Who Killed the Steel Industry?

Ignatius, David

Who Killed the Steel Industry? by David Ignatius When smart people in New York and Washington analyze what’s wrong wit11 the American economy, they tend to think about big, complicated...

...And they began to panic-demanding protection from the sort of whirlwind competition in which the American steel industry had been formed...
...Judge Gary placed the steel industry in an exalted position from which it arguably has never recovered...
...The idea that the proper relationship between business and government is one of constant combat has, however, been a distinctly American notion...
...To Americans, this image of “Japan, Inc...
...Business and labor-not without reason afraid of arbitrary, socialistic powerseemed to prefer meddling to planning...
...And, as long as the economy was expansive and abundant, nobody bothered to question whether the adversary system was actually the best way to serve the common interests that depended on key industries like steel...
...Thus it was in the corporation’s interest not to drive other, less efficient producers out of the market...
...conservative in his methods and ideas...
...plants in operation, and it saved the jobs of the workers in those plants...
...The government will immediately scream that this figure is inflationarywhereupon U.S...
...A local union p r e s i d e n t from Gary, who had managed to gather a half do/en of the pewter plates, remarked on the way back to Pittsburgh that it was odd, given all that Abel had done for the union, that he seemed to be leaving office unloved...
...By early 1977, the companies began to sense that they were in the midst of a classic ‘Ish a ke o u t , ” reminiscent of those of the 19th century...
...Historian David Brody, in his book Steelworkers in America, quotes from their r e p o r t : “The American manufacturer is not so David [gnutius is a Washington journali.,t M’ho c.overed the steel indu.str\, M*hile living in Pirtshurghfvon, 1976 to 1978...
...So the steel companies have dragged their feet, fighting the rules in court...
...maker), hadn’t built a new blast furnace since World War 111...
...And so, over the years, steel managers inevitably lost the hungry look...
...In 191 1, for example, he admonished his subsidiary presidents: “Make it certain your conduct is so high-toned, so fair and reasonable, that you cannot justly be charged with attempting to drive out of business any of your competitors...
...That wasn’t anybody’s job, really...
...Trade policy fixed the level of foreign competition...
...This limited the ability of American firms to take the risk of exploring new markets to drum up demand or sustaining investment through bad years...
...Unfortunately, what makes the steel industry’s story difficult to tell is that there isn’t just one villain who’s responsible for the mess...
...Part of the problem stemmed from what might be called the “New Deal stalemate...
...They should t a k e a t r i p t o Pittsburgh...
...Inefficient plants, and entire companies, were being swept out of the market...
...A broker in Chicago, say, will have a friend who manages a sheetsteel mill for one of the local plants...
...The steel companies were tied together by a market system that has virtually required standardization of products and prices...
...Most of all, the American steelmen have blamed their foreign rivals...
...That would have been costly, and risked further losses to imports...
...Speer might have been able to do that, but in the process, he would have had to forego more than a fev...
...That’s the way economic theory says markets are supposed to work...
...At a beer and sausage party after the ceremony, the local union presidents who had come to say farewell to Abe seemed more interested in grabbing handfuls of the large pewter plates that were being given away as souvenirs...
...And, saddest of all, steel’s executives increasingly seem to spend their days either pleading that the...
...In the steel industry, the engine of progress was Andrew Carnegie and his struggle to dominate his competitors...
...With the fanatical determination of Carnegie himself, the Japanese in the years after World War 11 set about cutting costs and increasing their share of the world steel market...
...the dean of the Wall Street steel analysts, took a lengthy tour of Japanese steel facilities several years ago...
...This price signalling is as delicate a form of communication as birdsong, and it is part of a tight, almost self-contained industry culture that has developed over decades...
...So, for most of the i n d u s t r y , government intervention against the imports seemed the more comfortable solution...
...The American companies were also partly prisoners of Wall Street...
...At that point, all the union could do was lend its muscle to the i n d u s t r y c a m p a i g n f o r protection from imports...
