public policy
based on the notes write 3 pages double spaced paper about
1. opinions of any public policy/government policy
2. what role does the government play, why the government involved in the policy
3. why private sector can’t handle by themselves
Globalization Outline
1.
2. Globalization has three major components:
a. Barriers to trade—rules that limit trade with another country
b. Tariffs—trade allowed but fee must be paid to importing government. Discourages purchase and protects local production
c. Immigration—rules about importing workers. Limit protects local workers but if skills needed can be harmful to economy.
3. When David Ricardo first postulated Comparative Advantage theory, the resources needed to produce goods were not easily moved across international borders let alone overseas. Those resources include land, labor, entrepreneurship and capital. Is comparative advantage undermined when these factors of production can relocate with relative ease? Add technology to these basic factors and yes, they are quite moveable.
4. Thomas Friedman’s GREAT BOOK—The World is Flat—describes our era as Globalization 3.0 (1.0 was 1492-1800—explorers and trade) (2.0 was 1800-2000 (I would make it more like the mid 1800)—multi-nationals and transportation improvements and telecommunications began to shrink the world.
5. He says that 10 factors led us into Globalization 3.0
a. Berlin Wall coming down in 1989
b. Netscape—the first public internet browser in 1995
c. Workflow software in the late 90s—common web-based standards (e.g. Windows)
d. Open source software that allowed computer fanatics to access and improve programs and websites.
e. Outsourcing—India for the most part—moving back office jobs—not physical plants
f. Off-shoring—that’s China and actual movement of manufacturing facilities
g. Supply chaining—inventory control that reduces need to stockpile products
h. Insourcing—UPS handling orders and deliveries for smaller operations.
i. In-forming—Google, Yahoo, etc.
j. “Steroids”—wireless devices that all accessing internet anywhere
6. Few facts from our readings
______________________________
______________________________
______________________________
______________________________
7. Advantages of Global Trade:
a. COMPARATIVE ADVANTAGE
b. Reduce worldwide poverty
c. Increase democracy worldwide
d. More business opportunities
e. Economies of scale—bigger = less costly
f. Faster specialization
g. Better for small firms (e.g. auto parts producer need not make entire car)
h. Larger markets = more innovation
i. Workers benefit from specialization pay premiums—higher skill= better pay
i. Export related jobs pay 18% more
j. Gender equality—more opportunities, global platforms less subject to gender bias
i. Gender gap wider in concentrated industries
k. Reduced prices have lowered inflation from the 70s and 80s (= increase in REAL wages)
l. # of goods has doubled
m. Better products
n. Faster diffusion of innovations
o. Competition drives out less productive firms
p. Huge opportunities in energy and environment
q. Thomas Friedman is an advocate for globalization in principle
i. Efficiency produces wealth, increases in income and spending-human wants and needs are infinite.
ii. Keys:
a. Reform Wholesale—Legal System:
b. Reform Retail- :education, infrastructure, culture of tolerance openness to new ideas from outside
c. Two reforms combine to create environment that makes it easy to start business, raise capital, innovate AND easy to close businesses to free up capital—GLOCALIZATION—
iii. Over the last century those countries that have tried to preserve their systems, jobs, cultures, traditions by keeping the rest of the world out have suffered.
iv. Goal is to get bigger, faster.
v. Another benefit: No two countries that are part of a major global supply chain have or will ever fight a war against each other
8. Negatives
a. Increased transportation = increased carbon emissions
b. Exacerbates inequality –big vs. small—larger companies can take greater advantage
c. Detrimental to middle class—job loss and wage competition
d. Recessions now worldwide due to interconnectivity
e. US share of world economy was 36% in 1970—now 24%–competitors are catching up
f. Inequality among countries is less under globalization BUT inequality within countries increases.
g. Reduced national sovereignty –a key factor in the Lasurain article. Increased democracy and national sovereignty cannot coexist. He discussed the
Global Economy Trilemma
:
i. If countries opt for globalization, SUPRAnational democratic organizations end up making the rules These organizations are from large, developed countries.
ii. If opt for national sovereignty, democracy must be limited.
iii. SHOCK DOCTRINE
a. Milton Friedman
b. Chile, Argentina, Uruguay, Brazil, Asian Contagion, Russia
9. General Agreement on Tariffs and Trade (Bretton Woods)—morphs into World Trade Organization—1995
a. The WTO and its agreements are permanent.
b. GATT dealt with trade in goods. The WTO covers services and intellectual property as well.
c. The WTO dispute settlement system is faster, more automatic than the old GATT system. Its rulings cannot be blocked.
9. Today the WTO has grown 164 members. But since the WTO was created,
a. Many developing countries believe that their industrialized trading partners have not fully granted them the benefits promised when the WTO was formed.
b. there is concern that the WTO focuses on corporate interests
c. Environmental and labor groups (especially those from wealthier countries) have claimed that trade liberalization leads to environmental damage and harms the interests of low-skilled unionized workers.
d. that the WTO has failed to handle China’s abuses
e. that intellectual property protection is too weak
f. that it can overrule national laws and harm national sovereignty
g. that labor standards are “protectionism in disguise” by large countries—just the reverse of the argument that it harms interest of unionized workers
h. and, of course, that it has cost US jobs and hurt wages
10. Let’s talk about the US, China and the WTO. China joined the WTO at the end of 2001. Clinton began the process while he was President. He claimed that opening up Chinese markets and that huge population would create substantial profits for US firms..and it did for some—Apple and agriculture profited nicely and prices were lowered for American consumers.
11. BUT—1 million manufacturing jobs were lost—2.4 million in total, according to the Council on Foreign Relations.
12. China, on the other hand profited hugely.
13. Here are the main complaints against China within the WTO:
a. Illegal state subsidies, tax breaks and cheap bank loans
b. Undervalued currency makes exports cheaper
c. still discriminate against foreign goods with stringent local content rules, required partnerships with Chinese firms, and forced technology transfers–2017 Chinese National Intelligence Law.
d. Control over supply chains—they do not want to export materials or parts—they want to export finished products.
14. Helberg’s article about Deindustrialization equaling disarmament is powerful and full of warnings about China. He says that we CANNOT AFFORD NOT TO BRING BACK MANUFACTURING.
15. Helberg says that we need to get busy FAST with artificial intelligence, robotics, computer and cell phone manufacturing. We need to develop key natural resources, skilled industrial workers, and foster innovation or else we will have effectively DISARMED ourselves in the 21st century world.
16. NAFTA and TPP:
NAFTA—The North American Free Trade Agreement with Canada and Mexico was approved in 1993 and became effective on January 1, 1994. NAFTA set out to:
a. Eliminate all tariffs between the three countries by 1998.
b. Liberalize financial services trade
c. facilitate cross border travel for business
d. expand size of government procurements available to all countries—especially for energy
e. tri-national panel to resolve disputes
f. set North America content %s that would encourage use of each other’s supplies and materials
g. Some provisions, although weak, for intellectual property
h. rules for transporting goods in all countries
17. For the U.S. in particular, here’s what has changed:
18. NAFTA was revised in 2019 as the US-Mexico-Canada Agreement————-USMCA
19. It made several key changes from NAFTA
a. AUTOMOBILES:
b. LABOR STANDARDS:
c. AGRICULTURE:
d. DIGITAL:
e. ENVIRONMENT:
f. TRADE SECRETS
g. INTELLECTUAL PROPERTY:
20. Lastly, the Trans-Pacific Partnership (TPP). This was a deal with 10 countries on the Pacific Rim in Asia plus Australia, New Zealand, Mexico and Canada. Not China—the purpose was to get a deal with these countries before China did. Trump pulled us out immediately upon taking office. It wasn’t just Trump—the left was against it, too.
21. The agreement was designed so that it could eventually create a new single market, something like that of the European Union and NAFTA, but we were not in the mood back then for more trade deals that COULD cost jobs like NAFTA did.
GLOBALIZATION NOTES:
2
weeks
1. Political stability has allowed capital and technology to flow freely around the world.
2. Strong educational systems are producing tens of millions of highly qualified and motivated workers in the developing world—especially India and China.
3. Inexpensive high band-width communications make it feasible for large workforces to be located and managed anywhere.
4. Here in the United States the concern is and has been if American workers will face direct competition at almost every job leve
l.
As we have discussed jobs were lost for many years not to foreign entities so much as to U.S.
multinational corporations
cutting costs by shifting to low labor cost countries. That has begun to change as these foreign entities have learned from us and how we funded them 50 years ago.
5. Globalization has three major components:
a. Barriers to trade—rules that limit trade with another country—e.g. certain % must be made locally (Local Content) or rules against accepting certain foreign currencies
b. Tariffs—trade allowed but fee must be paid to importing government. This increases cost, making product more expensive—discourages purchase and protects local production
c. Immigration—rules about importing workers. Need workers to produce goods and services. Limit protects local workers but if skills needed can be harmful to economy.
6. Comparative Advantage has been called into question. World benefits when product is made where it is least expensive or it is made better. When David Ricardo first postulated this theory, the resources needed to produce goods were not easily moved across international borders let alone overseas. Those resources include land, labor, entrepreneurship and capital (4 factors of production traditionally). Is comparative advantage undermined when these so called factors of production can relocate with relative ease? Add technology to these basic factors as a fifth factor of production, and yes, they are quite moveable.
7. Thomas Friedman’s GREAT BOOK—The World is Flat—describes our era as Globalization 3.0 (1.0 was 1492-1800—explorers and trade) (2.0 was 1800-2000 (I would make it more like the mid 1800s)—2.0–multi-nationals and transportation improvements and telecommunications began to shrink the world.
