This paper attempts to explain the cyclical relationship between the transportation industry and the U. S. economy. It begins by exploring the scope of logistics activities and their impact upon the economy, and then attempts to show how the economy in turn determines the state of the transportation industry and its ability to contribute to the economy. The paper will then reveal the impacts upon the transportation sector because of the recessionary conditions beginning in 2007 and continuing until 2010.
Finally, we will reveal how political partisanship has the ability to depress the health of the transportation industry by withholding needed infrastructure funds and the effect that has upon the economy. Transportation Logistics: Politics, Infrastructure and the Economy Logistics and transportation as a function of logistics management have a significant impact upon the U. S. economy. The inverse is also true. The economy has a significant impact upon logistics and transportation, especially in regards to the manner in which organizations manage their supply chains.
The end of an economic recession in the early 1980s and persisting economic fears developed into an unrelenting pursuit of cost savings and ultimately to offshoring of many ancillary business process, including manufacturing. This new strategy development has been a significant and lasting effect upon transportation and logistics management activities on a worldwide scale. As many organizations sought significant cost savings and other advantages by moving functions abroad, the supply chain became stretched, transportation more expensive and complicated, and logistics management more important on a strategic level.
However, as the supply chain was stretched and activities were increasingly offshored, the economic conditions within the U. S. became less stable. A significant portion of the economic strength within the U. S. can be traced to the economic opportunities afforded the middle class (consumers) in this country, as it is their consumption spending that truly drives the health of the U. S. economy. When these opportunities are suppressed, so is the strength of the economy suppressed in similar fashion.
Conditions that precipitate such suppressions of the economic opportunity of consumers and, in turn, the strength of the economy have far reaching implications because the U. S. economy is cyclical in nature. Consumers not only drive the economy, they pay the taxes which are used to fund the infrastructures which are the foundation of the nation’s transportation and logistics management systems. The fact that the transport sector of the economy has had a major impact on the development and the welfare of this middle class population can hardly be argued against.
On the contrary, Rodrigue and Notteboom (2012) argue that “When transport system are efficient, they provide economic and social opportunities and benefits that result in positive multipliers effects such as better accessibility to markets, employment and additional investments” and conversely, “When transport systems are deficient in terms of capacity oar reliability, they can have an economic cost such as reduced or missed opportunities” (Rodrigue & Notteboom, 2012, para. 1 economic importance section). This paper focuses on the economy’s effect upon transportation as a function of ogistics management within the supply chain and, the transport sector’s effect upon the economy, and the cyclical nature of the relationship that one has on the other. Because the economic opportunity of the nation’s populations is dependent upon efficient transport systems; which, in most cases, are dependent upon a publically-funded infrastructure; which, in turn, is dependent upon the economic strength of the populations; there exists a cyclical interdependence not unlike that which exists within most supply chains.
In this sense, we can view our country in terms of a large supply chain where the economy represents the finance department, the population represents the labor, and the nation’s infrastructure is representative of the distribution network—inefficiencies in any of these areas ultimately produces inefficiencies within the other areas. The Scope of Logistics’ Economic Impact. Since the strength of the U. S. conomy is greatly dependent upon consumer spending levels, the impact of logistics and transportation, as a function of logistics, greatly impacts the economy in several ways: direct impacts, indirect impacts, and related impacts (Rodrigue & Notteboom, 2012, para. 2). Direct impacts. Logistics and transportation directly impact the economy by providing access to employment, adding value to products, increasing market areas. The transportation industry in particular is a major contributor to the economy because its divisions form and support the foundation upon which the economy creates value.