...In the process, American steel companies lost customers and American steelworkers lost jobs...
...The no-strike agreement completed the web of interdependence that had been gathering around the industry and the union for more than a decade...
...Over time, the price of American steel would increase, and markets would be lost to foreign producers or to substitute materials like aluminum or plastic...
...The scheme did succeed in cooling the Steel Crisis...
...The 1930s had established the principle that the government has a right to meddle wherever it wants...
...What made the union’s troubles interesting was that by 1977 they stood in the way of what might have been a genuine collective-bargaining breakthroughone that could have put the steel industry and its workers on a more stable financial footing for decades...
...industry executives, all the while, denouncing the bureaucrats for ignoring the crucial “contract-1abor”variations...
...But that was a faint note against the escalating chorus of demands from the industry for import protection...
...Henry Clay F r i c k , Carnegie’s chairman, worried in 1898 that “we cannot get costs down any more...
...And he carried a majority of the members in the well-paid steel locals...
...Judge Gary banished what he viewed as irrational, anarchic competition, and substituted a loftier view of the purposes of business...
...But such flexibility was impossible without union agreement to overhaul the existing thicket of benefit p l a n s , c r a f t j u r i s d i c t i o n s , and manning-level agreements...
...The EPA had to oversee steel’s compliance with clean air and clean water standards...
...What response was best for the nation...
...In part, that probably reflects the fact that we’ve never had the experience of a centralized government that linked, at gunpoint, the resources of the state with those of industry...
...In Japan, for example, the elite Ministry of lnternational Trade and Industry (MITI) has developed target levels of growth and investment for steel and other basic industries...
...And government officials conceded privately that they had established what amounted to a cartel arrangement for world steel...
...As Japanese steel imports increased during 1976 and 1977, the list-price regime began to be undermined by secret discounting by American companies-struggling to meet the low prices quoted by foreign competition...
...It combined the assets of Carnegie, Federal Steel, Illinois Steel, and other, smaller, producers-and when founded, it controlled well over half of all U.S...
...As their troubles have mounted, American steel executives have tended to blame everyone but themselves...
...Instead of rock-em, sock-em marketing, or daring pricing policies, the steel industry developed an elaborate system of list prices, which are quoted identically by every major producer...
...As of last ye company’s oldest operating dated back to only 1962...
...But where the adversaries remained true adversaries-as is the case with the EPA-business too learned to play the adversary role, g r a b b i n g f o r every a d v a n t a g e , blocking the regulators with legal maneuvering and threats...
...Rapid growth had enab Japanese to move quickly alo economists like to call a “ curve”-the same thing had happen of course, in the formative years of the American industry...
...Steel prices were set through informal negotiations with the anti-inflation bureaucracy...
...In the end, after all the calculating, the “trigger prices” bore a remarkable resemblance to U.S...
...It’s hard, these days, to appreciate how envious the rest of the world was of our economy in that time...
...The “adversary relationship” gave way to an alliance-but an alliance in which the government all too quickly accepted the industry’s and union’s definition of the problem...
...In 1893, historian Brody points out, Carnegie decided to get out of a fledgling “pooling agreement” (in effect, a cartel) among companies that produced steel rails...
...What the IRS bureaucrats ignore is rke possibility that steel may, indeed, be a special case, deserving a special examination...
...It’s an unhappy truth that sometimes what is best for a company or an industry-for example, a long period of foregone earnings while the profits are ploughed back into new facilities-is not always what keeps the stockholders happy...
...Inland Steel, for example (the fifth largest U.S...
...and that the shakeout precipitated by the Japanese was forcing American companies to make tough management decisions they had been avoiding for decades...
...The price-setting ritual works something like this: In the weeks before a major change in list prices, steel companies begin telling their customers and the financial press how badly they need a price increase...
...Escape From Competition The history of the American steel industry is perhaps best understood as a long struggle to escape from competition...
