Charting America's Future: The Deindustrialization of America

...international economic policies have been as much affected by political as by economic considerations Indeed, there is strong reason to believe the political imperatives have been primary Perhaps at one time this was proper The question is whether an approach conceived to meet the exigencies of the late 1940s and '50s is valid in the '80s The perceived postwar political danger was Communism—the expansion of a totalitarian movement with the Kremlin as its center There was little fear that the Soviet Union could do much militarily The United States clearly had the edge in troops, hardware and, above all, the atom bomb The real worry was that economic collapse in Europe and revolutionary movements in the Third World would allow Communism to overrun the globe without armed intervention That worry was reinforced by the Communist takeover of continental China, viewed then as a gigantic extension of the Soviet monolith To counter the threat, the United States decided to use its economic strength to rebuild the shattered economies of Western Europe and to help "backward" nations move toward "development " Healthy economies would repel the Communist virus Thus the United States exported capital (money and technology) and imported goods We provided both the factors of production and the market to nations around the world Although it was apparent that in several instances this was doing direct damage to sectors of American industry, such discomforts were discounted as minimal and transient compared to having foreign countries embrace Communism In 1948, the U S turned out half the world's industrial production Europe and Japan were still digging their way out of the rubble of the War, offering little real competition Cash and credit America put into other nations came back in demand for our products and tools of production Where countries backed by American money and knowhow started to penetrate our markets and cause some disemployment, it was simply assumed the displaced workers would swiftly find j obs elsewhere in our ever-expanding economy In the long run, it was calculated, thriving Europe and Japan would throw open their doors to products "Made in the U.S A ", even the poor countries of the world would buy our things with their newfound wealth America would prosper today, the world would prosper tomorrow, and the Communist contagion would be contained To a large extent, the policy worked well Europe and Japan got back on their feet, their recovery hastened by America's assumption of their defense burdens The Commurust monolith began to crack—China broke away in the East and Eurocommunism emerged in the West Third World countries, in many cases, showed a rising per capita income Some of the expected outcomes, though, did not materialize The European Common Market brought the Continent's countries together, yet excluded outsiders like the U S Japan turned totally protectionist The Third World, despite its rising per capita, grew increasingly unstable as new riches went to a bloated elite while the great mass continued to wallow in poverty All this has damaged the U S economy America's postwar trade problem, the erosion of jobs by a flow of imports, emanated from the so-called "backward" nations—headed, ironically, by Japan The Japanese entered world markets with products that traditionally come from nations in their initial stage of industrial development textiles and garments Because these are labor-intensive commodities, countries with little capital equipment and much cheap labor can readily compete internationally What appeared to be a negligible concern in the mid' 50s soon blossomed into a major one, as Japanese exports wiped out sector after sector of the American apparel industry Although aware that exports from Japan were harmful to America's largest factory employers (textile and apparel had over 2 5 million workers), we allowed Japan to move freely into our markets to give Nippon political stability But this strategy created political instability among America's most vulnerable citizens, blacks and Hispanics Since textile and apparel wages are relatively low, workers are drawn heavily from marginal populations When their jobs are wiped out, it is difficult—often impossible—for them to find new ones Hence unemployment began to pile up among minorities In response, Washington sought to negotiate quotas that would allow Japan to increase its exports to the United States at a pace that would not cause catastrophic unemployment in this country Following much travail, arrangements were elaborated covering silk, cotton, wool, and synthetic fabrics By then, Japan was no longer the villain Wages had risen there, labor-intensive manufacture was less important, capital-intensive production—steel, autos, chips, computers—were becoming Japan's primary interest Of course, the problem of labor-intensive imports did not go away, it merely changed its locus to such places as Taiwan, Hong Kong, Singapore, Korea, Haiti, Mexico, and later China The concept of "negotiated quotas" was therefore expanded to include half a hundred nations, in a Multinational Multifiber Arrangement A H^H ^^Blmost from the beginning, however, US policy prescribed a slow death for American textiles and apparel, especially the latter The reasoning fell back upon the Ricardian theory of "comparative advantage" Let the backward countries with their cheap labor do what every nation does when it first enters the industrial era—namely, spin, weave and sew America would do what it does best But just what is it that America does best...