8. He says that 10 factors led us into Globalization 3.0 where
globalization
is individually dominated vs. multi-national
a. Berlin Wall coming down in 1989—capitalism beats communism and entire world can now see us and want what we have
b. Netscape—the first public internet browser in 1995
c. Workflow software in the late 90s—common web-based standards (e.g. Windows)
d. Open source software that allowed computer fanatics to access and improve programs and websites.
e. Outsourcing—India for the most part—moving back office jobs—not physical plants—Y2K
f. Off-shoring—that’s China and actual movement of manufacturing facilities
g. Supply chaining—Walmart—inventory control that reduces need to stockpile products
h. Insourcing—UPS handling orders and deliveries for smaller operations. That’s how Nike started—UPS handled their orders—now everyone can operate like the big ones
i. In-forming—Google, Yahoo, etc.
j. “Steroids”—wireless devices that all accessing internet anywhere
9. OK—so how about a few facts from our readings
a. Global trade grew 35x between 1980 and 2010—has flattened some since –BUT was only 10x before–1950-1980
i. Weaker demand for industrial goods vs. services
a. Initially advanced development moved demand from agriculture to manufactured goods, but as affluence increased, demand for services that accompanies advanced development began to reduce the relative demand for and value of manufactured goods and forces manufacturers to seek lower cost locations. Also, off shore manufacturing makes the rich even richer, furthering this movement toward services.
ii. Increase in protectionism and regulation
b. Foreign investment has continued to grow even though trade has flattened some -PUNCUATED EQUILIBRIUM??
c. Trade was 25% of worldwide GDP in 1960—now 58% (2010 peak was 61%)
i. Developing world = 60% of world GDP –was 20% in 1990
d. Growth since 1995 has been mostly high-skilled jobs
e. Trade represents 41% of American jobs
f. 11 of our top 15 export markets used to be recipients of US aid
g. $1 in US Trade and Development Agency spending begets $85 in
exports
i. $7B to Power Africa (energy) leveraged $40B private
10. Advantages of Global Trade:
a. COMPARATIVE ADVANTAGE—discussed last time
b. Reduce worldwide poverty
c. Increase democracy worldwide
d. More business opportunities
e. Economies of scale—bigger = less costly
f. Faster specialization—narrowed product orientation to be more competitive
g. Better for small firms (e.g. auto parts producer need not make entire car)
i. easier access to markets for smaller firms
ii. large multi-nationals now fragmented supply chains
h. Larger markets = more innovation
i. Workers benefit from specialization pay premiums—higher skill= better pay
i. OECD (Organization for Economic Development and Cooperation) – 3-9x raises in pay for open economies vs. closed
ii. Export related jobs pay 18% more
j. Gender equality—more opportunities, global platforms less subject to gender bias
i. Alibaba bigger than Amazon and ebay—small women producers
ii. Increased competition means firms can no longer overpay men and underpay women
a. Gender gap wider in concentrated industries
k. Reduced prices have lowered inflation from the 70s and 80s (= increase in REAL wages)
i. Poor people benefit more from lower prices—spend high %
l. # of goods has doubled
m. Better products—slowdown in productivity not due to Globalization—it is shift to services
n. Faster diffusion of innovations
i. Took 75 years for 1M telephone users
ii. 38 years for 1M radio
iii. 19 years for TV
iv. Internet 4 years to get to 50M
o. Competition drives out less productive firms
p. Huge opportunities in energy and environment
q. Thomas Friedman is an advocate for globalization in principle
i. Efficiency produces wealth, increases in income and spending-human wants and needs are infinite…not zero-sum game
ii. Keys:
a. Reform Wholesale—Legal System: privatization, deregulation of financial markets, foreign investment, low tariffs
b. Reform Retail–education, infrastructure, culture of tolerance (way country relates to world)
c. Two reforms combine to create environment that makes it easy to start business, raise capital, innovate AND easy to close businesses to free up capital—GLOCALIZATION—openness to new ideas from outside
iii. Compares Mexico to China—poor education, poor tax collection (no $ for infrastructure)—interesting quote about glue production: –READ p. 431—and 433?
iv. There is no way to stop it. You cannot ignore it without great risk to economic well-being. Over the last century those countries that have tried to preserve their systems, jobs, cultures, traditions by keeping the rest of the world out have suffered.
v. Outsourcing is necessary to innovate faster and more cheaply—to gain market share. Goal is to get bigger, faster.
vi. Another benefit: No two countries that are part of a major global supply chain have or will ever fight a war against each other
11. Negatives
a. Increased transportation = increased carbon emissions—(offset by innovations such as solar, wind)
b. Exacerbates inequality among businesses –big vs. small—larger companies can take greater advantage
c. Detrimental to middle class—job loss and wage competition
d. Recessions now worldwide due to interconnectivity
i. Economy that depends on foreign investment will be volatile
ii. REGARDING WORLDWIDE RECESSIONS— Asia, where
Thailand
started a collapse called the Asian Contagion in 1997. The crisis started in Thailand with the financial collapse of the
Thai baht
which was tied to the US dollar but could no longer maintain its value vs the dollar.
Capital flight
ensued almost immediately, beginning an international chain reaction. At the time, Thailand had acquired a lot of
foreign debt
.
[1]
As the crisis spread, most of Southeast Asia and Japan saw slumping currencies,
[2]
devalued stock markets and other asset prices, and a precipitous rise in
private debt
.
[3]
Indonesia
,
South Korea
, Malaysia were particularly hard hit. Federal Reserve arranged for $3.6 Billion to bail out 14 U.S. financial institutions– known to some as “When the World Almost Ended”—others—-Mexico near collapse in 1995, 2008 recession
e. US share of world economy was 36% in 1970—now 24%–competitors are catching up
f. Inequality among countries is less under globalization BUT inequality within countries increases.
i. Friedman—“Do worry, though, about the low-skilled American workers.” He says that they have to move vertically—BUT HOW? (my comment).……
g. Reduced national sovereignty –a key factor in the Lasurain article. Increased democracy and national sovereignty cannot coexist. He discussed the Global Economy Trilemma:
i. If countries opt for globalization, SUPRAnational democratic organizations end up making the rules (We’ll discuss the WTO next week). These organizations are from large, developed countries.
ii. If opt for national sovereignty, democracy must be limited.
h. Negatives are particularly true in Latin America.
i. [SHOCK DOCTRINE] Another good book is The Shock Doctrine by Naomi Klein. It does get repetitive but makes some key points about the globalizing world that are consistent with some of these negatives.
ii. She paints
Milton
Friedman as the great enemy.
a. [660—Commanding Heights]
b. [460—Head of School of Economics at University of Chicago—very conservative school—advisor to Nixon]
c. 1950s Univ of Chicago began paying for students to study in their home country and earn Univ of Chicago degrees. Friedman and other professors were given free travel and facilities in Chile, Argentina, Brazil and Mexico. Paid for by the Ford Foundation.
d. At that time 20% of total U.S. foreign investment went to Latin America. U.S. firms had 5400 subsidiaries there. Chilean mining alone sent $7.2 billion back to U.S. corporations.
e. Friedman wrote about something he called the Shock Doctrine in 1962—Capitalism and Freedom—”Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That is our basic function—to keep ideas alive and sustainable until the politically impossible becomes the politically inevitable.” [660—that was the point made at Mont Pelerin]
f. Here’s how it worked in Chile. It began with the 1973 assassination of Salvador Allende and the coup led by General Augusto Pinochet in Chile. Allende was socialist who had nationalized many American business interests in Chile. American CIA involvement in the coup, it later turned out, was largely prompted by the economic losses that US multinationals were sustaining under Allende, who had strong popular support within his country. Coup planners recruited several of Friedman’s disciples (known throughout the world as the “Chicago Boys”) in secret to devise an economic blueprint for the new government. (According to later US Senate investigation, the CIA provided over three-quarters of the funding for this economic plan.) In the shock and dislocation of the coup, the slate could be wiped clean and a new economics instituted. Twenty-four hours after Allende’s assassination a new 500-page economic plan was on the desks of the country’s new military government under General Pinochet.
g. It didn’t work out well. Inflation soared to 375%, the economy contracted by 15%, and unemployment went from 3% under Allende to 15% under the new regime. Small business leaders began to realize that free trade was wiping them out and turned against the plan; only the foreign nationals and small groups of Chilean financiers were benefiting, but Pinochet and the Chicago Boys persisted, cutting social services even more, further privatizing national industries. Ralston Purina, Bank of America, and Pfizer Chemicals blocked the flow of U.S. govt. loans to Chile and curtailed their purchases from Chile forcing Chile to borrow from the IMF under terms that were very much University of Chicago teachings.
h. Graduates of the University of Chicago were dominant in the IMF—International Monetary Fund created at Bretton Woods. IMF helps to bail out foreign countries that are in financial trouble but imposes strict conditions—privatize, cut social safety net
In 1982, Chile’s economy crashed: its debt exploded, it faced hyperinflation once again and unemployment hit 30 percent—ten times higher that it was under Allende. Ultimately, even Pinochet retreated from the Chicago Boys orthodoxy, renationalizing many of the companies.
i. Argentina was next—then Uruguay and Brazil
j. The shock therapy prescribed by Milton Friedman to fix ailing economies was now institutionalized. To be eligible for loans, a country had to agree to privatization and free-trade policies as well as to slashing government spending, which meant shredding whatever provisions had been in place to help the poor. In order to pay their debts, countries had to take on the unfettered free markets and minimal government of the Chicago School ideology. It went on to affect Russia, South Africa and many others.
k. Privatization and outside investment had started in Russia during the early/mid 1990s and Milton Freidman was a consultant to help them to take care of the huge debt they assumed from the former Republics.
When oil prices dropped approximately 30 percent between 1997 and 1998, severely decreasing the earnings of Russia-based companies as well as government receipts. Investors drawn into Russia by the new markets began to take serious notice of the rampant corruption and nepotism in Russia that was enriching many government officials and their friends (Putin was head of National Security).
The Russian government and the Clinton Administration intensively lobbied the IMF Board to approve new funds to bail out Russia. The IMF Board announced “in principle” a $22.5 billion dollar international bailout. The usual conditions were attached about selling off more assets and reducing government programs.
Not long after this loan was approved, Prime Minister Kirienko declared a 90-day foreign debt moratorium and announced a de-facto default on the government’s domestic bond obligations.
l.
The point of all of this is that the negatives—internal inequality (rich getting richer) and worldwide recessions are risks of globalization that gets out of control.
12. Bretton Woods did many things—the IMF, World Bank, $ as the reserve currency of the world (WE talked about the effect on Deindustrialization making the dollar so attractive) Bretton Woods also created something known as the General Agreement on Tariffs and Trade—the GATT. The GATT set the rules for trade until the World Trade Organization –the WTO–came into being in 1995 – more about that in a minute.
13. Although the GATT was expected to be provisional, it was the only major agreement governing
international trade
until the creation of the WTO. The GATT system evolved over 47 years to become a de facto global
trade organization
that eventually involved 130 countries.