...Other press conferences will follow, at which other companies’ executives suggest that a rise of, say, eight per cent or nine per cent is appropriate...
...presidents, journalists, or investorsthey often responded with pained resignation, as if they felt like Gulliver, caught helplessly in a web spun by sorry Lilliputians who’d never heard the roar of an oxygen furnace...
...Changes in these list prices can be initiated by a smaller producer, but they won’t hold unless they are ratified by U.S...
...The Steel Crisis was in full swing...
...Any company that pressed for unilateral advantage threatened to upset the applecart...
...It paid for this protection by making consumers pay a tax, in the form of higher steel prices...
...Like other labor leaders of his generation, he had struggled to build a stable union bureaucracy and win bread and butter gains for the membership...
...But even as the companies were moaning about imports, the shakeout was doing its brutal work...
...adjusting for yield variations and product-mix variations, and God knows what else...
...Morgan used concentrated financial power to best his rivals in the banking business...
...Abel appeared to be drunk, and in his remarks, he needlessly insulted the union's vice president, John Johns, who was also retiring...
...then other state and federal agencies have to fork over billions for job training, unemployment compensation and the like...
...with list prices underwritten by the government, industry profits recovered sharply in 1978 from the depressed levels of 1977...
...With so little incentive to clobber the competition, steel executives tended to be operating men, drawn from the ranks of mill s u p e r i n t e n d e n t s . Generally, they stuck close to the h e a r t h . They weren’t ‘going to make any great fortunes in the steel business...
...Even for the more efficient U.S...
...In time, even the Carnegie Company, began to weary of the Darwinian struggle...
...Inefficient producers were driven out of the steel business, as Carnegie had hoped, and those that remained were forced to match his attention to economy and innovation...
...The wave of plant closings ended...
...Labor costs are enormous and increase much faster than the sluggish growth of productivity...
...Steel’s problems tell us a lot about where we are and how we got there...
...This means extensive retrofitting of old plants, and not all of them are worth the expense...
...With so many new plants, and with costs that they believed were the lowest in the world, the Japanese adopted Carnegie’s sales philosophy: take orders, run the mills full, and charge whatever prices the market will bear...
...Abel, the union's white-haired president, was hailed as a labor statesman by outside commentators...
...Even as big an industrial lobby as the steelmakers, however, couldn't count on obtaining help from the government by themselves...
...Yet every three years, as the collective-bargaining agreement came up for renegotiation, steel buyers became so nervous about the possibility of a walkout that they stockpiled huge inventories buying steel from whomever would sell it, including foreign mills...
...As aging mills closed and thousands of steelworkers lost their jobs, the union joined with the industry in pressuring the government to do something to stop the import tide...
...Several months later...
...One Japanese company, Nippon Kokan, has built 13 new furnaces since 1945, each with progressively greater capaci productivity...
...If that sounds odd, bear in mind that competition is the enemy of every good businessman...
...But then, the 1RS’job is to worry about the integrity of the tax code, not the future of the steel industry...
...Sadlowski couldn't promise the wellpaid workers more money, but he offered something else: an appeal to old-fashioned labor solidarity and sentiment...
...The Treasury Department had to worry about steeltrade relations with the Japanese and depreciation schedules for blast furnaces...
...Nobody’s Job The final accomplice in the demise of the steel industry has been the federal government, and its role is especially disturbing...
...The problems of the American ’ economy become more comprehensible when you look at a specific industry that is in trouble, like the steel industry...
...For the most part, the various bureaucracies were too busy tilling their own gardens to worry very much a b o u t t h e overall health of the industry...
...But for American steel companies, with their cozy system of list prices, this sort of behavior was extremely disruptive...
...From 1950 to 1976, Japanese steel output grew more than 20 times, at an annual growth rate of 14 per cent...
...As a re‘sult, American mills would close, and jobs would be eliminated...
...And in operating their mills and furnaces, the Americans made decisions without regard for “trouble, cost or interference with preconceived ideas and vested interests...
