(What’s Left of) Our Economy: When Industries Disappear

Tags

apparel, big government, Breitbart.com, conservatves, embroidery, Frances Martel, Immigration, labor unions, manufacturing, New Jersey, skills, textiles, Union City, unions, {What's Left of) Our Economy

Until I read Frances Martel’s “Hanging by a Thread,” I used to think of Union City as little more than one of those bleak-looking smallish northern New Jersey municipalities the Amtrak trains pass through on their way between New York City and points south.  How wrong I was!  And for such wide-ranging policy and political reasons!  

Not that you can’t simply enjoy her long feature for Breitbart.com for the fascinating descriptions of what makes her hometown special geologically (e.g., it sits on lots of Manhattan bedrock-like granite, good for supporting factories with heavy machines and multistory housing) and demographically (because it developed fairly late in the 19^th century, its population was always dominated by immigrants).

Clearly important as well is Martel’s main theme – how manufacturing built solid prosperity for Union City from the get-go, and how its demise, due to developments like (but not restricted to) offshoring-obsessed U.S. trade policies helped bring punishingly hard times. (Full disclosure: Martel interviewed me for the article, and quoted me quite generously.)

But if you’re thinking this is only an article for trade and/or manufacturing mavens, or for New Jersey history aficionadoes, you’re sorely mistaken. For along the way, “Hanging by a Thread” offers important insights into how these closely related subjects profoundly affect many of the nation’s other major issues and challenges.

For example, Martel offers a novel twist on the notion that the United States welcomed so many immigrants so consistently (though not always) from the mid-19^th century onwards in particular because of its urgent need for unskilled labor. No doubt most of the newcomers were poorly educated. But as “Hanging” makes clear, industry during this period used lots of complicated machinery, including the embroidery sector that became concentrated in Union City.

As Union City’s official historian told Martel, many of its first immigrants came from Germany, Switzerland, Austria, and other parts of Europe with major textile industries, and brought with them extensive experience working with such devices that employers clearly found valuable.

Since skills (of different kinds, of course) remain so crucial to economic success today, Union City’s past raises the question of whether – as Open Borders advocates seem to believe – the United States today should indiscriminately welcome immigrants regardless of skill levels and gainful employability.

Two other messages coming through loud and clear from Martel’s research and analysis are especially important for conservatives to heed. The first has to do with unions. Martel’s parents were hard-line anti-communists who fled Castro’s Cuba, and her mother worked in apparel. The author explains that these arrangements were seen as “a critical part of the factory ecosystem.” The following exchange, with her mother speaking first, makes the point vividly:

“‘I have always had a good union. It works, I think. It works to have a union because without a union, in a private place, you’re screwed,’ she told me.

“‘You don’t feel that there is a conflict between that and being a capitalist?’” I asked…..

“‘No. What? Being a capitalist? No,’ she replied, with confusion. ‘No, that has nothing to do with socialism, it’s just so that the worker has someone to defend them. If you don’t have a job, they can fire you whenever. That’s not fair. To throw you out for no reason, it’s unfair ifyou are working well.’”

Martel’s second message for conservatives actually echoes a point I’ve made before (e.g., here): The more enthusiastically traditional free trade policies are pursued by American leaders, the bigger government’s going to get. But as Martel makes clear, these approaches to the global economy are bound to generate needs that far exceed the kinds of welfare state benefits (ranging from income support to heavily subsidized healthcare) used to keep living standards above third world levels (or at least try to do so).

As the Union City example shows, relentless globalization can also turbocharge government’s role in economic development itself. The author explains that, since 2000, Union City Mayor Bob Stack (a big-city machine politician if ever there was one)

“took the reins on the eve of the guillotine falling on embroidery and has taken to meticulously rebuilding the identity of the city. He tore down Roosevelt Stadium, the sports venue at the heart of the city, to build a new Union City High School – with a stadium on the roof. Union City previously boasted two high schools, one for Union Hill and one for West Hoboken, that Stack turned into middle schools. He built parks in honor of the city’s Cuban, Colombian, and Dominican populations, and an ‘International Park.’ Seemingly every other street has a water park open in the summer for children to play in – the biggest, Firefighters’ Memorial Park, boasts an Olympic-sized swimming pool. His administration also refurbished the downtown library into the Musto Cultural Center and built its replacement, the library at José Martí Middle School (which his administration also built), in the shadow of what was once St. Michael’s monastery, an imposing Catholic historic site that now houses a Korean Presbyterian congregation.”