14. The GATT was created to form rules to end or restrict the most costly and undesirable features of the prewar protectionist period, namely quantitative trade barriers such as trade controls and quotas. The agreement also provided a system (albeit weak) to arbitrate commercial disputes among nations, and the framework enabled a number of multilateral negotiations for the reduction of tariff barriers.
15. One of the key achievements of the GATT was that of trade without discrimination. Every signatory member of the GATT was to be treated as equal to any other.
This is known as the
most-favored-nation principle
. A practical outcome of this was that once a country had negotiated a tariff cut with some other countries (usually its most important trading partners), this same cut would automatically apply to all GATT countries. Escape clauses did exist, whereby countries could negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts. Most nations adopted the most-favored-nation principle in setting tariffs, which largely replaced quotas, and tariffs were in turn cut steadily in rounds of successive negotiations.
16. The average tariff rate fell from around 22%, when the GATT was first signed in Geneva in 1947, to around 5% by the end of the 1993 at what was known as the Uruguay Round). There were 8 “rounds” of GATT between 1947 and 1993.
17. In 1964 the GATT began to work toward curbing
predatory pricing
policies and dumping. Dumping is when a country or company exports a product at a price that is lower in the foreign importing market than the price is in the exporter’s domestic market. Because dumping typically involves substantial export volumes of a product, it often endangers the financial viability of the product’s manufacturer or producer in the importing nation. As the years passed, the countries continued to attack global issues, including trying, but failing, to address agriculture disputes and working to protect
intellectual property
.—copyrights, movies, music, etc.
18. The GATT ended because the GATT failed to achieve its goals. The weaknesses of the GATT were behind its failure, including a weak structure that was never ratified formally by the individual countries and had a very limited ability to enforce its objectives, particularly in the areas of agriculture and textiles. The European Union and NAFTA,–not exactly most favored nations plans both of which provide trade benefits to neighbors not available to others took place during the GATT. Also during the GATT, the United States was not able to convince Japan and China within the framework of the GATT to open their markets to U.S. goods. In addition, the GATT failed to cover trade in services and intellectual property rights, and the absence of an international mechanism to resolve disputes in international trade .
19.The relationship of trade policy to human rights, labor rights, consumer protection, and the environment were essentially “off the table.” This is because GATT’s role was limited to governing how nations used traditional tools of economic protection such as tariffs and quotas.
20. By the late 1980s, a growing number of nations decided that GATT could better serve global trade expansion if it became a formal international organization. In 1988, the US Congress, in the Omnibus Trade and Competitiveness Act, explicitly called for more effective dispute settlement mechanisms. They pressed for negotiations to formalize GATT and to make it a more powerful and comprehensive organization. The result was the World Trade Organization, (WTO), which was established during the Uruguay Round of GATT negotiations and which absorbed GATT and formally began January 1, 1995. The WTO provides a permanent arena for member governments to address international trade issues and it oversees the implementation of the trade agreements.
21. GATT was provisional. The General Agreement was never ratified in members’ parliaments, and it contained no provisions for the creation of a formal organization.
a. The WTO and its agreements are permanent. As an international organization, the WTO has a viable legal basis because members have ratified the WTO agreements, and the agreements themselves describe how the WTO is to function.
b. GATT dealt with trade in goods. The WTO covers services and intellectual property as well.
c. The WTO dispute settlement system is faster, more automatic than the old GATT system. Its rulings cannot be blocked.
22. The WTO has some issues, too. Despite its broader scope and powers, the WTO has had a mixed record. On the positive side, nations have clamored to join this new organization and receive the benefits of expanded trade and formalized multinational rules. Today the WTO has grown 164 members. But since the WTO was created,
a. Many developing countries believe that their industrialized trading partners have not fully granted them the benefits promised when the WTO was formed. There have been several attempts to mollify their concerns, especially in addressing subsidies, but not enough. Hernando DeSoto would certainly agree.
b. there is concern that the WTO focuses too much on corporate interests
i. Opponents of economic
globalization and, in particular, those opposed to the growing power of multinational corporations, argue that the WTO promotes the interests of large corporations at the expense of smaller local firms struggling to cope with import competition.
ii. Environmental and labor groups (especially those from wealthier countries) have claimed that trade liberalization leads to environmental damage and harms the interests of low-skilled unionized workers in their countries.
c. Others say that the WTO has failed to handle China’s abuses or that intellectual property protection is too weak
d. Or that the WTO can overrule national laws and harm national sovereignty (remember the Global Economy Trilemma—to participate globally you must become more democratic and lose some national sovereignty—China might prove otherwise.)
e. Labor standards, it is argued by smaller, low cost countries, are “protectionism in disguise” by large countries
f. and, of course, that it has cost US jobs and hurt wages
23. In India, Latin America, Europe, Canada (Ottawa) and the United States (Seattle), citizens have taken to the streets to protest globalization and in particular what they perceive as the undemocratic nature of the WTO. During the Seattle Meetings in 1999, about 50,000 people protested with some significant violence.
24. Critics of WTO want to see narrower deals that don’t require unanimity—for example,
a. in 2012, 19 members agreed to government procurement rules
b. in 2013, 23 members signed a Trade Services Agreement
c. 2014—14 members—Environmental Goals Agreement
i. Paris Accord (2016) with 194 countries was outside of the WTO and was limited to addressing global warming
d. 2015—53 members—Infrastructure Technology Agreement
25. Let’s talk more about the US, China and the WTO. China joined the WTO at the end of 2001. Clinton began the process while he was President in order to make China more democratic (small d). He claimed that opening up Chinese markets and that huge population would create substantial profits for US firms..and it did for some—Apple and agriculture profited nicely and prices were lowered for American consumers.
26. BUT—1 million manufacturing jobs were lost—2.4 million jobs in total, according to the Council on Foreign Relations.
27. China, on the other hand profited hugely. Its economy is 8 times larger than it was in 2001. It has become the world’s largest exporter—5x what it had been. Trade with the US increased. 400 million people were lifted out of poverty.
28. As for a democratized China…..still highly concentrated with a stronger and richer Communist Party. Some changes, but clearly not democratized and violating some WTO rules.
29. Here are the main complaints against China within the WTO:
a. Illegal state subsidies, tax breaks and cheap bank loans
b. Undervalued currency makes exports cheaper
c. still discriminate against foreign goods with stringent local content rules, required partnerships with Chinese firms, and forced technology transfers—you want to deal with China, share technology with Chinese firms that are owned by government. That is the 2017 Chinese National Intelligence Law.
d. Control over supply chains—they do not want to export materials or parts—they want to export finished products. Foreign companies have very limited access to Chinese raw materials.
30. Helberg’s article about Deindustrialization equaling disarmament is powerful and full of warnings about China. He says that we CANNOT AFFORD
NOT
TO BRING BACK MANUFACTURING.
31. China wields significant power in medical equipment. We’ve seen that with the pandemic and the medical equipment that they and India dominate. With the technology that we have shared with them, they have launched cyber attacks against us (as have their allies—the North Koreans).
32. American missles depend on a Chinese propellant—military night goggles use Chinese metals. Taiwan produces 50% of computer chips and China has been trying to get Taiwan back since the 50s—look at Hong Kong!!!
33. In Africa, China is building roads and hospitals in exchange for priority access to African raw materials. They are very protective of their own raw materials such as Zinc, Copper, Titanium and Cobalt. They are developing local talent in Africa to serve their economic needs.
34. Helberg says that we need to get busy FAST with artificial intelligence, robotics, computer and cell phone manufacturing. We need to develop key natural resources, skilled industrial workers, and foster innovation or else we will have effectively DISARMED ourselves in the 21st century world.
35.. Just a couple of words about our biggest deal outside of the WTO—NAFTA and something called the TPP that Obama negotiated and Trump quashed. Most of our trade deals are bi-national—just one other country and US. These two are/were multi-national.
36. NAFTA—The North American Free Trade Agreement with Canada and Mexico was approved in 1993 and became effective on January 1, 1994. Without belaboring the vast details of the deal, some of which never really took effect, NAFTA set out to:
a. Eliminate all tariffs between the three countries by 1998.
b. Liberalize financial services trade
c. facilitate cross border travel for business
d. expand size of government procurements available to all countries—especially for energy
e. tri-national panel to resolve disputes
f. set North America content %s that would encourage use of each other’s supplies and materials
g. Some provisions, although weak, for intellectual property
h. rules for transporting goods in all countries
37. On the plus side, NAFTA created the world’s largest free trade area of 500 million people, where trade between the three members quadrupled from $297 billion to $1.14 trillion during the period of 1993-2015.
Further, the agreement likely had the effect of lowering prices for consumers, especially for food, automobiles, clothing, and electronics. It also reduced U.S. reliance on oil from OPEC. In 1994, the United States got 59% of its oil imports from OPEC, but that number is reduced to 44% today as trade with Canada has ramped up. Canada is now the
#1 source of foreign oil
in the United States…plus we are increasingly self-sufficient.
BUT–NAFTA has led to the movement of auto jobs. While the amount of autos manufactured in North America has increased from 12.5 million (1990) to 18.1 million (2016), the share of that production has shifted to Mexico.
Mexico now produces 20% of all vehicles in North America – and U.S./Canadian shares have shifted down accordingly over the years. The ultimate result is the destruction of hundreds of
thousands
of jobs in both Michigan and Ontario, Canada.
As a final note, comparing macroeconomic indicators from 1980-1993 (“Pre-NAFTA”) with those from 1994-2016 (“Post-NAFTA”).
For the U.S. in particular, here’s what has changed:
38. Lots of disputes over the safety of Mexican trucks on US side of border, certain Canadian export issues regarding dumping lumber, paper and steel.