...Abel appeared willing to cut the sort of deal that would trade job security for flexibility in work assignments...
...The stalemate yielded a legalistic, a d v e r s a r y r e l a t i o n s h i p between business a n d t h e government...
...Antitrust policy determined who could merge with whom...
...But the New Deal stopped short of creating the sort of national economic-planning apparatus that could coordinate the buzzing swarm of regulators...
...Over that same period, productivity improved only slightly, from 13.1 hours in 1964 to 10.9 hours in 1975...
...Since there aren’t any stockholders to get in the way of the corporate managers, companies can go through lean years without getting frantic about quarterly earnings or dividend payments...
...As this practice accelerated, major steelmakers began to report large quarterly losses...
...Rockefeller exploited bottlenecks in the processing and distribution of petroleum and cornered the oil business...
...But the negotiations were being conducted in the shadow of the divisive Sadlowski election, and, by the closing days, it was clear that such an innovative bargain was out of the question...
...The same union officials who privately admitted that f e a t h e r b e d d i n g was widespread insisted in public that there could be no “tradeoffs” to management in the 1977 settlement...
...The IRS offers all sorts of technical rebuttals, but they boil down to an argument that if depreciation rules were changed for steel, they would have to be changed for everj*bodr...
...Soon one ofthe smaller companies, unable to restrain itself a moment longer, will actually announce a nine per cent increase...
...It's often been suggested that if Ed Speers, president of U.S...
...Instead, the story is a little like one of those offbeat murder mysteries, where the final pages reveal that every character in the story has had a hand in the crime...
...In 1901, a group of British steel executives visited the United States and was awed b y the pace of innovition and growth in our steel industry...
...Washington regulated while Pittsburgh burned...
...But, most of all, it allowed the industry, the union, and the government to postpone a real reckoning with steel’s problems...
...by David Ignatius When smart people in New York and Washington analyze what’s wrong wit11 the American economy, they tend to think about big, complicated things like the money supply, the level of aggregate demand, and the s i x of the federal budget deficit...
...These integrated plants could produce steel with less labor and with less loss of “yield” during the stages of production...
...But trigger prices, in the end, seemed to have added another chapter to the saga of the steel industry’s escape from competition...
...Railroad magnates formed big, prosperous railroads out of small, competing lines...
...at prices below Japanese costs...
...When they finally lose, they often simply close the facilities...
...makers were expected by %‘all Street analysts to present neat, q u a r t e r - t o - q u a r t e r increases in earnings...
...Because the Japanese were building new plants so rapidly to serve their expanding markets, they had a chance to pioneer new techniques, like giant blast furnaces...
...These savings meant lower costs...
...To take j u s t one example, Peter Marcus...
...Both sides, implicitly, recognized that they needed each other's help to maintain this amiable arrangement, for without protection from foreign competition, their web of interdependence might collapse...
...Total domestic U.S...
...government should get off their backs or demanding more government aid...
...Steel, really had wanted to beat back the foreign threat, he should simply have filled the holds of a few huge cargo ships with American steel, parked them outside Tokyo harbor, and offered the steel to Japanese buyers at rock-bottom prices...
...And, when times are really tough, workers have happily foregone pay increases...
...Japan Learns How Into this crystallized corporate world fell the Japanese...
...The limited-and often conflictingpurposes of the various government bodies is clearest in matters that iwolve technical issues...
...dividends...
...In the process, EPA rules have virtually guaranteed chronic unemployment in old mill towns...
...Managers here hadn’t had “time to wear themselves into agroove...
...Except for occasional boom years, profits are low, inhibiting investment in new facilities...
...Here, the debate between the experts of a given bureaucracy, and the experts of the industry, is largely incomprehensible to anyone with a broader perspective...
...We needn’t hesitate, take orders and run full, there’s a margin...
...In countries that have had this sort of governmentsuch as Germany, France, or Japan-a process of national economic planning quite easily emerged as an alternative to an adversarial system...