The major divisions of the transportation sector are infrastructure, vehicles, and operations. All of which directly affect the ability of organizations to make products available where demand exists, creating place utility and adding value to products. Transport vehicles and operations provide accessibility, expand distribution networks across markets, create economies of scale, and provide income for employment opportunities. Figure 1. ©Hofstra University Figure 1. ©Hofstra University
According to Coyle, Langley, Gibson, Novack & Bardi (2008) logistics activities also include such activities as warehousing and storage, industrial packaging, materials handling, inventory control, order fulfillment, demand forecasting, production planning and scheduling, procurement, customer service, facility location, return goods handling (i. e. reverse logistics), parts and service support, and salvage and scrap disposal (Coyle et al. , 2008, p. 39). Figure 1 illustrates the various economic impacts that an efficient logistics and transportation system has on the U. S. conomy. For the supply side of the economy, transport operations create income from fares and for wages, and also create access to wider distribution networks. Access to wider distribution networks, in turn, works to link the factors of production together. On the demand side, transport networks creates productivity gains and time and cost savings through improved accessibility to an expanded range of suppliers and consumers. Transport networks work to expand opportunities to acquire and to sell raw materials and commodities necessary for industrial and manufacturing systems.
In addition, these same systems improve access to labor, especially cheap labor as seen in the rush to offshoring which emerged in the 1980s. However, this particular benefit was realized not by the country’s economy, but in other countries where labor was cheaper than that in the U. S. It did, however, result in cheaper product prices in the U. S. Indirect Impacts. Logistics activities also indirectly influence the economy on a macro and microeconomic basis.
They create income through rent income for the facilities from which they conduct operations, attract other related economic activities through the formation of supplier networks, and they shape population patterns. This is especially true concerning transportation activities because efficient transportation systems are significant determinants of the economic value of products both domestically and internationally. At the macroeconomic level (the entire economy), logistics provides value through the creation of utilities: place, time, quality and possession.
Coyle, Bardi & Novack (2006) explain that transportation, by providing place utility, “reductions in transportation costs between points A and B”; time utility, making a product available within a specific market at a time when there is a demand for the product; and quality utility, assuring that products arrive without damage, create value to products that would otherwise not exist in distant markets (Coyle et al. , 2006, pp. 19-20). Related impacts. All economic activities rely partly on the efficiency of transportation systems. This is true of both cargo and passenger transport systems, as efficient transport increases the obility of these economic activities. According to Rodrigue and Notteboom (2012), the increased mobility afforded through efficient transport results in the setting of routes which enable new interactions between economic entities, improvements in cost and time attributes for cargo and passenger movements, increased reliability in terms of time performance and quality of products delivered, access to wider market base, access to larger and more diverse base of inputs for production (Rodrigue & Notteboom, 2012, section 1, para. 4). The Economy of Logistics: Macro and Microeconomic Perspectives.
The value transportation provides to the economy is apparent on both a microeconomic and a macroeconomic level through the place utility it provides. On a macroeconomic basis, transportation systems are “linked to a level of output, employment and income within a national economy” and have the greatest impact on population patterns and economic development (Rodrigue & Notteboom, 2012, para. 3). During the late 20th Century, transportation accounted for one-sixth of the nation’s gross national product (GNP), eleven percent of which was the movement of people and six percent of which was the movement of cargo (Encyclopedia Britannica, n. . ). Macroeconomic Perspective. The most important division of the transportation sector, in terms of the macro economy, is the infrastructure. Infrastructure activities within the transportation sector include the construction and maintenance of roads, rails, canals, terminals, and ports. “An adequate infrastructure is a prerequisite to economic development. Transportation and communications are important in developing and strengthening social, political, and commercial ties….
Transportation is also is necessary for goods to reach markets where they can be sold or exchanged for other merchandise or services” (Encyclopedia Britannica, n. d. ). Transportation allows each section of the country to exploit its geographical advantage and trade with other sections of the country. This is also true globally. Infrastructures such as seaports are the gateway to trading with other countries on the basis of some national geographical advantage. In terms of population pattern development, Coyle et al. 2006) argues that “Transportation has a catalytic effect on a society in that it stimulates commerce and movement. The reverse is also true. That is, the demand for commerce and movement will cause transportation to be developed” (Coyle et al. , 2006, p. 21). Again, the interdependence of economic factors and transportation systems is evident. In terms of economic development, the absolute cost of logistics services and therefore the benefits, both economic opportunity and market access, it contributes to the overall economy will also decrease as the strength of the economy decreases.