39. NAFTA was revised in 2019 as the US-Mexico-Canada Agreement————-USMCA
40. It made several key changes from NAFTA
a. AUTOMOBILES: The USMCA requires 75% of a vehicle’s parts to be made in one of the three countries – up from the current 62.5% rule – in order to remain free from tariffs when moving between the three signatory countries. It also requires more vehicle parts to be made by workers earning at least $16 an hour, which would hopefully provide a boost to manufacturing in the United States, where wages are higher than in Mexico.
b. LABOR STANDARDS: Manufacturing workers long blamed NAFTA for sending jobs to Mexico, where wages are lower, and it was a priority for Democrats that the USMCA strengthen the enforcement of labor rules, creating a more level playing field for American workers, including a process that allows for the inspections of factories and facilities that are not living up to their obligations.
c. AGRICULTURE: The USMCA will keep agricultural tariffs at zero, while further opening up the Canadian market to US dairy, poultry and eggs. In return, the United States will allow more Canadian dairy, peanuts and peanut products, as well as a limited amount of sugar, to cross the border.
d. DIGITAL: USMCA prohibits Canada and Mexico from forcing US companies to store their data on in-country servers. It also ensures that US companies cannot be sued in Canada and Mexico for content appearing on their platforms.
e. ENVIRONMENT: The agreement provides $600 million to address environmental problems in the region – like sewage spillovers from Tijuana that impact San Diego – and makes regulations easier to enforce by doing away with a requirement to prove that a violation affects trade. While the new enforcement measures pleased most Democrats, they didn’t go far enough to get environmental groups like the Sierra Club to support the agreement.
f. TRADE SECRETS: It includes protections against misappropriation of trade secrets.
g. INTELLECTUAL PROPERTY: Stronger protection and enforcement of Intellectual Property rights that are seen as critical to driving innovation, creating economic growth, and supporting American jobs.
41. Lastly, the Trans-Pacific Partnership (TPP). This was a deal with 10 countries on the Pacific Rim in Asia plus Australia, New Zealand, Mexico and Canada. Not China—the purpose was to get a deal with these countries before China did. Same kind of deal as NAFTA and USMCA, but Trump pulled us out immediately upon taking office. It wasn’t just Trump—the left was against it, too, including Bernie Sanders,
farmers
, labor unions,
tech companies
, environmentalists,
economists
,
LGBTQ
advocates, and libertarians. Even Hilary Clinton who had favored it as Obama’s Secretary of State opposed it in her campaign. The
coalition
that formed grew from dozens, to hundreds, to literally thousands of organizations, many working together for the first time, ranging from Black Lives Matter to Doctors Without Borders to the Tea Party.
42. The pact aimed to deepen economic ties among these nations, slashing tariffs and fostering trade to boost growth. Members had also hoped to foster a closer relationship on economic policies and regulation. The agreement was designed so that it could eventually create a new single market, something like that of the European Union and NAFTA, but we were not in the mood back then for more trade deals that COULD cost jobs like NAFTA seemed to do.
2
DEINDUSTRIALIZATION—
2
weeks of lectures
1. UCLA in early 80s. Took a class—.taught by lawyer for Western Center on Law and Poverty. We were involved in the closure of a Starkist tuna canning plant in San Pedro. Starkist was owned by Heinz.
2. In that class, we read a 1982 book by Barry Bluestone and Bennett Harrison called the Deindustrialization of America.
3. Barry Bluestone is the founding dean of the School of
Public Policy
& Urban Affairs at
Northeastern University
in
Boston
. Previously he was director of Boston College’s Social Welfare Research Institute. He is also one of the co-founders of the Economic Policy Institute.
a. Bennett Harrison died in 1999. He was professor of political economy at MIT and also taught at Harvard, New School for Social Research, and Carnegie Mellon University.
4. This book affected me more than any other academic work that I have ever read. I used it for years as the primary book in a City Planning class and undergraduate PA that I taught. I have also used it for Policy. Lots of articles and books since but this started it all and served as a basis for further studies.
5. When I was asked to do a section of Public Policy a few years ago, it was suggested that I reawaken some of this material. I said that Trump has stolen the issue and I did not want to be painted in his corner, I thought that the issue was no longer groundbreaking
6. Upon further thought I assumed that Trump did not really care about the working people losing their industrial jobs (good assumption!!!) and that the orientation that I wanted to express was not addressed in all the discussion about robotics, globalization, and greedy unions.
7. The classical economic theory of COMPARATIVE ADVANTAGE (David Ricardo—1817) says that everyone is better off when countries produce what they can at a lower cost than other countries or at a higher quality. If you cannot make it better or less expensive, then you do not deserve to be doing it and you and the world will be less well off if you do. But—this holds ONLY IF WE USE THAT CONSUMER SURPLUS to generate new businesses and jobs to replace those that are lost to other economies.
8. You could say to me..”Look, the genie’s out of the bottle. These manufacturing jobs are gone.” Fareed Zakaria (CNN—start watching some of these shows) once pointed out that by 2050, 4 of the 5 biggest economies with be in Asia and the U.S. will be #3 behind China and India (other 2 Indonesia and Japan). What is important about the work of Bluestone and Harrison is the way this job movement took root and what are the implications are for public policy not only economic policy but all public policy—even if the effects cannot be reversed.
9. Let’s work our way from Bluestone and Harrison to today with updated facts and newer readings. I will throw a lot of data at you—stop me as necessary but don’t get hung up on the statistics. I posted my lecture notes on CANVAS.
10. Bluestone and Harrison discuss US Steel laying off 13000 workers in the 70s, the shutdown of a GM plant in Hamtramck, Michigan, the dismantling of Youngstown Sheet and Tube. Anaconda Copper, 13 Chrysler plants, Ford’s New Jersey plant, Firestone, Goodyear, Uniroyal, General Dynamics, Anchor-Hocking, Rohr, Max Factor and others.
11. They outlined the takeover craze of the 70s that had US Steel paying $6 billion to buy Marathon Oil and then not having sufficient funds to rebuild their steel capacity to compete against the Japanese. They discuss General Electric and RCA adding 30,000 and 19,000 jobs respectively overseas while cutting 25,000 and 14,000 jobs here and Colgate whose US payroll declined by 71% while its foreign payroll increased by 17%.
12. In addition, we can cite the Bethlehem Steel factory in Baltimore, which once employed over 35,000 workers and produced millions of tons of steel per year, but lost 3,000 jobs in 1971 and a further 7,000 in 1975. By the 1980s, the factory employed fewer than 8,000 workers, a 77 percent decline from its peak employment.
13. OR–Homestead Steel Works where the factory that dated back to the 1800s and gave birth to the United Steel Workers union became a Loew’s Cineplex; a McDonald’s; a Target; and a Bed, Bath and Beyond. And the poisoned brownfields of Buffalo’s abandoned 200 manufacturers led to the eventual evolution of Love Canal. How about 70 percent of the Boeing 787 being made in Asia (Michael Crichton—AIRFRAME).
14. As of 2006, the city of Flint. Michigan had lost over 70,000 manufacturing jobs, thanks largely to the decline of its auto industry (Roger & Me), which began in the late 1970s. The negative financial impact on Flint was so great that the governor of Michigan declared the city to be in a state of fiscal emergency in 2011.In a bid to save money, city managers decided to satisfy Flint’s public water needs with the Flint River, rather than with Lake Huron or the Detroit River as had been done previously. We will discuss this again in our infrastructure section. But due to the effect of years of pollution, the water from the Flint River reacted badly with the pipes that transferred the water to the city, corroding them and introducing toxic levels of lead and other chemicals into the water supply. Some have suggested that the Flint water crisis—as well as the associated civil unrest and frustration—can be connected directly to the history of GM deindustrializing Flint.
15. We must guard against the danger of sentimentalizing this past (Make America Great Again?), but we should also not dismiss the ideas and experiences of ordinary people caught up in this process of industrial change.
16.
Rawthorn and Ramaswamy, in an IMF funded paper, state that deindustrialization is the result of successful economic development and increasing productivity (robotics, etc.) and the shift to service that accompanies productivity. COMPLEX ARTICLE—LET ME SIMPLIFY. If I can produce 10 items of manufactured goods and service them per hour and if productivity grows so that I can produce 15 in an hour, I’ll now need 1.5 hours to service them. SO advanced development and increased manufacturing productivity will produce more service jobs, which are less economically valuable.
17. Christopher Kollmeyer [Read in 660 in 2 weeks–not 460] did a statistical analysis that argued that globalization is due mostly to increased national affluence and the movement away from a demand for goods vs services. International trade was the second strongest cause and the productivity issue of Rawthorn and Ramaswarmy –that increased manufacturing productivity will produce more service jobs, which are less productive and cause more workers to be service employees vs. manufacturing employees—was third.
18. Rawthorn and Ramaswarmy claim that an economy’s growth will trend toward its least productive sector as that sector takes over more and more of the economy because it is less productive and has to try to keep up. Manufacturing grew in the 50s and 60s despite “automation.” Not a zero sum game—why can’t we be more productive and grow our manufacturing base? Japan did it..China did it—South Korea did it—Singapore did it.
Why can’t we continue to innovate and develop new products?
19. Bluestone and Harrison have determined that 50 million jobs were lost between 1970 and 1985 and 56 million replaced them—a gain of 6 million jobs BUT in different locations, paying less, with less job security and fewer benefits. They indicate that this was not just a snowbelt/rustbelt to sunbelt movement that was argued at the time because 50% of all plant closings and 46% of all contractions were in the Sunbelt.
20. Let’s look at some additional numbers.
21. In the years from 1947 to 1973 (30 Glorious Years—Pax Americana), median income in the U.S. doubled—4% per year—even after adjusting for inflation. From 1974 to 2019, the increase was a total of 43.8% after inflation in 46 years–1% per year—only 1/4 the rate of the earlier years. .
22. According to the Bureau of Labor Statistics, the average hourly wage for non-management private-sector workers is now $22.65. After adjusting for inflation, today’s average hourly wage has about the same purchasing power as the pay in 1973 when the $4.03-per-hour rate recorded in January 1973 equaled $22.41 today.
23. In 1955, the average manufacturing workers’ pay was 89% of median household income (one worker needed in family)—now 47%. Retail workers income was 57% of median—now 34%. In 1955 9.3 million more people worked in manufacturing than in retail..now there are 3.6 million more in retail…combine that with pay differential and you see problem. Between 2000 and 2010, 66000 manufacturing facilities in the U.S. closed.
And now even retail is in decline by 1.1% per year.
24. Between 1989 and 2000 manufacturing productivity increased by 4.1% annually causing a small decline in worker hours of 0.3% per year. Between 2000 and 2007, productivity increases continued at a rate of 3.7% per year BUT hours worked declined by 3.1%. Productivity growth slowed to 1.3% 2007-2015 and has been -0.13% between 2017 and 2019 and workers are still losing these jobs. So much for the fruits of technology.