...But we have a right to expect something better from the government...
...As it happened, the union didn’t have to wait long fqr a glimpse of its future...
...The management of U.S...
...I do not think anyone can stand in our way,” Carnegie wrote...
...In this way, American steel buyers established relationships with foreign steelmakers and learned that, for the most part, they offered high-quality products...
...Which would be a nuisance...
...Nor would they have to restrain their own wage demands, which have caused steel’s labor costs to rise faster than labor costs in nearly every other industry...
...There had not been a nationwide steel strike since 1959...
...When the bureaucracies dealt with the steel industry, it was in the narrow terms of these regulatory responsibilities...
...Suddenly, the government was confronted with a decision that would affect the development of the steel industry for years to come...
...The mature U.S...
...This obviously benefits consumers, but it increases the businessman’s anxiety and insecurity...
...One company, bemoaning rising costs, will tell reporters that it needs an increase of six per cent in the near future...
...But usually, modern facilities were patched onto existing plants...
...Industrial growth meant that there were enough markets, and profits, for everyone...
...In the long run, of course, the union would be the loser for, this sort of resistance to innovation and change...
...The pro-Abel candidate, Lloyd McBride, managed to win only, by running up substantial margins in the dingy, non-steel outposts of the union — l i k e the machine tool industry, the container industry, and the steel-fabricating industry—where prosperity and its discontents were less obvious...
...Lawyers, of course, could applaud such a relationship...
...Where there is innovation, many ofthe techniques are copied from foreign competitors...
...steel demand grew only slightly in the years after 1945, so there wasn’t the same spur to build new facilities...
...I n s t e a d , the i n d u s t r y agreed to guaranteed wage increases and other goodies that, over the life of the threeyear contract negotiated in 1974, dramatically increased steel's average hourly labor costs by about 50 per cent...
...Investment decisions were determined partly by federal tax policies and partly by commands from the anti-pollution bureaucracy...
...Instead, t h e C a r t e r administration chose the course that would keep its most vocal constituents happy...
...For the Japan what the learning curve taught was enormous cost-saving advantage t could be gained from buildin carefully arranged “integrated” plants...
...For its part, the union agreed to the symbolic emasculation of the no-strike pledge, which calmed down the nervous buyers...
...But he was less successful in selling his policies to his own rank and file, and, four years later when he retired, he left a bitterly divided union...
...He cursed and drank beer and loved to sing old labor songs...
...But Abel's bureaucracy got the scare of its life in 1977, when a flamboyant challenger named Ed Sadlowski ran for union president on a platform denouncing the no-strike agreement and most of the rest of the Abel legacy...
...The recurring price wars made planning and investment decisions difficult for many companies...
...Once every decade or so, one of the U.S...
...In contrast, the “mature” American steel industry didn’t have the money, or the immediate need, to construct whole new facilities from the ground up-and this undercut the benefits of whatever new technology the Americans could afford...
...A few brave souls, like Lewis Foy...
...According to the Bureau of Labor Statistics, the Japanese reduced the number of manhours needed to produce a ton of steel from 25.2 hours in 1964 to 9.2 hours in 1975...
...The simple truth is that if the steel industry had been as badly managed as the federal government’s policies toward it, it would have disappeared long ago...
...The ENA was the sort of collective bargaining "breakthrough" that sends labor-relations professionals into ecstasies of exegesis...
...When the market situation required, he even “dumped” steel at prices below his own costs...
...Alan Wood Steel, the nation's oldest producer, closed its doors in the summer of 1977...
...They needed an ally—which brings us to the second v i l l a i n in the steel story, the steelworkers' union...
...The U.S., in this period, grew at an annual rate of only 1.6 per cent...
...We tend to expect shortsightedness and self-interest on the part of private groups, like businessmen or trade unions...
...This sounds like a good idea, except that it limits the ability of companies to add facilities, and jobs, in declining industrial areas-with already high pollution-where they may be most needed...
