
because all of your competitors' chances are we're making their products in China or some other very low -wage country. And China stood alone in terms of the scale and the efficiency. So that was like saying we're not making it at the greatest possible scale or the lowest possible price. Walmart would prefer to talk to somebody else. And that pressure was very real. And the more that you're dealing with publicly traded companies,
who now have surrendered their ability to think strategically about the value of treating their workers well, they've got to answer to Wall Street. And if you buck that trend, you could get thrown out of work. I mean, in an age where everyone's running their company for the benefit of investors who are thinking about the next quarter, it becomes very difficult to say, well, I'm worried that there could be a pandemic or there could be some other shock.
to the system. There could be the Fukushima nuclear disaster or something like that. Again, therefore, I'd like to build up my inventory. I'd like to pay my people more so that they're invested in my company. That's a prescription if you're in a publicly traded company, you get thrown out the door. And by the time something happens such that you're validated, your view that you have to think about resilience is validated, there's a good chance you're long gone. Whereas,
The CEO who just says, no, I'm going to squeeze labor as hard as I can. I'm going to cut costs as much as I can. I don't care about resilience. Eventually, they will be revealed for flying pretty close to the sun. But by then, they'll probably be on a beach with a cocktail in their hand, sleeping in a hammock.
Arjun (27:52.254)
And I think it also means that you're kind of at the whims of just these companies. Back to that almond example, can you tell me a little bit more about what happened? Because my recollection is that basically shipping companies just didn't want to carry almonds before, and I'm sure I'm oversimplifying that greatly, but is that what happened?
Peter Goodman (28:13.33)
No, no, no, no, no, it's a great question. So, okay, so here's the deal. So the shipping cycle involves importers moving products from factory towns in Asia, especially China, to ports typically on the West Coast of the United States. So let's say, you know, you've got a container full of furniture from Shanghai, it arrives on the docks at Los Angeles, gets unloaded, then that empty container might get put on a truck.
or a rail and sent up to the Central Valley to be loaded up with almonds. So California is the source of 80 % of the world's almonds. And then chances are that container gets moved by truck to the Port of Oakland, gets put on a container ship and sent out to the world. So in the spring of 2022, I'm out in the Central Valley and I'm talking to almond farmers who are agitated. I mean, they are truly anxious. They've got the
previous year's crop already sold but still sitting in their warehouses because the shipping carriers have jacked up the price of moving a container across the Pacific from something like 2 ,500 bucks before the pandemic to in many cases 25 ,000, 26 ,000, $28 ,000 after you throw in all the special handling charges. And that trade is so lucrative,
that the shipping companies have no interest in sending empty containers up to the Central Valley to pick up almonds. That's a waste of time. They're taking the empty containers, putting them right back on the ships, sending them back across the Pacific to get to China to get the next load of stuff. We're burning diesel fuel to ship air back across the Pacific Ocean. And as a result, the almond farmers...
Arjun (30:03.803)
Wow.
Peter Goodman (30:05.586)
are sitting in the Central Valley unable to get ships to pick up their freight in Oakland. They're just told, you know, sorry there's no space for you.
Arjun (30:14.139)
Wow. I think with thereto, that financialization makes me wonder, there are a lot of externalities in there. The diesel fuel, the, I mean, just the frank matter of the issue of potential waste for a crop over there. But also, is there any incentive really for these companies to kind of get it together? Because as we've talked about here on Lever Time and we've covered in the Lever,
You know, we looked at food companies and food companies seem to have taken advantage of the period of the pandemic or this period of inflation to push up their prices a little bit more. But the incentives are now kind of disentangled from each other. Is that something that we saw happening with the supply chain? Was there an incentive for these companies to really figure it out, to get goods moving, or were they actually benefiting a little bit by sort of extorting the fact that they, they.
We're a monopoly in these industries.
Peter Goodman (31:13.038)
they were benefiting a lot. I mean, this is a crucial point. So first of all, the shipping carriers were celebrating record profits in 2022. They were making somewhere around $300 billion as an industry. So here's this vital artery to everything, right? This is how we get medicines and the building blocks for medicines.
This is how we get medical devices. This is how we get furniture, clothing. All of this stuff that consumers depend on is coming in via this industry that has every reason to prolong the crisis. We don't know where on the supply -demand curve they're maximizing their revenues. It's somewhere around the threat of disruption so importers and exporters will just pay whatever it costs to make their stuff move.
without actually dropping the margins. But if you don't have much competition, what incentive do you have to lower your prices? And if you've been liberated from regulations that forced you to disclose your prices so everyone can see them, well, now there's no transparency and you got the whole world believing that these disruptions have created all this inflation, which happens to be true, but we don't know how much is a reasonable...
