ECON 3020 is only offered in the Spring.
Each year, I try to offer some guidance to students on what country/region might be in the news, and how it might affect macroeconomic outcomes.
Betcha' never heard of Bab-el-Mandeb. Perk up: it's been in the news for several weeks, and the story is not getting smaller.
***
Americans are biased in a lot of ways. That's a given.
One of the things we're biased about is the Panama Canal. It's a big deal ... to us ... and pretty much no one else. It's not really big enough any more, its expandability is limited, and it doesn't really link up the important spots believe it or not.
The really big and important canal in the world is the Suez Canal, running through Egypt, to join the Mediterranean Sea to the Red Sea (and then the Indian Ocean and the Pacific Ocean).
Almost three years ago, a cargo ship about twice the length of the Titanic, through a combination of factors that may not have even involved human error, got stuck in the canal.
Most of the world freaked out.
But not the U.S. (or the Americas more generally) because our ship traffic mostly doesn't go through the Suez. Everyone else's does.
Here's the three posts I did on this incident for the Spring 2021 class.
The estimated cost of the blockage of trade was ... $9,000,000,000 per day (for the whole globe).
So, you see ... macroeconomic consequences.
***
Except Americans did notice this, they just didn't make the association.
If you followed the link in yesterday's post, you could have produced a graph like this one:
Macroeconomists (and a lot of other scientists) think of data that arrives over time in terms of impulses and propagation. Impulses are the causes. Propagation is how they're amplified, stretched, and distorted into what we experience.
It's hard for people without exposure to this stuff to fathom how what they're experiencing can be connected to events they've forgotten about. But it happens. Especially with global trade, because the time frame is months or years, not days and weeks.
There are two important points to that graph.
- I think it's fair to say that CoVid and the initial lockdowns are probably the biggest impulse in our lifetimes. And while that did get propagated out to about 8 months, global supply chains processed it and got back to normal.
- But there was something bigger that happened from October 2020 to February 2023. I'm sure CoVid was part of that, but I think we can probably agree that its impulse can't have been as big then as it was in March of 2020. And the world is being hit by fresh impulses all the time, so that big hump is a propagation of a bunch of stuff, all overlapping, and jumbled together. But one of those impulses is definitely the blockage of the Suez Canal — about a third of the way into that big hump.
Bottom line, if it bugged you that you couldn't find stuff on the shelves two years ago, part of the reason was a ship on a windy day the previous spring. Global supply chain disruptions take a long time to work their way out of the system.
***
So what does this have to do with Bab-el-Mandeb? The Red Sea is long and thin, with a canal at one end, and a strait at the other called Bab-el-Mandeb.
And it's in the news because it's indirectly related to the conflict in Gaza, which in turn is related to Iran having been an international troublemaker for the last 2 generations. Iran supports a whole lot of bad actors in the Middle East, including Hamas in Gaza. And an ethno-religious group in Yemen largely drawn from a tribe called the Houthis. The Houthis hold land that overlooks the Bab-el-Mandeb. And they have missiles and drones. From Iran. And, while they have almost no connection to or affinity with Hamas, for some reason they are itching to join the conflict. Go figure. They're doing this by firing missiles and drones at unarmed cargo ships heading to the Suez Canal.
(None of this is to diminish the political and military problems this presents to the U.S. whose naval ships are now the main target. But this is just a macro class).
What's important for macro is all those ships are now going around Africa, which takes time and costs money, both of which are negative impulses the global economy will feel.
This fantastic image from Wired shows what ocean-going trade is supposed to look like:
Yellow shows the most important trade routes. And there's pretty much one big yellow one: hooking around most of Europe, through the Suez and Bab-el-Mandeb, straight across the Indian Ocean and then heading to China and Japan.
Also note that the scale is multiplicative: yellow is 5 to 10 times as heavily trafficked as orange, and 25 to 500 times as heavily traveled as red.
Think of it this way: the Houthis are trying to discourage traffic on the world's biggest watery interstate. And ships are already going around Africa:
Maps like this are easy to come by. I got this from marinetraffic.com. You can even watch it live. Green is cargo ships, red are tankers, orange is fishing, dark blue is cruise ships, and so on.
Normally, there's very little traffic going around round the southern tip of Africa, and most of that goes to South America. Not this winter and spring.
***
A lot of students don't like economics and/or finance because they lack certainty about the statements they make. It's one reason some students prefer accounting. Fair enough.
But a big reason that economics and/or finance are like this is that they're forward looking. It's a lot easier to explain what did happen than what will happen, right?
So, file this one away in your brain. I could be wrong, but if several months down the road we start seeing bare shelves, and stock-outs at Amazon, tell your friends you knew this might happen.
Also, it's a campaign year, and Democrats will be pushing the infrastructure legislation they passed a few years ago. Whether or not you were in favor of that, global trade routes are infrastructure too, and needing to protect them was not part of that plan. Perhaps it should have been.
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