...The dangers of the system were revealed in the unfolding of the Steel Crisis of 1979...
...Union leaders could postpone the date when they might have to change the inflexible rules that prevented the productive use of labor in the mills...
...In each area where the bureaucracy got involved in steelmaking, there was good reason for the government to be concerned with the industry’s behavior...
...Steel’s bargainers recognized that if the industry was to use modern facilities to best advantage, it would need more flexibility...
...And in defending their embattled industry, they’ve often shown the s o r t of conservatism and resistance to creative thinking that the British visitors of I90 I found so remarkably absent from the American industrial landscape...
...And in a sense, it was the product of the joint battle against imports...
...The industry, in effect, pledged that it would maintain the extraordinarily high level of wages for steelworkers, in return for the union's pledge not to strike nationwide, and for its implied promise to help the industry lobby for protection from foreign competition...
...It was buy-out proposal, like those that have been reached in the newspaper business and o t h e r industries where new technology has made many crafts obsolete...
...The a l t e r n a t i v e t o the ENA agreement would have been for the industry to become tight-fisted at the bargaining table and take a long strike, in the hope ot winning a settlement that would cut the rate of increase in labor costs...
...Thus, any clever businessman hopes to corner the market-by beating back less clever rivals, or by developing a unique product for which there is no competition...
...Such marketing campaigns are the great game of American business, and their relative absence from the steel industry gives steel something of a dull reputation in business circles...
...is both fascinating, and repelling...
...What had happened to Abel was that he had become a victim of the union's prosperity and success...
...American exports of steel, meanwhile, were rising, and British home markets were threatened...
...The Labor Departanent had its hands full with safety and health issues in the mills...
...Had the government-and the press, and the public-been used to thinking in national terms about the health of the steel industry, it might have been easier to resist the demands of the companies and the union for trade protection...
...Business, often enough, learned to play along with this system-wherever possible by the simple expedient Of “Capturing”the agencies who were its ostensible adversaries...
...The decision to restrict imports kept several inefficient U.S...
...We’ve never been a t o t a l i t a r i a n country, and, we feel, this is not the moment to start...
...But, at the same time, it seems equally obvious that in our economic sphere, the adversary system just isn’t working...
...Take the issue of depreciation charges for capital equipment...
...The retreat came in 1901 with the formation of the United States Steel Corporation...
...Steel, the so-called “price leader...
...The crisis posed precisely the sort of broad question that had fallen between the desks of the federal regulators over the years...
...Meanwhile, American markets are threatened by new steelmasters from across the seas: the Japanese...
...They may have a few good years left, but not enough to justify spending many millions for brand-new scrubbers and water-emission systems...
...And since steel is bought by hard-nosed purchasing agents, rather than softhearted consumers, it’s tough to use advertising to subtly suggest that the customer will be a more popular guy if he buys your brand...
...Four months after the new contract-shorn of the productivity tradeoffs-was signed, the wave of plant closings began...
...Government economists undertook to calculate what it should cost to produce steel in Japan: they then decreed that they would investigate, and penalize, anyone caught importing steel into the U.S...
...The Union Joins the Fight The central understanding between the American steel industry and the United Steelworkers of America was set forth in a document called the "Experimental Negotiating Agreement " (ENA), signed in 1973...
...When pressured by the larger world-of U.S...
...Steel, after all, isn’t a very sexy item...
...To solve the steel industry’s p r o b l e m s , t h e c o m p a n i e s , t h e union, and the government have to grow up...
...Bethlehem Steel closed much of its Johnstown Works in Pennsylvania and then portions of its Lackawanna Works near Buffalo...
...It's difficult to maintain the t i d y p r o f i t - a n d - l o s s s t a t e m e n t s investors prefer while meeting the competition in a roller-coaster market...
...When steel supplies were short, the Japanese would exact a premium from their customers around the world...
...l n d i v i d u a l pieces of American hardware could be every bit as advanced as those of the Japanese, but since they were tied to other, less modern f a c i l i t i e s in t h e s a m e steelworks, the net productivity gain tended to be less...