Arjun (32:12.633)
Mm -hmm.
Arjun (32:29.881)
Yeah.
Peter Goodman (32:34.324)
recouping of extra costs and how much of it is a fattening of margins, which by the way is happening again because you know as we speak we know that the Houthis are opening fire on container vessels that are headed toward the Suez Canal in solidarity with Palestinians living in Gaza.
And as a result of that, you got a lot of container traffic that would normally be going through the Suez Canal from Asia to get to Europe and the East Coast of the United States, that instead is going the long way around Africa, which adds days. There's a lot of extra fuel that has to be burned. Well, the analysis I've seen suggests that that should increase the cost of moving a container by about a thousand bucks. But the actual increases are like three and four thousand bucks.
And again, there's no regulation. So this is just money that this international shipping cartel is able to grab for itself because we're dependent upon what they're offering and there's no competition.
Arjun (33:25.688)
Wow.
Arjun (33:38.199)
There is kind of one, I wouldn't say it's a proposed solution, but there is a wave of movement, if you will, that says bring manufacturing, build everything back in the United States, just build everything here. I guess one, is that actually a viable solution to the shipping problems because you would still ostensibly have to ship things. But the other thing that I wonder is, is there an incentive for any CEO who has shareholders right now to say,
Sure, let me go for the thing that is ostensibly going to be a little bit more expensive and let's just invest everything here, let's raise the prices of everything. What do you think?
Peter Goodman (34:20.179)
We're not bringing everything back. I mean, first of all, we should remember that trade is overall a good thing.
Trade is why we're having this conversation and we're not running around trying to feed our families with crops that we can grow. Trade, not to be flip about it, has increased wages for companies that export, it has dropped consumer prices. The problem is that trade generates losers as well as winners. And we've done a really poor job of taking care of the losers and that's...
created the backlash that's altered the geopolitics, such that multinational companies are looking at the prospect of another Trump presidency. He's threatening 60 % tariffs on Chinese goods. So that actually creates an incentive to think about...
buying some form of insurance, diversifying away from sole reliance on China, if that's been how your company's been running. There's certainly an argument for not being exposed to single countries, and especially a country that we're deciding to have a trade war with, as the supplier of really important things like the chemical components for basic medicines, like personal protective gear. But what's more likely to happen, and there's some evidence that it is happening, though,
for reasons we've discussed in terms of the incentives, I'm somewhat skeptical about how long it will stick, is that companies are willing to spend a little extra money to diversify away from sole dependence on China. I mean, I just came back from India, spent a couple weeks visiting companies that are picking up orders from Walmart.
Arjun (35:59.571)
Mm -hmm.
Peter Goodman (35:59.603)
on housewares that used to be made in China that are now shifting to India. Mexico is a place that's picking up a lot of trade for the simple reason that it's actually easier to do just in time if you're doing it in Mexico. It's not, I mean, back to the Toyota point, Toyota made sure that their suppliers were clustered close to their factories. Well, you can reach pretty much any place in North America.
within two weeks from just about any place in Mexico. And the time zones aren't that different. There are much easier language barriers to address. So there's a pretty good argument that you get more resilience. I also think it's important in dealing with the takeaways from this crisis, the typical framing.
from business is there's a trade -off between resilience and efficiency. As if what we've had is perfect efficiency but it broke down so now we're going to build some more resilience which will be less efficient. There's a lot of inefficiency in the perverse kind of efficiency that we've lived through. We talked about just -in -time. I think you guys on your podcast have actually talked about precision scheduled railroading which is just -in -time on the rails which really means
Arjun (37:20.4)
Mm -hmm. Yep.
Peter Goodman (37:22.867)
you know, fire lots of workers, limit train service, stick the people who are still working with more responsibility than ever, which keeps people on the road longer, which makes people quit, which makes the supply chain less reliable. But, you know, I talked to an engineer at Union Pacific who was horrified to discover that he was routinely pulling cargo to the wrong destinations. And he was doing this not by accident, but because,
Arjun (37:49.453)
Wow.
Peter Goodman (37:52.691)
His company, which is essentially a duopoly in its territory out west, was telling Wall Street that it would prove its efficiency, its commitment to efficiency, by lowering dwell time. That's the amount of time that cargo sits in any one place. So this got turned into an imperative at the level of the rail yard in Nebraska where this guy was passing through, that whenever the next train's leaving, you attach cargo to that train.
So this guy discovers, I'm driving this train that's headed for Oregon. I'm carrying auto parts, drums full of chemicals that are supposed to be going south to California. And the company's just decided, well, we got a lower dwell time. So that's highly inefficient. You've got somebody waiting to repair their car. You've got car dealerships that don't have stock. You have paint manufacturers that can't make paint because they can't get the chemicals they need. And contractors can't get the...
paint they need to satisfy their orders. That's a lot of inefficiency in the name of demonstrating to Wall Street that you're really dedicated to ineffici... to efficiency.