25. From its peak # of manufacturing workers in the 1970s, we have lost 7 million manufacturing jobs. Warehouse jobs are the one source of industrial job growth—Online shopping and Walmart, but that growth is slowing, too, as machines do more and more of the work.
i. U.S. share of global manufacturing was 28% in 1979—now 16.6%. China is 28.4% and passed us in 2010. States where industrial jobs are most important: Wisconsin, Indiana, Iowa, Michigan and Ohio.
ii. China makes 28% of the world’s cars, 41% of the world’s ships, 60% of TVs, 90% of mobile phones.
iii. Apple’s Elk Grove (Sacramento) manufacturing facility is now an Apple call center
26. From the late 1940s to the early 1970s, incomes across the various economic classes grew at nearly the same pace. Real family income roughly doubled from the late 1940s to the early 1970s at the 95th percentile, at the median, and at the 20th percentile. Then, beginning in the 1970s, income disparities began to widen, with income growing much faster at the top of the ladder than in the middle or bottom. The share of taxable income in the top 1% has risen from 10% in 1970 to 21% in 2019—doubled—top 0.1% has 5%–likely more now.
27. Regarding taxes–In the 50s, maximum income tax rates were 91%. In the 60s and 70s, the max rates were 70%. Reagan dropped the max rate to 28% and it had been increased back up to almost 40%. Trump reduced it to 37% and cut corporate rates from 35% to 21%, but the law put in place some provisions that cut high income rates to 20% in many cases.
28. In 1973 maximum income taxed for Social Security was $10,800 and rate was 4.85% ($524/year max). It’s now 6.2% against a max of $142,800 in income ($8854/year). The key here is not only the tougher tax on low and middle income earners but also the fact that the billionaire pays as much as the person who makes $142,800.
29. Or this one: A company closing a plant in the United States in order to move operations overseas can deduct the cost of the plant closing against U.S. tax liability. The company receives a tax benefit worth as much as 21 percent of the plant closing. Similarly, a company can fund its foreign operations by borrowing money in the United States and making an equity investment in its foreign subsidiary. Interest on the loan gives rise to a U.S. tax deduction even though there is no U.S. tax on the income from the investment while the income remains overseas.” Trillions of dollars are sitting overseas because they will be taxed if they are repatriated.
30. 45% of full-time IT jobs have been sent overseas. A study from Ball State University in Indiana says that ¼ of all jobs are at risk of outsourcing—most in jeopardy are Indiana and Mississippi (sort of calls into question low wages are only factor).
31. Call center telephone operators in the US make $13.65/hour—in India, they make $2. In the Philippines, it’s $1.70 and the Philippines has passed India in # of call center jobs. Payroll clerks in the US make $15—in India, it’s $2. Job relocations have always happened. Agriculture became more mechanized and African-American workers in the South moved to industrial jobs in the North. Television manufacturing replaced steam engine production. Automobiles replaced carriages.
32. Using Joseph Schumpeter’s concept of “creative destruction,” it is argued by some that deindustrialization and disinvestment allow for assets and individuals from older industries to more productive and efficient in newer industries. Seen in a national context, this concept suggests that deindustrialization frees capital for more efficient use in new industries and ultimately creates new jobs for displaced workers. But deindustrialization does not necessarily reliably generate good jobs to replace those that are lost.
33. Rather, Creative Destruction sets off a complicated set of factors including globalization, offshoring, deregulation, downsizing and technological change that are inherently interconnected. For example, technological change not only allows for more efficient production but also makes the movement of money and material goods, communications and management easier across great distances. Consequently, reinvestment is not confined to any particular country and so may not generate an advantageous economic or industrial transition for the nation or its displaced workers.
34. In addition, as we’ll see, deindustrialization is largely controlled by corporations to enhance stockholder value. Put differently, the economic shifts of the past 45 years are the direct result of decisions made by corporate and government leaders to pursue economic profit rather than the good of either communities or the environment, according to one of our articles by Russo and Linkon.
35. The ratio of pay of CEOs at the 350 largest public U.S. firms to the pay of typical workers in those firms’ industries shows that in 1965, these CEOs made 21 times what typical workers made. As of 2016, they make 271 times typical workers’ pay—a growth in disproportion of 13 times. Data also show that CEO pay grew twice as fast as corporate profits.
36. Foreign investment in US manufacturing has grown from $50 billion in 1985 to $2 trillion in 2019 (40x), while US investment in overseas manufacturing has grown from 100 billion to 1.5 trillion (15x) during the same time.
United Kingdom
Canada
Japan
Germany
Ireland
2019—OUT
40% in Manufacturing
2019: OUT–Ireland (cheap labor), Netherlands (high tech, tax breaks, largest European seaport, 4th largest airport, advanced financial sector, educated multi-lingual workforce-
Dow, Cargill, Heinz, Nike, Netflix, Tesla, Staples
), Bermuda, UK (GE, Cisco—mostly in Scotland and territories because of Brexit—then Luxembourg and Singapore.
The excess of foreign $ in vs out is good, right? Certainly better than no such investment and no jobs.
37. Yes, but temper the excitement a bit. Foreign owned plants do less sophisticated work here than the former American plants–hence pay less. The top line work is done at home, and the screwdriver (assembly) work here. Plus the profit goes home–it doesn’t multiply to the same extent here as would locally owned operations.
38. So–How are the lower and middle classes keeping up?
a. Women—but this is about maxed out
b. Personal Debt – including mortgages
i. 1950—65% of annual income
ii. 2000—128%
iii. 2019—185%
SO—two sources of bail out are fading away—borrowing and women working
39. Local communities have been devastated by plant closures.
a. Bethlehem Steel in Johnstown, Pa. eliminated 4500 jobs, with another 3000 lost through the multiplier (M=1.6:1). Youngstown Sheet and Tube laid off 4100 and it was estimated that another 12000-13000 workers would be hit (M=3.8:1).
b. GM closed a plant in Norwood, Ohio–cutting 4000 jobs. Another 8500 jobs followed these in services and suppliers (M=3.1:1). The town itself derived over 30% of its revenue directly from GM, so it had to lay people off and postpone capital improvements–it’s been unable, of course, to offer much financial help to its residents and the impacts are spreading throughout the area.
c. Estimates made in Ohio when Youngstown Sheet and Tube closed said that the public loss for every worker laid off was $17,000 per worker. The federal loan guarantee to Chrysler was based on a $18,500 per worker public cost. So, local governments, rather than being able to help in these times of need, are actually worse off themselves because of their dependence upon these businesses also.
d. Detroit is a classic example of this local economic impact. 250,000 jobs have left–its population is less than 40% of what it was in 1950. In 1980, 2/3 of its residents received some form of public aid–its now 80%. The biggest single landowner in the city is the city with 64,000 abandoned lots. Taxes on the few remaining taxpayers and businesses are 4x the rate applicable in other Michigan cities as the city struggles to cover its costs (Baumol, again for 660 and past 450 students).
e. These impacts are particularly painful in company towns. Anaconda Copper and Mining Company in Montana was purchased by ARCO which shut down the plant two years later, eliminating 1000 jobs in this 12000 person town By the time that the damage worked its way through the town, the total payroll of $51 million was down to $9 million. Workers sold their $55,000 homes for $35,000. Visits to the Alcohol Service Center increased by 52%, and there was a 150% increase in persons seeking drug counseling. There is a strong correlation between pockets of unemployment and high rates of opioid addiction and death. The patient load at the Mental Health Center went up 62%.
40. Taylor’s article: deindustrialized communities have had to endure some of the highest rates of violent crime and murder in the country. Between 1985 and 2010, Detroit, St. Louis, Camden, NJ and Youngstown were routinely populated the national top 10 lists for murder rate per capita, each appearing no fewer than 15 times during that span.
41. Fractured by urban decay, white flight, poverty, segregation, crime, and mass incarceration, deindustrialized communities came to resemble war-torn battlefields rather than places of residence. Indeed, for much of the past several decades, deindustrialized communities like Baltimore, Detroit, and Flint seem to have been some of the worst places in the country for watching black families struggle and die.
42. Graham and Pinto see things differently: The deepest desperation in their study among among Out of Labor Force (OLF) men is the white working class men, who in the past had stable, middle-class lives compared to the more precarious status of minorities. Yet Black and Hispanic OLF males retain higher levels of well-being, especially hope, and are more likely to report that they get recognition for giving back to their community than are whites. WHY??? (family support)
43. Minority OLF men also report less pain than whites. This suggests psychological pain, as there is no objective reason why whites should have more physical pain than minorities, particularly as the latter often have inferior jobs and poorer health care. Finally, within white males OLF, well-being and health are particularly bad for those with lower educational attainment and ages 35-54. (marginalized by doctors)
44. Spannaus article: The largest relative increases in midlife mortality rates occurred in the Ohio River Valley. The increase in midlife mortality during 2010-2017 was associated with an estimated 33,307 excess US deaths, 32.8% of which occurred in 4 Ohio Valley states. The common characteristic of these regions is deindustrialization.
45. From Russo and Linkon; The loss of tax income for cities creates a variety of social problems. Among the most obvious cumulative effects of plant closings are cutbacks in local services. From police and fire protection to maintenance of city parks and streets to garbage collection, cities must cut their costs when they lose a significant portion of the local tax base. Those cuts create further problems. Cuts in police and fire protection make it difficult to respond to the increases in crime that often accompany unemployment. Lack of public asset maintenance or reduced garbage collection makes the local landscape look rundown and unattractive, which in turn makes it difficult to attract new businesses or residents. These changes can bring down property values, which reduce taxes even more. Deindustrialized cities often find themselves trapped, without the funds to improve their circumstances and with fewer tools available to alleviate these fiscal crises.
46. Crime increases in deindustrialized communities for several reasons and over a long period of time. While some crime occurs as laid off workers run out of money and options, and decreased police presence contributes to the problem, crime is a long term problem for such communities. Criminologists have found that street crimes increase as unemployment spreads, but after a lag period, more serious criminality can develop.
47. In the 1990s, a decade or more after Gary and Youngstown were both hit by deindustrialization, the two cities traded back and forth the dishonor of having the highest per capita murder rates in the United States. During that period, criminal justice experts determined that most of the murders in the Youngstown area were being committed by young adults who were born between 1977 and 1984, the most intense period of the deindustrialization. But for the mill closings, Youngstown residents of this age might have been earning a decent living in the steel industry. Having a reputation for crime also creates a tough challenge for local boosters in bringing new jobs to the area.
48. In order to preserve police and fire protection, many cities cut back on maintenance. As a result, local streets may not be repaired regularly and street lighting may be cut back. Landscaping in pedestrian areas may not be maintained or cleared of trash quite so often. All of this creates a kind of “broken window syndrome” in which decay begets more decay. Such problems are often exacerbated by other economic costs.