In other words, Union City realistically recognized the choices before it, and rejected “the option much of the Rust Belt took: do nothing, abandon ship, hope the invisible hand swoops in before you hit the concrete.” As a result (and also because of its proximity to New York City), it’s more than avoided the ghost town fates of counterparts like Gary, Indiana, Youngstown, Ohio, and Detroit, Michigan.

(What’s Left of) Our Economy: A Big New Hit to Free Trade Theory

Tags

Adam Smith, Bruce R. Scott, comparative advantage, David Ricardo, economics, economists, factors of production, free trade, Great Britain, machinery, manufacturing, Portugal, protectionism, Ralph E. Gomory, Steve Keen, technology, textiles, The Wealth of Nations, Trade, William J. Baumol, wine, {What's Left of) Our Economy

OK, time for some good news – at least if you’d like the economics community to come up with more realistic views of trade policy and its impact on the national and global economy. As made clearest by a (sadly overlooked) journal article by Steve Keen of Kingston University in London, some noted academic economists have identified fatal-looking flaws in comparative advantage theory – the 18^th century concept that ever since has anchored mainstream scholarly thinking about the entire discipline, along with justifying the virtues of the freest possible trade flows.

As Keen writes, comparative advantage identified benefits flowing from economic specialization, and was first advanced by British economist Adam Smith in his seminal The Wealth of Nations to explain the superiority of laissez-faire, free market practices within industries. His compatriot David Ricardo extended the concept to relationships between industries and countries. The core idea in its trade theory version is that all countries and their peoples will reap maximum gains if they limit themselves to those tasks that represent their own best efforts – even if they’re laggards by international standards in that particular sector.

I first encountered a compelling objection to comparative advantage in the early 1990s, in the form of a sharp observation by Harvard Business School professor Bruce R. Scott. As he noted, Portugal, one of two countries in Ricardo’s classic description of comparative advantage’s virtues, basically hewed to the Ricardian prescription, specialized in turning out relatively simple products (in this case, wine) – and remained a poor country for centuries. The second country was Great Britain. It specialized in higher value goods (epitomized, in that era, by textiles), and became the world’s greatest and richest empire.

More fundamentally, Portugal specialized in activity that could generate good levels of growth in the short-term, but whose long-term wealth creation potential was limited by low levels of productivity growth, capital and technology intensiveness, by limited potential for innovation, and by deficiencies in other closely related indicators of dynamism. Great Britain specialized in activity whose positive spinoffs were bound to be far greater.

Other major Ricardo blind spots have been pointed out since then – for example, his skepticism that capital would ever easily move across borders. But his central insights have continued commanding pervasive respect among professional economists. Just as important, they’re still revered by political leaders and opinion molders who find these theories convenient for portraying their often self-interested trade policy preferences as indisputable truths, or who learned in a freshman economics class that they’re gospel.

Keen’s big addition to comparative advantage critiques has to do with unfettered free trade’s likely effect on an economy’s diversity and growth potential. As he notes, Ricardo’s case for liberalizing trade flows hinges on a completely unrealistic assumption about its impact on a national productive base, and hence on national output and incomes. The assumption: that countries will wind up better on net if they abandon those activities that don’t meet the comparative advantage test, and refocus their efforts on activities that can pass it, and that such a transition is feasible in the first place.

In other words, Portugal would scrap all of its textile factories (and presumably all its other industries as well), and become for all intents and purposes a mono-economy devoted to wine. Great Britain would abandon whatever wine-making and other non-textile work it was engaged in, and turn into a big cloth-making facility. What of the other necessities of national and individual life, at least those that are in theory trade-able? They would be imported – and paid for by the earnings from exports of the national champions.

Simply articulating this scenario reveals how completely fanciful it is. For example, what about supplying needs before the envisioned transitions are completed? How long will they last? And even over decades under a free trade regime, could the global economy possibly be expected to turn into the kind of exquisitely complex but perfectly functioning mechanism that could enable a large number of mono-economies from securing the full range of traded goods and services that are either needed or simply wanted?

