Suggestion #5: Avoid a crisis caused by "just-in-time"

Those who brought us the Financial Implosion have set the stage for another, worse calamity.  We must act to prevent a similar disaster in the Real Economy -- that could affect manufacturing, commerce and possibly survival -- exacerbated by a dangerous over-reliance on “just in time.”

To be clear, I am not talking about the plight of the U.S. auto-makers, who are near collapse because of inefficiency, bad management, and failures of imagination by both owners and workers. Nor do I refer to the painful-but-expected retrenchment and layoffs we’re seeing in many industries.  These are worrisome, but there is another problem looming on the horizon -- one that may hammer even competent enterprises, that imagine they are healthy enough to weather the storm.

I refer to a brittle weakness in our economy, courtesy of the same smartaleck caste of MBAs who brought us derivatives and hyper-leveraged finance.  A frailty that could, potentially, turn some short-term crisis into full-scale disaster -- and all because of a good theory that’s been taken way too far.


Another trick of “optimization”

For decades, we’ve been told -- by the same fellows who brought us “efficient finance” -- that manufacturing and commerce should be fine-tuned to squeeze every penny of profit, by trimming away all “fat.” Industries that hew close to the teachings of W. Edwards Deming and Toyota’s Taichi Ohno require that their suppliers deliver parts and raw materials at the precise moment when they are needed.  Under this principle, any reserves that are kept on-premises will only encourage sloppy management and incur unnecessary storage costs -- a calculation that has long been exacerbated by shortsighted tax policies that punish warehousing and inventory-keeping.

This approach, called “Just-In-Time,” is based upon the very same postulate that led the business-major types to bet our economic farm on arcane financial instruments, leading to catastrophic failure, in 2007 and 2008.  A wholly unjustified wager that the economy and its supporting systems will always remain stable and never experience disruption.  

Of course, this was just another expression of the basic concept underlying America’s vaunted way-of-life -- thinking only for today, spending all we had, with the lowest savings rate in the industrial world, while assuming tomorrow will always be kind. The freighters will keep bustling into our ports while foreigners continue to buy our debts.  Trucks and trains will keep delivering everything where it needs to go, with perfect, computer-controlled precision.

Our ancestors’ age-old wisdom of putting a little aside for just-in-case robustness has been replaced by a delusion of just-in-time efficiency, based on a belief in perfectly reliable global interdependence.

But, in real life, animals - even efficient ones - carry fat reserves. Surprises and disruptions happen. And when they do, we worry less about tweaking widgets-per second, and more about survival.


For the record, and lest anyone misconstrue, I actually have a great deal of respect for W. Edwards Deming and the first- order effects that his teachings had on industrial practice, not only in 1950s Japan, where he was pivotal in rebuilding that shattered nation into a prosperous economic powerhouse, but everywhere that Just in Time and related notions had positive effects, introducing tight discipline into management. For example, when Toyota eliminated on-site parts overstocks, they exposed countless inefficiencies in production that would have been overlooked, if employees could just reach over and grab replacements from a big pile. I'll be the last to deny the benefits that spartan efficiency have brought to industry and commerce. Nor does my praise of the warehouse overlook the fact that inventories do incur an inherent cost.

Nevertheless, any good thing can be taken obsessively too far, especially when a conflict arises between corporate profit and the common good. It is the job of the state to ensure that robustness and resiliency are desiderata that are included in the mix. Rules and market forces can be tweaked that encourage a balance. Above all, Deming-style practices, when followed obsessively, constitute what's called "success dependent planning" - or fine tuning everything to be based upon an assumption that all eventualities have already been taken into account. And as Nobelist F. Hayek clearly demonstrated, that notion can be carried over a cliff into pure (and self-destructive) delusion.

NASA got into a lot of trouble trying to use success-dependent planning. And when it is done by armed forces (and today's U.S. military show many signs of falling into this trap), there is a sequence of events that will follow, as inevitable as sunset. Surprise, dismay and then defeat.

Let’s go back to the example of tax laws that punish warehousing and inventory keeping. These are nothing less than inducements for fragility. If such disincentives were removed, even reversed, good managers might feel more ready to stockpile a little. Perhaps even enough supplies to keep their enterprises going for a while, say, during an unexpected ice storm, or if terrorists toppled a few of our vulnerable, chokepoint bridges.  Or if any of ten thousand other things broke down, in our humming national and international grid.

Moreover -- and here’s a little bonus that’s highly relevant during a recession -- in the short term, just filling such expanded inventories could add to national demand, providing a little more economic stimulus at a critical time. By rewarding companies for investing in inventory, we might also foster a self-fulfilling expectation that good times will return. This, alone, might justify innovating ways to ease back from just in-time thinking.

Even more convincing is the robustness argument. A modicum of warehoused supplies could someday make a crucial difference. And this applies not only to industrial supplies, but to the food and other vital consumables that the people of a city might need, if they found themselves cut off for a while. The ancient Egyptians knew this. The puritans did. Anybody with a gram of wisdom does, especially if they accept that we still live in dangerous times.

Above all, this is the opposite of what the MBA caste wants us to do.  And, nowadays, what better sign could there be, that an idea is worth looking-at?

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And that completes my short list of unconventional ideas about the current economic crisis.  Next: foreign policy and national security.unconventional ideas about the current economic crisis.  Next: foreign policy and national security.