This is because as the economy grows, so does the demand for more goods and services, and thus the cost logistics services as well as its percentage of value added to GDP. Of course, as was the case during the recession, the inverse is also true. However, this analysis can be deceptive, depending upon the context of the increase or decrease in GDP contribution. Microeconomic perspective. On a microeconomic basis demand for transportation is either for freight transport or for passenger transport, and the supply of transportation is either public or private.
The demand for freight transport is usually addressed through private transportation providers because there is a profit to be made. Transportation systems operating within the supply chains of private organizations seek to integrate the factors of production between producers and consumers by exploiting “geographical comparative advantages” to their advantage, creating economies of scale, and forming strategic alliances with suppliers in attempts to produce value in their products and services from a consumer perspective (Rodrigue & Notteboom, 2006, para. 4).
This is done specifically by establishing networks, improving reliability, creating access to more markets, and reducing cost through increased productivity. Transportation addresses the demand for freight transportation by producing place and time utilities. Encyclopedia Britannica (n. d. ) gives an example of geographical comparative advantage by stating that “If oranges are worth $4 a bushel in Florida and $10 a bushel in Chicago, then the demand for transporting oranges from Florida to Chicago is expressed as $6 a bushel” (Encyclopedia Britannica, n. d. , p. 5).
An efficient transportation system will provide both place and time utility for oranges from Florida to Chicago by making them available in Chicago(place utility) where demand exists and by making them available before the market is flooded with oranges and demand no longer exists (time utility). The demand for passenger transport is addressed by a mixture of private and government interests. The government usually maintains the transportation infrastructure which serves as the foundation for the various networks and attempts to maintain a balance between what is profitable to business and what is necessary for the public good.
The government’s involvement, through subsidization, is necessary where the market will not support profit. Such is the case with many public transportation systems in operation today. Many metropolitan bus lines and subway systems are government-subsidized, not privately funded. The justification for this subsidization, if not the public good, is sometimes just the employment opportunities they provide. However, some passenger travel is addressed by overlapping government subsidization and private investment.
Most passenger travel occurs in private automobiles, and private industry manufactures and sells these automobiles to consumers. However, it is the government which constructs and maintains the roads over which these vehicles travel. Governments at the federal and state levels tax businesses and individual consumers alike for the use of public roads. These funds are used to maintain and construct interstates, highways, and local roads which maintain and increase the economic mobility of all parties involved. Impacts of the Great Recession
The Great Recession of 2008 impacted the transportation industry in several ways: decreased freight volumes, increased operating costs, and uncertainty about future forecasting. As consumer incomes decreased amidst rising unemployment rates, freight tonnage decreased, causing transportation providers to trim their labor forces and further exacerbate decreasing demand for transportation services. The demand for transportation services accounts for a substantial percentage of total U. S. economic activity, as all products require some sort of transportation services to move them to markets.
The Bureau of Transportation Statistics (n. d. ) reported that in 2002, “transportation-related goods and services accounted for more than 10 percent—over $1 trillion—of U. S. Gross Domestic Product” (BTS, n. d. , para. 2). The Bureau of Economic Analysis (BEA) reported that in 2007, the initial stages of the economic recession, transportation had fallen to 2. 9 percent of U. S. GDP and by 2010 had fallen to 2. 8 percent of GDP (Gilmore, Morgan & Osborne, 2011). Table 1 illustrates the makeup of the transportation sector as a percentage of U. S.
GDP by its divisions from 2004 through 2010. 2007 through 2010 are the primary years impacted by the recession. All divisions remain relatively stable through 2008, where we see a drastic decline in the truck transportation division. This decline can be explained by the declining domestic economy within the U. S. during this period. Also, truck transportation is mainly used to transport cargo over relatively short distances to domestic markets while air, ocean, and rail have a larger footprint in the movement of goods destined for international export to emerging countries.
Other explanations for the relative stability of transportation divisions that primarily serve the international markets may also be at the foundation of the weaknesses of the U. S. economy. As companies have offshored many of their manufacturing activities in order to gain a competitive advantage in the international markets, they have undercut the volume of domestic consumer spending because the employment opportunities associated with those activities have also been offshored. This has a multiplier effect upon the economy and the transportation industry alike.