...Abel's retirement ceremony was held June 1, 1977, at the southwestern P e n n s y l v a n i a e s t a t e of an old industrialist, which the union had recently purchased...
...It was a comical situation: hordes of statisticians puzzling over Japanese production figures, converting them from metric tons to net tons and back again...
...Steel, after several days of deliberation, will announce a statesmanlike increase of only six per cent...
...Privately, even union officials would concede that, in many mills, electricians, millwrights, and other craftsmen sometimes spent half the day sleeping or playing cards because they couldn’t be assigned work outside a particular jurisdiction...
...So when the company decided several years ago to install a new “superfurnace” at Indiana Harbor, it retained Nippon Kokan to provide what the Inland company magazine called “Japanese expertise...
...Finally, government could avoid facing up to the need to coordinate its own confusing policies...
...Individual agencies were established whose function was not to view business as a potential source of wealth and creativity for the nation, but as a behemoth to be circumscribed at a particular point-as a polluter, as a taxpayer, as an employer...
...The ENA was only another step along this road...
...Executives could continue to badmouth big government and dispense pieties about the free market, even as ’the government’s policies were blunting the intense market competition that might bring about a leaner, more efficient industry...
...In his drive for monopoly, Carnegie kept economizing and cutting prices...
...Steel needed to avoid letting its market share get too large...
...During 1977, according to many steel buyers, this sort of practice became so commonplace that there developed a virtual black market in steel, with companies selling prime-quality products as if they were seconds-often at steep discounts...
...makers would build an e n t i r e l y new s t e e l w o r k s , w i t h appropriate fanfare, and it would be nifty...
...While it created an efficient industry, this sort of c u t t h r o a t competition was unpleasant...
...In a subsequent report, he wrote that one Nippon Steel Corporation plant was “ t h e most impressive industrial facility this writer has ever seen...
...Freed at last from ruthless competition, the industry began its long slide into maturity...
...If the depreciation life of mill equipment were shortened, they argue, there would be less reason for steel companies to keep existing facilities in operation when more modern techniques are available...
...When the mill rolls tonnage that doesn’t quite meet the specifications required by the mill’s best customers, the manager will call the broker and offer to sell him “seconds” for 15 per cent below list price...
...Competition lowers prices and profits...
...To begin to understand what has happened to the American steel industry in the 20th century, it helps to go back to a different time, when America’s chief worry seemed to be how best to exploit its abundant :ratural resources and the everflowing ideas of its entrepreneurs...
...These days, it’s the Americans who return breathless from visits to foreign mills...
...And with each new plant the Japanese installed, they improved their steelmaking techniques and productivity...
...chairman of Bethlehem Steel, seemed to understand that for all the anguish that accompanied the plant closings, the harsh decisions taken in 1977 were making for a stronger steel industry that would be better able to compete with the Japanese over the long run...
...There isn’t much you can do to differentiate your I-beam from that of your competitor...
...Finally, in September, Youngstown Sheet and Tube closed its Campbell Works in Youngstown, laying off nearly 5,000 workers...
...In their view, the combat of business and government produced-in a marvelous synthetic moment understood only by lawyersoutcomes that served “the public interest...
...In this way, most of the great American fortunes have been built...
...Unlike Japanese steelmakers, which are financed mostly by bank debt, and thus don’t have to worry about stockmarket expectations, the stockholderowned U.S...
...In its dealings with the industry, the government has behaved like the worst sort of monopolist: remote, arbitrary, and inefficient...
...Steel went into the 1977 contract negotiations prepared to offer permanent job security for the industry’s current employees, in exchange for a free hand in using them in the most productive way...
...Pollution standards have been developed as if little else in the world mattered...
...What wasn't often reported, as government officials in Washington scrambled to help bail out the industry, was that the plants being closed were among the least efficient and highestcost in the industry...
...The ad ministration’s chosen instrument of relief was a bizarre device known as “trigger prices...