49. When companies abandon factories, they often leave behind significant soil and water pollution. This can create large swaths of unusable or undesirable land. In Youngstown, for example, much of the area where the steel mills once stood remains empty 30 years after the structures were torn down. Although Environmental Protection Agency regulations push companies to clean up these areas, such rules sometimes backfire. When Anaconda, Mont., was named a Superfund site, selling homes and bringing in new industries became even harder, because no one wanted to buy a home or build a business in an area known to be polluted with dangerous toxins.
50. Strangleman, Rhodes and Linkon add: As jobs left the city, so too did white workers with the means to move to suburbs or small towns where factories relocated. Wealthier whites also followed investments outward. As a result, Detroit’s population began an unbroken downward fall in the 1950s. As Detroit’s population shrank, it also grew poorer and more minority. Increasingly, the city became the home for the dispossessed, those marginalized in the housing market, in greater peril of unemployment, most subject to the vagaries of a troubled economy.
51. The DeRuiter-Williams article about racism and deindustrialization says that education is often considered a way to escape such desperate conditions; however, as Detroit was in the middle of a budget crisis, schools were closing across the city to cut costs. The schools in the city were overcrowded. With some schools closed, already overburdened schools were weighed down with even more students.
High
school dropout rates were significantly higher than the national average. There is a shortage of suitable housing as the city tears down block after block of dilapidated houses, leaving empty lots in its wake. Often- times these homes are torn down to remove undesirable and dangerous crack houses that sprung up around the city (as they did in many major cities) during the 1980s. Property value has plummeted, and suburbanites are more than hesitant to return to the city.
52. In “Roger & Me”, Ronald Reagan comes to Flint to suggest to the laid off workers that they move to North Carolina for work. All that is needed for you to know if that was a good idea is to look at the Monongahela Valley of Pennsylvania–the center of steel making USA, 100,000 jobs were lost–that’s 250,000 people impacted if you figure an average household size of 2.5–guess how many people left????————–30,000–mostly young people who went to Pittsburgh for low pay service jobs. A Fortune Magazine study of Youngstown showed that 35% of displaced workers took early retirement, 40% were re-employed within two years at significant cuts in pay, 15% were still out of work (disproportionately women and ethnic minorities), and only 10% moved. A UCLA study of displaced defense workers shows similar percentages.
53. How about re-employment? People laid off from automobiles, steel, meat packing, aerospace, glass, textiles, and petroleum refining never recovered. These are the core, union jobs which we have lost many of during these years.
a. Ann Stevens of Yale found that displaced workers are still earning 9% less even after 6-10 years compared to equivalent workers who did not lose jobs. The RAND Corporation found that displaced workers in aerospace who did find jobs, found jobs that paid 20% less.
54. The Bureau of Labor Statistics does a periodic study of displaced workers. Here are some of their findings:
· In January 2020, 70 percent of the 2.7 million long-tenured (3 years at same job) displaced workers were reemployed. 41 percent of these long-tenured displaced workers cited that they lost their job because their plant or company closed down or moved
· Among long-tenured workers who were displaced from full-time wage and salary jobs and were reemployed in such jobs in, only 65 percent had earnings that were as much as their previous jobs—meaning 35 percent lost income
· The reemployment rate for long-tenured displaced White workers rose was 71 percent. The rates were Hispanics (68 percent), Blacks (62 percent). Asians were best (74 percent)
55.What about the so-called post-industrial economy and the service jobs that are replacing industrial ones? Multipliers of 2-2.5:1 are typical of industrial multipliers. Service sector multipliers are at most 1-1.25:1, so if you lose an industrial job, 1-1.5 others go with it, and you’ve got to create 2 service jobs just to reemploy everyone who lost their job when one manufacturing job is lost–often at much lower pay, so the community is still badly off even when it replaces the job. Baumol: whereas industrial jobs can be technologically progressive and cost reducing, service jobs are inflationary.
56. The article by Lawrence and Edwards identifies three causes of this hardship: productivity growth, globalization and less demand for goods and more demand for services.—Clearly regarding globalization, if you can get a foreign worker with equal skills for a handful of $ per day or less, why on earth would you pay even minimum wages to an American? Technology/Productivity certainly figure in, too—fewer people are needed, but this has been an issue since I was a kid and we always managed to develop new industries to meet the new consumer demand and productivity is tied to manufacturing—70% of United States research and development has historically been in manufacturing. Bluestone and Harrison and others concede that some of all of this hardship is, in fact, due to the simple facts of competitive economic life in a globalizing economy.
57. Of the 7.4 million manufacturing jobs lost, a recent study by the National Bureau of Economic research indicated that between 1990 and 2017 670,000 jobs lost were due to robots—an important #, but not 7.4 million. On the other hand, it is estimated that by 2030, 39-73 million jobs could be lost to robots with only 20 million being shifted to other jobs. The
jobs more likely to be taken over by robots
include those in the transportation and storage (56%) sectors, as well as manufacturing (46%) and retail (44%). Also at risk are workers who operate machinery, prepare fast food, collect and process data, originate mortgages and do paralegal and accounting work.
Jobs safest from the effects of automation involve managing people, high-level expertise and unpredictable environments. They include engineers, scientists, health care providers, educators and IT professionals, as well as gardeners, plumbers and elder care providers.
58. Russo and Linkon again: The changes wrought by deindustrialization do not affect only places like Youngstown, Ohio, or Gary, Ind., or only industries like steel and automaking. Today, communities with strong high tech industries, like San Jose, Seattle, Austin and Cambridge, are experiencing significant job losses due to offshoring as globalization makes it easier for companies to hire well trained but less expensive workers somewhere else. Most American workers and their communities are vulnerable to dislocation, even when their work and economies have nothing to do with manufacturing.
59. When deindustrialization was seen as a matter of losing jobs in “dinosaur” industries, few leaders seemed to care. But as the middle class and “knowledge workers” face the economic and social struggles of major job loss, policymakers and corporate leaders began to take note.
60. White collar and professional jobs are now being lost, including computer jobs, management jobs, architectural jobs, legal jobs and back office jobs.5 Alan Blinder, former vice chairman of the Board of Governors of the Federal Reserve and a professor of economics at Princeton University and director of the University’s Center for Economic Policy Studies, estimated that between 30 million and 40 million high end U.S. service sector jobs could be outsourced. “Shipping electrons is a lot easier and cheaper than shipping physical goods,” said Blinder, While still in its infancy, “electronic offshoring has already begun to move well beyond traditional low end jobs such as call center operators to highly skilled jobs such as computer programmers, scientists and engineers, accountants, security analysts and some aspects of legal work – to name just a few.”
61.The one factor not as frequently used to explain this decline is that much of the decline I have been discussing, is due to a deliberate, planned, systematic policy of disinvestment in America’s basic productive capacity that was undertaken starting after the Second World War and began to blossom in the early 1970s (notice how much of the change is benchmarked by 1973 even though these data come from a variety of sources)–in a word–DEINDUSTRIALIZATION. This was the point of Bluestone and Harrison’s book, and this component of deindustrialization merits discussion today as historically valuable for informing our present policies—economic and others.
62. So, what happened and why? Let’s go little farther with more of what happened before we get to why it happened.
1. Corporate Conglomeration leading to concentrated power
2. Bretton Woods—attractiveness of US $–invites
foreign investment
3. Technology facilitates foreign relocation/Suburbanization
4. Unions strengthen–then weaken as organizing becomes difficult
5. US $ begins to lose its luster—deficits
6. Defense vs. reindustrialization/Foreign Competition/Profits decline after Vietnam
7. New Managerialism
CORPORATE CONGLOMERATION
63. Starting with the 1960s, corporations went on a conglomerate buying binge. This peaked in the 70s, 80s and 90s but still continue today. Conglomerates are a post-1950 business development for the most part. Conglomerates are those corporations which have a wide diversity of companies under one ownership.
64. Previously in our history, corporate acquisitions were usually of two other types–Horizontal acquisitions and Vertical acquisitions. Horizontal acquisitions and mergers dominated from after the Civil War to 1905 when Anti-trust laws were passed. These mergers consist of taking over or combining with others in the same business. Vertical mergers dominated from 1905 to the Depression–here, a business takes over its supply or distribution sources. Each of these types stays within the same business sector or industry. Conglomerates don’t stay in the same business, they diversify; hence, there are a wealth of possibilities open to them–with more possibilities come more mergers!!
65. So, starting back in the 60s, you have ITT taking over Avis, Sheraton and Continental Baking. Into the 70s, Phillip Morris takes over Miller Brewing, Kraft and General Foods. You have US Steel directing its profits into the acquisition of chemical firms and shopping malls–you have GM buying Hughes Aircraft and Electronic Data Systems–you have Coca-Cola buying Columbia Pictures–or Mobil Oil buying Montgomery Ward, etc. Proctor and Gamble buying Gillette. Pepsi taking in Frito-Lay. The point is that for manufacturing companies, money was going into buying these ventures rather than into new
capital investment
for their existing businesses. During the supposedly booming 1970s, Fortune 500 firms expanded only 1 in 7 of the plants they owned.
66. To make this redirection of funds even worse for our manufacturing sector, US corporations were also diversifying by shifting capital overseas–Direct foreign investment grew twice as fast as domestic investment between 1950 and 1980–during the 70s this disparity was many-fold more.
67. There is a legitimate debate that surrounds this issue of foreign investment. Proponents of foreign investment argue that American firms would have lost overseas markets if they had not produced there because they could not have serviced these markets with domestic production. They further argue that they would have lost their domestic markets to lower cost foreign producers if they had not been able to use lower cost labor overseas. Opponents say that some of the foreign business could have been supplied from domestic production, especially if this foreign investment capital were put into plant improvements and research and development at home, and that most of the domestic demand could have been supplied from domestic production because there would be less foreign competition without our investments–we were the competition.