Keen, however, identifies what he reasonably seems to view as a more fundamental problem: The sectors of the economy in which Ricardians want countries to specialize are relatively strong because they efficiently use various factors of production (chiefly, according to Keen, machinery). The Ricardian transition entails other parts of the economy switching to that strong sector (again, wine-making and textile-making in Portugal and Great Britain, respectively), and essentially becoming just as good as wine-making – largely because all the kinds of machinery used in that economy can easily, and indeed seamlessly be redeployed in the strong sector.

If this assumption was valid, as Keen observes, then it would be reasonable to suppose that each rejiggered national economy could produce even more output, and generate higher incomes for its population, than before. But as the author also observes, this outcome makes no sense because “machinery is specific to each industry, and the crucial machines in one industry cannot simply ‘move’ to another without loss of productivity.” And if you believe, as is the case with mainstream economics, that rising productivity is a key – and over the long run, the biggest key – to rising incomes, then you should recognize this Ricardian transition also as a recipe for worsening national impoverishment.

That is, in the kind of mono-economy Ricardo hoped would eventually comprise the global economy, most of the populace would be struggling with inappropriate capital stock and other assets to earn a living engaged in activity with which it boasted little, if any, experience.

Why did Ricardo overlook something so obvious? In Keen’s words, it’s an example of “a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry….”

However, Keen continues, “The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.”

Here’s another example of the same delusionality that will be familiar to everyone who’s followed the U.S. trade policy debate for the last few decades: the claim by supporters of current trade policies that trade-related production and job losses are no big deal because America’s real edge in the global economy going forward is, say, services. So the best response is to train all those displaced auto workers to become nurses (and, pace Keen, to use all that surplus auto production machinery to write software).

Just as interesting, Keen points to a small but growing body of research touting the advantages of industrial and other economic diversity – the opposite of Ricardo’s aim. A broad-based manufacturing and technology base has of course long been supported by critics of current trade policies for national security reasons (to ensure the ability to produce an adequate range of defense assets), and to avoid potentially dangerous dependence on foreign supplies of civilian goods as well.

Similarly, it’s been contended that too many linkages exist among manufacturing industries, and between manufacturing and many kinds of services, to assume that entire sectors can be lost without major collateral damage.

Keen’s piece, however, also spotlights evidence that the world’s least successful national economies tend to possess narrow – at best – productive bases and to generate a comparably narrow range of exports, and that the most successful turn out a wide variety of goods for both domestic and foreign markets.

Keen’s theoretical critique of Ricardo is by no means the only one that’s come from the ranks of economists themselves. In 2001, William J. Baumol (a former President of the American Economic Association no less) and Ralph E. Gomory, one of the nation’s leading technology authorities, produced this study purporting to show that explicitly promoting national industries and technologies via various forms of government intervention (including tariffs) can produce better results for individual countries that toeing the free trade line.

But the Baumol-Gomory case has (so far) failed to dent confidence in Ricardian trade theory notably. And certainly the Mainstream Media never displayed much interest. In that vein, of possible import is the appearance this week on Bloomberg.com of this follow-up of sorts to Keen-like analysis. More steps on a  journey of a thousand miles?

Im-Politic: The Media’s Anti-Trump Trade and Immigration Canards

Tags

2016 elections, apparel, China, CNN, Donald Trump, E-Verify, illegal immigrants, Im-Politic, Immigration, imports, Jake Tapper, Jeb Bush, Mainstream Media, manufacturing, Marco Rubio, Milliken & Co., North American Free Trade Agreement, offshoring, textile machinery, textiles, Trade, Washington Post

I don’t want RealityChek to turn into Donald Trump Defense HQ, but media coverage of the tycoon-turned-GOP-presidential-candidate remains such a transparent exercise in (ignorant) sliming, and so much of the mudslinging focuses on his trade and immigration policy positions, that I’ve got to return to the subject yet again.

This past week, countless pundits and reporters (and their editors) clearly have decided that they can at least slow Trump’s surge in the polls by portraying him as an economic hypocrite. Hence the burst of columns and stories slamming the candidate as a trade protectionist whose signature apparel products are made in China, and as an immigration xenophobe and racist whose construction projects employ illegal aliens. What they really show are classic examples of, in effect, blaming the victim. Here’s what I mean.