...steel production Under the leadership of Judge Elbert Gary, the corporation succeeded in its goal of bringing discipline and price stability to the industry...
...By the 1970s, the federal government had a hand in virtually every aspect of the industry...
...First, they have decreed that old plants and new ones must meet similar rules on emissions...
...There’s always a bit of discounting in the market...
...Even as steel’s problems worsened, the various components of the federal establishment clung to their separate bureaucratic imperatives-unplanned and, for the most part, uncomprehending...
...Three quarters of a century later, the American steel industry is politely termed a “mature” industry, with problems the British should easily understand...
...During that period of growth, new production techniques had steadily lowered the cost of making steel: the cost of steel rails, for example, had been cut at one of Andrew Carnegie’s mills by more than two thirds, to $12 a ton in 1900 from $36.52 a ton in 1878...
...It should be said that the retreat from competition was aided, in a peculiar way, by the antitrust laws...
...With everyone moving in the same direction, toward productivity and growth, Japanese industry can function with the efficiency of an anthill...
...In the classic manner of a beleaguered industry, they’ve argued that “unfair” t r a d e , r a t h e r t h a n h u s t l e and innovation, accounts for the success of their competitors...
...Indeed, in the last several years, they’ve spent increasing amounts of their precious revenues on public relations efforts-arguing that steel’s difficulties can be solved if only the wretched foreigners will stop “dumping” cheap steel here, a It would be nice if the problem was that simple...
...But when the market was soft, as it was during the last several years, Japanese prices would take a nosedive...
...Or if, rejecting the industry’s trade arguments, we could find another equally simple explanationlike greedy unions, big government, or incompetent management...
...Steelindustry economists argue, persuasively, that the incentive to invest in new steelmaking equipment is limited by the Internal Revenue Service requirement that it be written off over an 18Year period...
...companies, the Wall Street factor counseled against a price war with the Japanese...
...The British visitors were struck by the dynamic spirit of American business...
...EPA’s rules encourage companies to build elsewhere...
...And the competitive regimen was extended, painfully, to steelworkers, who were often laid off or forced to take sharp pay cuts at the bottom of the economic cycle...
...It was a peculiar day...
...By the 1970s, they had become a giant, capable of providing the first strenuous, sustained price competition the American industry had seen since Judge Gary ended the era of cutthroat rivalry...
...industry wasn’t so lucky...
...list prices...
...With a majority of the members in the steel industry agreeing with Sadlowski that Abel was a l r e a d y in bed with management, the union couldn’t appear to be giving up any of its existing rights-even if they amounted to featherbedding...
...Constructing most of their plants from scratch, the Japa could craft them as if they were one giant machine-with iron ore, coal, and limestone unloaded from giant ships at one end and finished steel products emerging at the other...
...But after a lifetime, they knew how to make steel...
...Steel’s decline suggests t h a t we can’t a f f o r d t h e New Deal stalemate-and its drain on productivity and innovation in our b a s i c i n d u s t r i e s - v e r y much longer...
...Compounding the problem for old mill towns are other EPA rules that have encouraged building new plants in areas with low pollution levels...
...At the EPA, the focus is similarly single-minded...
...In 30 years the American industry had changed from an infant, with output only one sixth that of the dominant British, to a giant, whose output was double that of the British industry...
...To escape being broken up by the trustbusters, U.S...
...The tragedy was that no one in Washington took the trouble to coordinate these regulatory activities in a way that would insure that the c o u n t r y maintained a h e a l t h y , competitive steel industry...
...Except in the worst depressions, this meant holding prices high enough that they covered the least efficient producer’s costs and allowed everyone to stay happily in the black...
...A few big banks, working with the MITI technocrats, allocate capital according to the plan...
...The EPA’s edicts led residents of the Mahoning Valley in Ohio to complain that the agency cared more about fish than about steelworkers...

Vol. 11 • March 1979 • No. 1


 
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