...The notion is one of those fantasies derived from the assumption that a line graph on a piece of paper has a life of its own, independent of external reality It doesn't In modern America, the extrapolation of the slope bumps up against two rude facts First, the foundation for this country's service economy in the post-World War II era has been the goods-producing sector, where automation has made it possible for a smaller percentage of the total labor force to create the affluence for expenditures on services?both pubhc and private Lacking that base, the service superstructure would crumble No great economy can rest on everyone taking in everyone else's washing Second, if we eliminated factories, we would have to import our manufactured wares With what would we pay7 We could ship soybeans and wheat, but that would not be enough We could empty Fort Knox, and then what7 Would we pay for our imports by exporting the services of our public employees (about 40 per cent of the service economy), such as teachers, firemen, policemen, samtationmen, revenue agents, G-men7 Or would we export the services of those in the private sector, such as teamsters, beauticians, waitresses, salesladies, elevator operators, plumbers, social workers7 To these questions there has come an ingenious answer, in line with "comparative advantage" We would export our capital We would become a rentier economy, resting securely on our big fat assets The basic assumption is that the income from capital invested overseas would be greater than the outflow of capital, and the net gain would buy manufactured goods from other countries In technical terms, we would lose on the "balance of trade" side yet come out ahead on "balance of payments," mainly because of our foreign investments But this is highly dubious There is no reason why an American corporation should hasten to bring its profits back home, where it has to pay taxes on the repatriated income, when it can allow that money to float tax-free around the rest of the globe Moreover, the United States has been running trade and payments deficits As might be expected given our postwar policy of encouraging imports, there have been trade deficits every year from 1971-80 (except '73), and in the last four years of that decade they ran between $25- $33 billion annually The balance of payments, embracing income from foreign investments, registered smaller deficits $200 million in 1980, $9 billion in 1978, $10 billion in 1977, etc A closer look at those figures, though, reveals that they are quite faulty, for—as the official Department of Commerce statistics note?that account definition has been changed to include reinvested earmngs on foreign investments and historical data have been revised accordingly " In other words, the balance of payments looks much better than it is because the Department of Commerce "changed" the definition of "income" to include money that does not come in, profits that stay abroad and are reinvested there Let us assume, however, that earnings on foreign investments were somehow returned to the United States in sums large enough to purchase from other countries the manufactured goods that America needs What will happen is exactly what has been happening as American industry has increasingly moved abroad Economic polarization will be accelerated in the United States and globally If the US becomes a rentier economy, the income from foreign investments will not come back to all Americans It will "drip down" even less effectively than at present because the employees of our corporations—in many cases the vast maj only of them—will be located in other countries Some of the corporate profits will be spent to employ a relative handful of researchers here to develop new products or methods of production, some will be used to secure services in the United States for the small investing class But mostly there will be a piling up of wealth in the pockets of the rentiers (as in the classic rentier model of the United Kingdom at the height of its imperial economy), while the rest of the nation lives on crumbs?or on the dole The deindustnalization of America already is responsible, in part, for our declining productivity, because the service sector has traditionally lagged behind manufacturing in annual rates of productivity improvement Ditto the drop in take-home buying power, since service wages have always been lower than manufacturing wages And it is more difficult for the U S to keep its research and development lead m the absence of working operations to test laboratory inventions ^^^^^^m of the popular rationales for the shifting of manufacture out of the United States is that it has been helping to industrialize the Third World In the long run, it is said, this development of the less developed countries will benefit us as well as them But in recent years concerned analysts of the Third World have concluded that the poor nations need an "agn-cuitunzation," rather than an "industrialization," of their economics From 50-80 per cent of the populations of these lands are rural, and what they do best—speaking of "comparative advantage"—is grow things in the soil Pinning their hopes on manufacture has had tragic consequences Up to 1940, the poor countries were all net exporters of wheat, rice and other grains to the more industrial nations By the end of World War II they were net importers, having allowed their soil to be exhausted out of sheer neglect As farm income sunk, the poor families did what they do everywhere they produced children as their best cash crop, and populations exploded as the soil shrunk Unable to live on the land, these desperate people poured into the cities, offering their labor in factories for pennies to produce products to be sold in other lands Meanwhile, their deeply indebted governments have been finding it extremely hard to buy needed food on the world market, and the great suppliers—the United States, Canada, Argentinaand Australia—are finding the burden of giving the needed food products almost impossible to shoulder Sterling Wortman, vice president of the Rockefeller Foundation, has urged "that the development of agrarian countries be concentrated less on industry and more on agriculture' —on replenishing their soil to make it more productive by means suitable to the local level of skill and the indigenous culture "If productivity of large numbers of small farmers can be increased in the poorer countries," says Wortman, "and if for added millions ot farm families there is an increase in disposable income, markets will develop for imported food supplies and to reproduces urban industry Once tann income rises, lamiK size also is likely to be smaller, and when fewer agrarians feel the need to leave the soils, wages m the cities are likely to improve Right now, the Third World is becoming a highly profitable sweat shop for the manufacturers, wholesalers and retailers in the rich countries Global entrepreneurs, aided by the elites in the poor countries who have advanced themselves by serving as brokers between the sweat-shop labor and the foreign corporation, are pitting the Third World people of Asia, Africa and Latin America against the Third World people of the United States—to the disadvantage of the poor everywhere Robert Lekachman summed up the painful process in a paper for the Conference on Labor's Stake in a Changing World Economy alliances in the Third World between authoritarian governments and huge multinational conglomerates have promoted historical tendencies toward enclave industrialization Ill-balanced industrialization has enriched small indigenous elites of entrepreneurs and stockholders of global corporations, but done amazingly httle for the impoverished masses Unbalanced development has promoted monoculture and turned food exporters into food importers Premature urbanization has created vast miserably-sheltered, unemployed or underemployed hosts of migrants from the land " During the 1960s, for instance, Brazil's GNP per capita grew in real terms by 2 5 per cent annually But the relative share of the national income received by the poorest 40 per cent fell from 10 per cent in 1960 to 8 per cent in 1970, while the relative share of the richest 5 per cent increased from 29 per cent to 3 8 percent The Economist concluded in September 1974 that "In 42 other developing countries, the same trend tends to recur—an enlargement of economic income for the community as a whole with the benefits disturbingly concentrated at the richest end of the spectrum of income " This sad finding is confirmed by the report of a special UN committee, The Group of Eminent Persons to Study the Impact of Multinational Corporations On Development and On International Relations A "host country" may experience "high rates of growth," the report observes, yet "its income distribution may not improve or may even deteriorate Welfare standards may be kept low High income may accrue largely to domestic elites associated with foreign interests Basic needs of the population such as food, health, education, and housing may be left unattended " In sum, the present policies of "industrializing" the Third World turn out to be a process for enriching the rich in both the rich and poor countries at the expense of the poor in both the poor and rich countries ^J^^n impoverished countries that are unable to provide for their people by the export of manufactures, the alternative is to export people The consequent legal and illegal emigration from those countries poses painful economic, social and political problems for the First World nations, not the least being imported poverty So the end result of the rentier economy is polarization on a world scale That is hardly surprising, for the system allows global corporations to locate their finances and facilities anywhere m the world—playing off nations against nations—to maximize returns to the rentiers Like the rulers of the Roman Empire, the rentier can master the world economy by the ancient ploy of divide et impera (divide and rule) In this new world setting, traditional solutions to national economic troubles, such as expanding aggregate demand or even imposing tariffs and quotas, are by themselves not enough National policies must deal with the international character of the modern economy The next three chapters in this series will propose a positive program to cope with America's overall economic needs—including reindustnalization—in an internationally interwoven and interdependent economy 77ie preceding pieces in this series were "The Great Debate " (NL, November30, 1981), "Those New Deal Years (1933?1938)"'(NL,December28,1981), "Undoing the New Deal (1939-1981) " (NL, January 25), "Responses-1" (NL, February 8), "The Roots of Stagflation" (NL, February 22), "Responses-2" (NL, March 8), "The Politics of Productivity" (NL, March 22), "Responses-3"(NL, April 5), "Supply-Side Trickle-Up" (NL, April 19), "The Budget Balancing Act" (NL, May 31), and "Farewell to Fairness" (NL, June 28...