As multinationals become more invested in the international markets and streamline higher paying jobs here in the U. S. , they also undercut their base income—domestic consumer spending—and the ability of the government to maintain the infrastructure through tax revenues. Table 1. Value Added by Industry as a Percentage of Gross Domestic Product, 2004-2010 ©Bureau of Economic Analysis Table 2 illustrates the number of full-time employees in each division of the transportation sector from 2004 through 2010.
Here we can see the multiplier effect in action, as employment fell from 2008 to 2010 in not only the truck division but also in air and warehousing and storage. Each of these divisions has income bases which are more domestic in nature than rail and ocean transport. Table 2. Full-time Employees by Industry, 2004-2010 © Bureau of Economic Analysis This is important because it also illustrates the relationship between the health of the economy and the methods and strategies employed in the management of logistics within supply chains.
Joel Anderson (2012) of Material Handling & Logistics reports that “In the face of tightening trucking capacity, rail intermodal is seeing a massive resurgence. Shippers are turning more to warehouse-based third-party logistics providers (3PLs) to provide intermodal and other logistics management expertise previously associated with non-asset-based 3PLs” (Anderson, 2012, p. 18). This is indicative of supply chains’ reluctance to invest in more production in light of reduced consumer demand for their products as a result of the depressed economy.
As demand declines, inventory carry costs rise due to unsold products and decreasing warehouse capacity. So companies spend less on transportation. Other factors are also driving the decline in transportation spending among U. S. companies. The number one reason cited by transportation industry officials is political uncertainty. The uncertainty is driven primarily by angst among Congressional members and the White House over the state of the post-recession economy and how best to reauthorize the surface transportation law.
In 2004, one year before the law’s expiration, that reauthorization was stalled by the need to reconcile three major issues: “how much to fund the measure, whether to increase the gas taxes that ultimately provide money for each state’s highway programs and determining if the formulas regarding how each state receives funding should be altered” (Konish, 2004, p. 12). However, seven years later and with a new administration at the helm of the nation’s economy, the issues had changed and the reauthorization would not be completed until mid-2012.
Transportation and Politics SAFETEA-LU (Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users) was signed into law on August 10, 2005 and was the largest surface transportation investment in the history of the U. S. It was intended to provide funds for maintaining and growing the nation’s infrastructure (FHWA, 2005). However partisan gamesmanship over the appropriate amount of funding for renewing the bill stalled its renewal in 2004 and moving forward through two administrations.
The $256 billion proposed by the Bush administration at the time was far below the $375 billion that the Department of Transportation deemed necessary to maintain the then current conditions of the road (Konish, 2005). Paul Whitted (2005, as quoted by Konish), vice president of the National Stone, Sand and Gravel Association, stated that Democrats were supporting a $318 billion bill because “They aren’t going to give the Republicans any kind of victory” (Konish, 2005, pp. 12-13).
Matt Jeanneret, vice president of communications at the American Road and Transportation Builders Association (ARTBA), admits that “The president’s veto threat has kind of been looming like a black cloud over the negotiations…. So that’s one of the reasons the bill hasn’t moved forward” (Konish, 2005, p. 13). Fast forward to 2010 after numerous short-term extensions, some as short as two months, and an economy debilitating recession to an Obama administration that is still struggling to pass a reauthorization of the transportation bill.
For this administration, the roadblocks are similar—intense partisanship in both houses of Congress—but the stakes are much greater. As the economy is slowly starting to reemerge from the greatest recession since the Great Depression, as strengthening of the transportation sector is needed to bolster many of the President’s policies to stimulate the economy by increasing the nation’s presence on the international market. Many organizations are reluctant to make the necessary investments to kick start the economy because the lack of stable legislation makes it impossible to make long-term plans.
Many state legislators expressed frustration at the inability to continue transportation projects that were started with funds from President Obama’s stimulus package. New Hampshire Representative expressed her frustration by stating that “It makes no sense to me that, after putting the industry to work with the stimulus funds to begin rebuilding the nation’s crumbling transportation infrastructure, the federal government would then turn around and un-employ those workers by not funding the reauthorization” (Reed, 2010, p. 17).