I first ran into this tactic in the early 1990s, shortly after starting to concentrate on trade policy issues upon being hired by the Economic Strategy Institute. One of ESI’s original corporate donors was Milliken & Co., a huge textiles manufacturer. And as its activities in supporting organizations critical of U.S. trade policy started to attract coverage, news articles and material from various hired guns of the nation’s offshoring lobby invariably mentioned that, although Milliken enthusiastically backed restrictions on imports that competed with its own products, it had no qualms using foreign-made textile production machinery in its factories. Obvious hypocrisy, right?

When I checked with the firm’s Washington, D.C. staff, though, I got an answer that somehow the critics never mentioned: The same American approach to trade that was threatening the textile industry had also destroyed domestic textile production machinery making. The main reason? These U.S. policies failed to recognize that foreign rivals were just as determined to monopolize global textile machinery manufacturing at America’s expense – through subsidies, dumping, and other forms of economic predation – as they were to monopolize the production of fabric itself via the same tactics. As a result, any U.S. company that wanted to continue turning out textiles and related products had little choice but to use imported production equipment.  I’m still waiting for the Mainstream Media to acknowledge its oversight.

Donald Trump faces the same kind of problem. At some point recently, he decided that selling men’s business clothing and accessories could be a good money-maker. But when he looked for manufacturers, he discovered that most of the American apparel business had been displaced by imports. Just to give an idea of how great the damage has been, since the current phase of American trade policy began at the start of 1994 with the implementation of the North American Free Trade Agreement, U.S. garment production is down by nearly 78 percent in real terms. In many individual segments of this industry, losses have been much greater. For example, from 2005 through 2013 alone, American men’s neckwear output sank from a paltry $362.39 million to $127.38 million – a nosedive of nearly 55 percent.  (These figures are calculated from the databases of the Federal Reserve’s industrial production reports and the Census Bureau’s Annual Survey of Manufactures, respectively.)  

But none of this was apparently known to CNN’s Jake Tapper, to cite just one example. He plainly thought he had engineered a Pulitzer-worthy “gotcha” moment when, during an interview with Trump, he revealed that he was wearing a Trump brand tie that was made in China. Responding to the anchor’s accusation of hypocrisy, the candidate responded, “I say my ties, many times, are made in China, not all of them by the way, but a lot of them are made in China, because they’ve manipulated their currency to such a point that it’s impossible for our companies to compete with them. When it comes to outsourcing jobs, which is what this tie would be a representative issue of, one of the issues is that the people in China, the laborers, are paid a lot less, and the standards are worse when it comes to the environment and healthcare, and worker safety.”

And Tapper’s comeback after being schooled in the unmistakable macro-realities of doing business globally? An anecdote: “American Apparel makes stuff here–.”

But what about Trump’s use of illegal immigrant laborers to build his fancy apartment towers and resorts? The Washington Post clearly thought it had spotted another example of Trump fakery when it reported that “a Trump company may be relying on some undocumented workers to finish” a big D.C. hotel project. To his credit, correspondent Antonio Olivo gave Trump’s spokespeople ample opportunity to make the point that, as has become the norm in the construction business, big firms use independent contractors to supply laborers, and that it’s these companies’ responsibility to ensure that they’re properly documented. What was less clear – and this is the fault of Trump’s staff – is that very effective counterfeiting of the needed documents is commonplace, and that even the largest contractors aren’t able to verify them adequately, especially when labor needs to be supplied ASAP.

What the Post should have added, however, is that for more than a decade, the nation has had available a highly effective system for fighting phony residence papers – E-Verify. The good news: Even detractors admit that the internet-based system “catches 4.5 undocumented workers for every one U.S. worker wrongly identified.” The bad news: its use is still largely voluntary.

I haven’t been able to find a Trump statement of support for mandating E-Verify’s use, but is it remotely plausible that he’d oppose it? Doubtful, especially since such immigration enthusiasts like his rivals Jeb Bush and Marco Rubio have praised the program – despite failing to say explicitly that they’d expand it to cover all employers.

Unquestionably, Trump’s campaign can be legitimately criticized on any number of grounds, and his trade and immigration positions are eminently debatable, too. But in almost entirely concentrating their attacks on Trump in uninformed trade and immigration-related cheap shots, the Mainstream Media is revealing much more about its own pro-establishment, anti-Main Street biases than about its target.