Arjun (39:01.933)
Is there any lesson here about consumption? Was demand ever a factor in some of the problems that we saw in the last couple of years, or was this really more on the side of what was happening because of some of these implementations of things like just in time and the monopolization of the shipping industry?
Peter Goodman (39:23.989)
I think consumers, I mean, we certainly play a huge role. Let's come back to almonds. Just the amount of water that goes into...
into nurturing the almond crop in the Central Valley of California could keep LA stocked for two years. So we're essentially, you think about Los Angeles tand the politics and the battles over water that go back to the beginning of the city. You think about the fact that LA suffered terrible droughts and we are in essence burning diesel fuel to export water across the ocean. I mean, that's kind of cosmically insane on many levels.
Arjun (39:41.613)
Wow.
Arjun (39:47.341)
Yeah.
Peter Goodman (40:03.348)
But I don't put a lot of stock that consumers are going to save us from the screwed up and vulnerable supply chain. I think that most of us, we're busy with our jobs, we're busy with our kids, we don't have time to be supply chain geeks. I mean, it's going to take a combination of sensible government regulations and especially a taking on of monopoly power and financialization.
so that market forces can actually work in our interests. I mean, you know.
the business lobbies that are always trying to justify the status quo. And here there really is overlap with my last book, Davos Man, How the Billionaires Devoured the World. You know, they love to position any attempt to regulate as like a form of socialism, as, you know, you're anti -market. But I mean, a lot of the problems we're talking about are problems of the market not working. I mean, if we had more competition for shipping and we had transparent pricing, then when one carrier jacks up the price $10 ,000,
Arjun (40:50.121)
Right.
Peter Goodman (41:06.806)
in the space of a few weeks, there'd be additional entrance, except we don't have those entrants because we've built this shipping system that relies on mega ships and a handful of mega ports. They're the only ones that can actually manage the vessels that are increasingly at the center of global trade. And so you have huge barriers to entry. You don't have competition. You have pricing power. So if we could deal with antitrust enforcement,
labor mobilization so that workers do get their share of the action. I think we should be sharing that, not just good for the human beings involved in producing our stuff and delivering it to our doors, but also for business itself. I mean, the system that we've got is efficient purely from the standpoint of investors just thinking about quarter to quarter. It's not even good operationally for businesses.
Arjun: Yeah.Does it seem like after the supply chain disruptions recently, there is a reconsideration in the CEO or the investment class? Because even outside of their business interests, I just imagine there were plenty of investors who were probably annoyed themselves by some of these issues that they saw. Does it seem like there's at least in that world, the Davos world, if you will, some sort of a reconsideration or at least open discussion about how to change this?
Peter Goodman
I mean, I think in terms of financialization.
I mean, there's a lot of lip service, right? I mean, you can talk about stakeholder capitalism if you want. But I think I'd laid this out in my last book. And I think the pandemic pretty much proved that these are press releases and photo ops. And Milton Friedman and his idea about profit maximization is still very much with us. That's the driving force. I do think the geopolitical considerations are very real. Right. So whoever wins the presidential election here in the states in November,
If you are...
managing money or running a business, there is a safe assumption that US -China trade animosity and really the emergence of what feels like a new Cold War is with us for good and you better plan accordingly. So if you're going to depend solely on China, China's got an unbeatable combination of highly efficient labor, that's very cheap, labor unions are basically banned, you can get around environmental standards by cutting in the relevant Communist Party officials.
That's been very enticing to companies like Walmart, but you can't get around the fact that the Trump tariffs are now the Biden tariffs. They're not going away. We've seen an increase in tariffs. I mean, on the grounds of national security combined with the imperatives of industrial policy and the idea that the US has to protect important emerging industries like electric vehicles, we've seen additional tariffs. So that is forcing a thinking about
Peter Goodman
place that wasn't there before. We've all lived through a half century or so where we've been invited to assume that a factory in southern China might just as well be in southern Ohio. Doesn't matter as long as there's a container ship, as long as there's rail or truck or whatever that can bridge the gap. Well, it is true for geopolitical reasons that.
That's changing, and especially in terms of the place of China as a center for global manufacturing. But as I conclude in the book, I think the imperatives of financialization are still very much with us.
Arjun
Peter, thanks for taking the time to sit down. This is a fascinating conversation.
Peter Goodman
thank you so much, Arjun. I really enjoyed it.
Thanks for listening to another episode of lever time.
This episode was produced by me arjun singh with help from Chris Walker, and editing support from Lucy Dean Stockton.
Our theme music was composed by Nick Campbell.