Others are concerned about the international competitiveness of the U. S. without adequate transportation infrastructure. Indiana Representative Terri Austin stated that “On the international front, we are seeing countries in Asia and Europe invest billions of dollars to improve roadways, high-speed rail and light rail…. They understand that transportation infrastructure is the cornerstone of economic competitiveness, and critical in the ability to move goods and people as quickly and efficiently as possible” (Reed, 2010, p. 20).
On September 3, 2011, President Obama, expressed his understanding of the importance of the nation’s infrastructure as he urged Congress to pass yet another extension in lieu of an actual renewal of the law by stating that There is a lot of talk in Washington these days about creating jobs. But it doesn’t help when those same folks turn around and risk losing hundreds of thousands of jobs just because of political gamesmanship. We need to pass this transportation bill and put people to work rebuilding America We need to put our differences aside and do the right thing for our economy. And now it the time to act (Bruce, 2011).
The president also cited the fact that one million American jobs depend upon the passing of the bill and that “Renewing this transportation bill is a no-brainer…. But thanks to political posturing in Washington, they haven’t been able to extend it this time—and the clock is running out” (Bruce, 2011). The president was attempting to publicly expose the danger of political squabbling in the 112th Congress that was again rooted in disagreement over the amount of funding to be allocated to the transportation bill—the House wanting to allocate $235 billion over six years and the Senate wanting $109 billion over two years (Bruce, 2011).
Almost a year later, on July 6, 2012, President Obama signed into law a transportation and student loan bill after Republicans and Democrats finally compromised to get the legislation passed. The new bill will provide $120 billion to finance highway, bridge and public transportation projects over 27 months and will create approximately 3 million jobs (NY Times, 2012). While the passing of the bill is welcomed by most in the industry, it is a far cry from the type of legislation that is needed to stimulate the economy and to strengthen the nation’s transportation infrastructure.
Because 2012 is an election year in which the Republican Party hopes to reclaim the presidency, the Obama administration was forced to settle for any legislation that would avoid a lapse in funding to maintain the condition of transportation infrastructure in terms of the economic value it currently creates. Many in the industry hold sentiments similar to those voiced by Associated Equipment Distribution CEO, Toby Mack, concerning last year’s extension. Mr. Mack stated then that “While the extension is welcome news, it falls far short of giving the construction and equipment industries the certainty essential to recovery and job creation….
By delaying action on a new multiyear highway bill, Congress is putting off much-needed investment in the infrastructure the U. S. economy needs to grow and flourish” (Rock Products, 2011 Conclusion Transportation and logistics is the foundation of America’s economic competitiveness in terms of domestic and international business activities. Additionally, the transportation systems which exist provide the means for a dynamically mobile population with the means to exploit their geographical comparative advantages beyond their geographical boundaries.
The U. S. economy and the transportation logistics sector are intrinsically connected and interdependent upon one another. As the economy expands and contracts, so do the transportation sector activities which contribute so much to the size of the economy. The transportation and logistics sectors impacts the economy on both a micro and macroeconomic level, providing the jobs and the mobility necessary for a flourishing economy and the economy provides the funds needed to support a dynamic transportation system. Randall Eberts (n. d. explains that The interface between transportation investment and economic development has broad ramifications that go beyond transportation’s basic purpose of moving goods and people from one place to another…. Transportation has a broader role in shaping development and the environment. Policy concerns in the next millennium will increasingly focus on the effects of transportation on where people live and on where businesses locate; and on the effects that these location decisions have on land use patterns, congestion of urban transportation systems, use of natural resources, air and water quality, and the overall quality of life. Eberts, n. d. , p. 1). When the politicians and political pundits lobby in the nation’s capital for policies that interfere with the delicate balance that exists between the two merely for political gain, they risk initiating a downward spiral, characterized by uncertainty and inability, which places both the nation’s economic competitiveness and the ability to create wealth in jeopardy.