...rest of the world through exports, exchange rates, imports, interest rates, direct and indirect investments, and the massive movement of populations driven from their homelands by both economic and political pressures This wasn't always the case In 1933, the year of Franklin D Roosevelt's inauguration, the export and import ot goods and services equalled only 7 6 per cent of our Gross National Product, in 1979 the figure was up to approximately 25 per cent Direct investment in foreign countries in 1929, was $7 5 million, in 1979 it came to about $300 billion Add to that a variety of other private and government assets abroad, and the sum hits at least a trillion dollars—one-third of our GNP Today, if Washington pumps buying power into the system, we no longer can assume it will purchase U S goods, it may be used for imports, nullifying the "ripple effect" of enlarged consumption Nor does the creation of a larger capital stock in this country assure that the funds will be invested here, they may go overseas (About 1 5 trillion U S dollars are in Europe—Eurodollars—an amount corresponding to roughly half our GNP ) Attempts to control the money supply turn futile when billions go sloshing back and forth across oceans Similarly, research and development projects to perfect America's technical skills do not mean that our entrepreneurs will use their new advantages to build plants in the United States to employ more Americans, R&D achievements can be transported to U S plants overseas or sold to foreign companies?as they are And collective agreements between employees and employers do not guarantee that a certain level of wages and conditions will prevail for workers in the U S , factones can be closed and their operations moved overseas—as they are SL...