68. Large corporations exercise market power that enables them to outlast or defeat competitors by passing along cost differentials or deploying various cost cutting strategies until they prevail. Start up foreign competition could not have overcome that strength without U.S. $$, and, on balance, every $1 billion invested overseas costs 26,500 domestic jobs
69. What caused this overseas movement? Expensive labor—lazy union workers—machines—globalization? YES, but there is an underlying force that was at work. Can it be reversed—doubtful—but there is value in understanding what happened and why for future policies—economic and other. In order to understand more about this change, we need to talk more specifically about the period between the end of the Second World War (1946) and the end of the Vietnam War (1974)–an era known as the Pax Americana (30 Glorious Years)
BRETTON WOODS
70. The Pax Americana is the period during which US based companies dominated international economics. We emerged from World War II with the only major functioning army on Earth, with more than 1/2 of all the useable productive capacity in the world, and as the banker and creditor to both former allies and former enemies. The centerpiece of this dominance was the establishment of the dollar as the capitalist world’s principal currency by the Bretton Woods agreement of 1944.
71. The Bretton Woods system was history’s first example of a fully negotiated monetary order intended to govern currency relations among nations. The International Monetary Fund was endowed with international authority, able to identify nations in need and able to impose rules for these nations if they wished to continue in the system. The IMF’s primary purpose was to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact business with each other.
To maintain stability and prevent crises in the international monetary system, the IMF reviews country policies and national, regional, and global economic and financial developments. IMF financing provides its members breathing room to correct balance of payments problems: national authorities design adjustment programs in close cooperation with the IMF that are supported by IMF financing; continued financial support is conditional on effective implementation of these programs—free trade, privatization, government social service cuts.
72. The World Bank’s stated official goal is the
reduction of poverty
. However, according to its Articles of Agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and
international trade
and to the facilitation of capital investment. The system was set up to be directly dependent on the preferences and policies of its most powerful member, the United States (or as Naomi Klein postulated in the Shock Doctrine—specifically Milton Friedman and his Chicago Boys and their pro-corporate, pro-free market orientation—more about this when we discuss globalization).
73. After the war, only the United States was capable of assuring some degree of global monetary stability. All currencies were tied to the value of the dollar. All international transactions could be settled only in dollars or gold. Dollar was literally as good as gold.
74. The value to other countries of holding dollars in their reserves contributed to the takeover of foreign industries by US corporations by allowing them to buy foreign businesses very easily and cheaply. During the 60s, huge amounts of American capital went chasing these “good deals”. The proportion of total plant and equipment investment located outside of the US doubled in the metal and machinery industries from 14% during 1957-61 to 28% during 1967-70. By the early 70s, nearly 1/3 of annual automobile company investment was being placed abroad. By the early 70s close to 3/4 of total US exports and 1/2 of all imports were transactions between the domestic and foreign subsidiaries of the same multinational, conglomerate corporation. (660—Mueller article)
It is further worthwhile to note that 1/3 to 1/2 of our foreign trade deficit is still due to this trade with our own corporations. As the comic strip POGO used to say…we have met the enemy and he is us.
TECHNOLOGICAL ADVANCES/SUBURBANIZATION
75. Technological advances in computers, telephones, and air travel — financed in large part by the federal govt. during WWII– were allowing corporations to operate far reaching networks of production facilities. Further technological improvements were making machines substitutable for humans, thereby reducing the need for highly skilled labor. All of this made the use of cheap foreign labor very attractive and very possible.
a. During this period of the 50s and 60s, we were experiencing unprecedented economic expansion. Our movement to overseas markets was more than matched by an enormous burst of growth in the home market. The post-war suburbanization of middle class households, financed, again, in large part by government built roads and subsidized home loans, set the scene for unparalleled consumerism and the proliferation of shopping centers, tract housing projects, automobiles, and automobile-related services, like drive-in restaurants and movies. It has been estimated that during this period 1 out of 6 Americans owed his or her job to the existence of the automobile.
b. Conglomeration was leading to greatly increased levels of concentration of power in most industries. During this period the Fortune 500 increased their share of employment, profits and assets by 70%. Increased power among these firms caused economic decisions to be made by the few rather than a host of competitive operations.
c. One of the first things that these newly super-powerful corporations set out to do was to stabilize relations with labor. These great national and international opportunities of this period would be more difficult to exploit if there was trouble with labor. The history of labor-management relations in this country was not a peaceful one. If labor peace could be secured, either by breaking the unions or reaching some accommodation with them, corporations would have the breathing space necessary to make the investments and wait for the payoffs of their new global enterprises.
d. The decision was made to “buy off” the unions–to share the wealth of this era with them to a sufficient extent to nullify further organizing on the unions’ part. So a two-pronged strategy was put in motion–buy the silence of union organizers and simultaneously work within the government to reduce union power.
LABOR UNIONS
76. A little labor history here—-
a. As I said, the history of American class relations between the end of the Civil War and the end of WWII is filled with confrontation. It is also a history of significant grass-roots political participation by labor in the Democratic Party and in third party movements. The first workers compensation law was passed in 1909 in Montana. Unemployment insurance was pioneered in Massachusetts in 1916 although the first bill to actually pass a state legislature was in the early 30s in Wisconsin. In 1917, a Department of Public Welfare was created in Illinois, followed by Massachusetts in 1919. The national government joined the act in the 30s—the first Democratic President since WW1.
b. The Norris-LaGuardia Act of 1932 put a stop to court-ordered injunctions forbidding laborers to strike or picket.
c. The Wagner Act of 1935 (labor’s “Magna Carta”) created the National Labor Relations Board and gave workers the right to organize and to collectively bargain. Companies were prohibited from blacklisting or otherwise punishing union members or organizers.
d. The Fair Labor Standards Act of 1938 abolished child labor, established the first minimum wage, and institutionalized the 8 hour day.
e. Bolstered by the tight labor markets during the second world war and by the national priority on defense, one out of every ten workers in the US in 1946 was involved in a strike–the biggest strike year in US history. Soldiers were slowly being discharged and were not yet fully home in 1946.
f. Then, as the labor markets loosened with returning soldiers, it was business’ turn to strike back and the Russians gave them their chance. The US Chamber of Commerce and the National Association of Manufacturers had been working since 1937 to weaken the Wagner Act. Coming out of the War, Senator Joseph McCarthy and then Congressman Richard Nixon and others from the 1946 Congressional election were outspoken anti communists who believed the unions to be heavily infiltrated by Russian sympathizers and Communists (and they were—not to the extent that McCarthy was claiming, but they were there.)
McCarthy, Nixon and others so inclined passed the Taft-Hartley Act in 1947, over President Truman’s veto. The Taft-Hartley Act compromised the Wagner Act by disallowing sympathy strikes (strikes to show solidarity with other strikers), it gave employers the right to sue any union chief who called for a strike if there was a no-strike clause in the labor-management agreement, and most importantly, it gave individual states the ability to override federal statutes and pass “right-to-work” laws which outlawed compulsory union membership. The Act also made dues paying voluntary, which weakened the financial clout of union management—still an issue.
g. More than ½ of the states (28 as of 2017) plus Guam and the federal government eventually passed right to work laws—most of the South and non-industrial West and Midwest. The first states were Arkansas and Florida then Arizona, Nebraska and South Dakota and most recently the states of Indiana and Michigan in 2012, Wisconsin in 2015, and Missouri in 2017. What drove the South was the thought that Blacks and Whites should not be in the same union. The Taft-Hartley Act made labor organizing virtually impossible in these states and helped weaken all forms of labor objections to certain postwar reorganizing plans and plant closures. With labor divided–the North bought off by sweet labor deals and the South and West severely weakened by Taft-Hartley–with the anti-Communist mood of the late 40s and early 50s–and with media campaigns describing the new multinationals as the world’s great engines of progress, the union movement lost the momentum which it had been building for 50 years. Their ability to organize new members in the fertile territory of the South and West was greatly damaged. All unions had left to bargain for was more money for their existing members. They gave up any right to be a part of business decision making. Business–with its record profits– found this to be a cheap price for peace and control.
h. By 1955, when the AFL (American Federation of Labor) and the CIO (Congress of Industrial Organizations) merged, American unions had become thoroughly institutionalized in their relationship to both government and the employers. Union officials had become a union bureaucracy, a select group with its own perks and privileges, rising salaries and status, and its own ideology, at best an arbiter between employers and workers, at worst the employers’ enforcer.
i. In other words, if the unions would enforce labor discipline, supply labor stability, agree to longer contracts, purge the radicals, stay within the two party system, stay out of pricing decisions and corporate social issues, then the employers would increase union pay and benefits substantially. Where and whether a company does business and the overall direction of the industry were out of play in labor negotiations. Shutdowns and cutbacks were not to be negotiated, they were to be announced.
j. Bluestone seized upon this in his separate article about the deindustrialization of Detroit and the auto industry. According to Bluestone, once the European economies and Japan recovered, and later Korea, they began to produce products that were competitive if not more than competitive. The managers of America’s auto companies and the leadership of the UAW (United Auto Workers) continued to basically play the same game that they had played when import competition was not a problem. There were UAW leaders, he says, who saw a day of reckoning in the auto industry and were urging the company to work with the union to improve the product, but the leadership in the auto companies, and the leadership in the union, failed to follow up on any kind of collaborative approach to improve the industry. The result was that imports took a major share not only in the auto industry but in other industries as well.
j. This new orientation toward pay and benefits that employers willingly paid to quell union militancy had another and unintended consequence. Union workers began to be seen as a privileged class of worker with big pay and benefits other workers did not have. They lost their political support as non-union workers grew more resentful.
77. As might be expected, union membership is now historically low. In 2019, 6.2% of all wage and salary workers in the private sector were union members—10.3 percent of all workers. Highest percentage 35% in the 1954.
a. Public-sector workers have a union membership rate (33.3 percent) more than 5 times higher than that of private-sector workers.
b. Federal employees are 31% unionized– states are 35% –local govts. 39%.
c. Here’s why-Workers in education, utilities and in protective service occupations had the highest unionization rates. Manufacturing workers are 12% unionized–was 39% in 1973.
|
Service Employees International Union |
|
American Federation of State, County, and Municipal Employees |
c.–Median weekly earnings of nonunion workers ($892) are 80 percent of earnings for workers who were comparably employed as union members ($1,095).
d.-Among states, highest and lowest union membership:
Hawaii has the highest union membership rate (23 percent)—followed by New York (22%), Washington (20%), Alaska (19%) and Rhode Island (17%)–while South Carolina and North Carolina have the lowest (3 percent) with Utah, Virginia and Texas at 4%.CA = 15%. All South Central States are below the national average and all Mid-Atlantic and Pacific states are above.
e. Over half of the 14.6 million union members in the U.S. lived in just seven states (California, 2.5 million; New York, 1.7 million; Illinois, 0.8 million; Pennsylvania, 0.7 million; and New Jersey and Ohio, 0.6 million each), though these states accounted for only about one-third of all employment nationally.
f. You see the results–35% union membership in 1954 to 10.3% today—6% private sector. Business was set for an end run away from the high cost labor that they helped to create as soon as the pieces were in place–first to the South and then out of the country.