...This is the latest article in a year long exchange on CHARTING AMERICA'S FUTURE BY GUS TYLER 9. THE DEINDUS TRIALIZATION OF AMERICA In the last decade, the principal engine of international production has not been trade but rather the transfer of capital and technology across borders...

...Robert D 'a Shaw Columbia Journal of World Business, 1972 I n mapping economic policy for the United States in the 1980s, we have to think in international terms The American economy is inextricably intertwined with the...

...American multinationals were spending nearly 10 per cent of their total outlay on plants and equipment in other countries, by 1976 foreign outlay had risen to nearly 20 per cent The reasons for this trend may be found in governmental policies—of other countries and our own By the '60s Europe and Japan, back on their feet, were busy closing their doors on American goods Their prime instrument was not the tariff barrier, it was a morass of red tape to mire foreign imports Finding it difficult to export their products, American corporations decided to export their production—to the glee of the countries that, by their protectionist practices, were now the beneficiaries of U S capital, technology and managerial know-how America's reaction was not to complain, but to cheer as well Both the private and public sectors see many virtues in U S capital leaving America The big private companies see a chance to produce and sell in protected markets at inflated prices, and to enioy host government subsidies tor export Using their foreign facilities as a launching pad, they can export to the United States—dumping where they are able to get away with it—to compete against U S companies that still prefer to produce exclusively or mainly within our shores As for U S policy, it remains geared to bolstering the economies of Europe and Japan to protect their governments from Communism Thus the tax and tariff laws in the United States give preference to foreign over domestic investment Multinational corporations, for instance, do not have to pay a corporate income tax on profits made in other countries unless and until those profits are repatriated to the United States Consequently, profits reinvested outside the U S escape the IRS Where a multinational pays a tax to another country, the payment is treated in the United States as a tax credit rather than as a tax deduction This gives such a corporation a considerable advantage over a competitor who must pay a tax in, say, New Jersey that is only allowed as a regular deduction Further, the wholly-owned subsidiaries of multinationals in different countries bill each other for goods and services, and being the obedient children of the mother corporation, they can rig the charges to show little or no profits for a subsidiary in a country with high taxation and very good profits for one where taxes are low or nonexistent In the end, a global company can come close to escaping taxes everywhere A sophisticated refinement on this caper is the timing of payments to shifts in exchange rates, so that profits and losses are registered in the right places at the right moments to maximize income and minimize levies The U S tariff code also permits an American manufacturer to export component parts made here to another country for assembly, and then to return the finished product for sale with a tariff falling only on "value added"—most often merely the cost of labor, typically a fraction of labor costs in the United States This section of the code is an open inducement for U S firms to export the manufacture of products—at the expense of American workers Multinationals can use the threat of moving to another country as a weapon in bargaining with American unions, too, and the same threat is available to them elsewhere They actually can hold whole nations hostage by threatening to leave if corporate demands are not met The critical point is that if all multinational sales were exports from the United States, these companies would indeed be able to take up the slack in America's industrial employment That has not been the case, yet the concept of "comparative advantage" lives on, with a " service economy" viewed as the new savior We could function perfectly well as a nation without factories After all, once our service sector was only 40 per cent of the labor force, now it is 60 per cent ,why not 80 per cent, and so on...

...In the search for an answer, it was suggested that displaced textile and apparel workers would find similar employment in boots, shoes, electronic assembly, plastics, toys, novelties, steel fabrication, ceramics, junk jewelry, bicycles, cameras, color TV, light wood products, etc That hope was dashed quickly Any labor-intensive product could be made for less where wages were less—that is, in the Third World Consequently, labor-intensive production in the Umted States began a dramatic decline The slide was speeded by American entrepreneurs, who contracted out their work to the cheap-labor lands In the process, U S firms provided overseas plants with the best in American machinery, managerial know-how, styling, sizing, and merchandising American retailers favored the inexpensive imports that permitted a much higher mark-up on final sale American financiers who had extended heavy loans to developing countries counted on their borrowers to raise cash by export—to the United States Before long, it was being said that our best shot was capital-intensive manufacture, because our sophisticated technology put us so far ahead of the rest of the world Yet the expected expansion in this area did not materialize Instead, in many "heavy" sectors in the U S both production and employment were shrinking This was not due to any shrinkage in the income, output or investments of America's great manufacturing corporations Most of them were growing nicely—in other countries Although American companies had foreign subsidiaries prior to the turn of the century, the rapid rise of the multinational corporation to its powerful position in the world economy is a phenomenon of the post-World War II years In 1960...