DECLINING DOLLAR
78. Bretton Woods started faltering in the late 1950s and really began to fail seriously as the 1960s turned into the 1970s. America’s persistent deficits began to be an international problem. The U.S. balance of payments ($ sent overseas vs. $ coming in)—plus dollars created by borrowing and deficit spending plunged the U.S. to a $3.5 billion balance of payments gap in 1958 and to even larger deficits in 1959 and 1960. The world was now awash in these dollars that were going out to other countries. The former eagerness of governments to obtain dollar reserves was transformed into what seemed a new desire to avoid excess dollar accumulations.
79. The postwar bargain was coming unstuck. In the United States, concern was growing about the competitive commercial threat from Europe and Japan. Concern was growing in Europe and Japan about America’s use of its deficit financing. The world was stuck with a fixed $35 value for the dollar even though there was now an excess of dollars. The world found itself in a tough spot. To forestall pressure against the dollar that might cause the value of the dollar to be changed from $35—thereby destabilizing international trade, U.S. deficits would have to cease. But this would confront the system with a different problem—the world was benefitting from US spending and the trade imbalance.
80. After 1965, U.S. behavior became even more destabilizing, mostly as a result of increased government spending on social programs at home and an escalating war in Vietnam. Japanese and German competitors arose from the ashes of their countries to challenge US corporations, and gasoline prices jumped manyfold sending economic and, more importantly, psychological shock waves through America.
a. Inflation began to gain further momentum, causing deficits to widen once again. To honor the fixed US rate of $35 per ounce of gold caused countries to accept a declining asset at a high value. Inflation everywhere began to accelerate. Eventually, the US did devalue the dollar but not enough—and Germany and Japan stopped honoring any fixed rate—Nixon took us off the gold standard, allowing the dollar’s value to “float” just like other currencies.
DEFENSE/FOREIGN COMPETITION
81. While we were fighting in Vietnam and “defending capitalism” against the Russians and Chinese, Japan and Germany rebuilt their industrial infrastructure–so whereas in 1959 we were home to 71% of the world’s largest multinational corporations, by 1976 we were home to only 43%. We were rudely awakened coming out of the heated Vietnam War based economy to find that while we spent money on defense, our allies had built modern factories and had purchased or at least borrowed technologies from our own corporations–GE owned the biggest share of Toshiba and had granted 24 licensing agreements to them to make products for GE to export back to the US. Westinghouse did the same with Mitsubishi. General Dynamics had deals with French and Belgian arms makers, Goodyear teamed up with Michelin and Bridgestone (Japan), Ford was working with Mazda, Chrysler with Mitsubishi Motors, etc.
a. Jane Jacobs in her book Cities and the Wealth of Nations calls defense spending—TRANSACTIONS OF DECLINE. We waged war and Japan and Germany rebuilt their industrial infrastructure.
82. Bottom line–in 1963-1966, the rate of return (profit) for product-oriented, non-financial corporations in the US was 15.5%. In 1974-1978, it was 9.7%. (Commanding Heights mentioned the declining rate of US profits as it discussed the rise of Reaganomics and Milton Friedman and the return of Hayek.) [660–Remember the Acceleration Principle….growth has to continue at same rate].
83. US corporations looked at their operations and asked themselves what was needed to rebound. They found themselves so far behind that the time it would take to rebuild their infrastructure and the cost of borrowing money at 15%-20% in the late 70s only to earn 9.7% were such that reindustrialization was not an option. They had to find new ways to up their profits in the US–and do it quickly– or continue to move out. They did both.
NEW MANAGERIALISM
84. Not at all coincidental to this sudden realization that we had fallen way behind were two major schools of thought coming out of America’s business schools—Discounted Cash Flow analysis and the Growth Share Matrix.
85. Discounted cash flow–or present value–is the way money in the future is valued today. I go into depth on this in other classes, but I just want to touch upon it here. You can see intuitively that money one year from now is worth less to you than if you were to get it today–money three years out is worth less than 1 year out, etc. Among a variety of reasons is one very simple one–if you had money now, you could earn interest or some other return on it for the year or three in these examples. So, at the very least, the money down the road is worth less by the foregone interest–let alone such other considerations as risk and inflation.
86. As an example, if I had $1,000,000 and could earn that 9.7% on it—the 1974-78 profit rate, in 10 years that $1,000,000 could grow to approx. $2.6 million. In other words, I had better be able to get $2,600,000 in 10 years if I’m going to invest $1,000,000 today. To make it worse, if I want to get back to that 15.5% return from 1963-66—and I’ll need that to cover the 15-20% interest rates which were then prevailing in the late 70s, I need $4,400,000 in 10 years or else the $1,000,000 investment won’t pay off. That’s quite a return–over 4x in 10 years, but those are the numbers.
87. Lester Thurow, the late MIT economist, once determined that there are very few investments that will take longer than 6 years to pay off that a corporation will ever make using discounted cash flow analysis. Between 7 and 10 years, some sharing arrangement with government may work and after 10 years, they will never pencil out for any significant amount of private investment. Immediately, all the bright young executives could see that re-industrialization couldn’t possibly pay off—-IT WOULD TAKE TOO LONG–after all it took 30 years since WWII to get into this mess and now maybe longer to get out. To quote the former chaiman of ARCO, Thornton Bradshaw…”American corporations can hardly ask their shareholders to wait for long term investments to pay off–the free enterprise system does not allow for such a luxury”
88. Long term thinking and planning vanished in the 1970s in response to our panic coming out of Vietnam and the decline in profits, Add to that the sudden realization that the world was not ours anymore and the fact that the technological groundwork was being laid for businesses to move and to do so relatively quickly.
89. Simultaneously, coming out of Harvard was the Growth Share Matrix developed by the Boston Consulting Group. This is a simple little 2×2 matrix plotting growth against market share for various corporate enterprises.
|
Market Share |
|||
|
High Low |
|||
|
Growth Potential |
High |
Stars |
Problem Children |
| Low |
Cash Cows |
Dogs |
90. This matrix shows four groups–stars with great profits and growth–problem children with lower profits but lots of growth ahead with the proper investment strategy–dogs with poorer profits and little growth opportunity–and cash cows with good profits, but not really going anywhere as is unless huge sums of money were to be redirected toward them.
91. Conglomerates used this matrix in principle to make decisions about their various activities and subsidiaries. Stars–keep them going, treasure them. Dogs–dump them—even if profitable but just not as profitable as other ventures and they are drawing down overall profit rates, which keep their stock prices up. What about the other two? Large profits going nowhere (Cash Cows) or great potential with the right investments. Simple, right?? Redirect profits from the Cows—-MILK THEM–and give the money to the problem children–they’ll become the stars more easily AND MORE QUICKLY than the cash cows.
92. What businesses were these cash cows—–older, stable, modestly profitable enterprises–things like autos, steel, machinery—-the very stuff we have lost. The 1970s through today have been dominated by these philosophies of the “quick fix”. Bluestone and Harrison called this short-term thinking, quick profit, cash oriented business philosophy–the “NEW MANAGERIALISM”. Conglomerates bought and sold subsidiaries at a feverish rate, running down and closing profitable enterprises after milking them of their cash to finance investment elsewhere–going to the right to work states and overseas or investing in other, quick growth types of enterprises. Everybody joined the party–traditional old-line product oriented companies began to merge into conglomerates, using the steel industry, transportation equipment, and metalworking as cash cows to finance diversification into problem children service industries like finance, real estate, and that most glamourous of all–high tech.
93. This pace of movement of capital is something Bluestone and Harrison called the VELOCITY OF CAPITAL. At present, the amount of money that moves around the world in a fraction of a second is 50 times the total daily trade in goods and products. The faster it moves, they argued, the less time there is to absorb its effects and the more damage its movement does.
94. Wall Street loved acquisitions and reduced labor costs…GREAT SHORT TERM BOOSTS–stock prices soared and that’s good for corporations because high stock prices allow you to raise money more cheaply (do not need to borrow at 15-20% in the 70s)–they put you in a better negotiating position for mergers and buy outs, and they keep others from being able to buy you out because your stock is high. Warren Buffet always looks for undervalued stocks to buy. If you are a corporate manager, maybe you would prefer that he stay out of your business—especially if you are running it badly. This emphasis on stock prices also feeds the short-term mentality because stock prices fluctuate around their price/earnings ratios. All things being equal, a drop in current earnings will reduce stock price.
95. If we take a look at two different situations—businesses that were independent of conglomerate ownership before 1972, but were bought thereafter and those that stayed independent, you’ll find that conglomerates bought up the better businesses, but by the time they were run for a while by the conglomerate management, their performance had declined to the level of the ones that were not bought.
96. Three things were at play here—inefficient, distant management, cash cow milking, and a socially unmanageable velocity of capital—business movement without social consequences being considered. David Gordon of the New School for Social Research in NYC found that “bureaucratic control” accounts for over 85% of the measured retardation in labor productivity after 1973—much as Bluestone argued in his article about Detroit. And to quote Harvard’s Michael Porter…”General Mills has made a fortune in the cereal business but has made a mess out of everything else”.
97. We often hear about NAFTA and job losses resulting therefrom—and, yes, the issue of globalization did explode in the 1990s with NAFTA and the World Trade Organization—and we’ll get into that next time, but I hope that I have shown you that we started moving plants out of the country 40 years earlier than that and even to Mexico to take advantage on low labor costs and docile unions in 1965 with the Maquiladora program.
98. Why do you think that nobody was making a big deal about it before then?
Times were so good—either not noticed or perceived as part of the good times
99. You’ll note that much of the data I provided seems to refer to 1973/74 as a breaking point. It was the end of Vietnam and the artificial stimulus of war, the accumulation of deficits and inflation, the emergence of Japan and Germany all coming together to produce the perfect storm that triggered responses that were short term fixes further damaging the long-term economic position of the U.S.
100. What about government? Where was it at this time? Reagan—get government out of our business. They quit on us. Lessons are important for both trying to come back as best we can and for other issues that the government has abandoned or will abandon and especially our inability to think LONG-TERM.
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