Bringing Back the Old Economy
In 1960, my father attended what was then Case Institute of Technology. Even though it was the most expensive school in Ohio, he was able to pay his tuition with his summer jobs. When he graduated, mechanical engineers were in demand; American manufacturing was booming, and the jobs being offered to good young engineers generally included the promise of a pension and the expectation of job security. In our neighborhood, most of the families I knew had a father working in manufacturing and a mother taking care of the children and the home. Not all those working in manufacturing were engineers; many were high-school graduates who worked on the plant floor. But all made enough money to support their families in comfortable, middle-class fashion, without the need for a second income.
The manufacturing sector they worked in was focused overwhelmingly on the American market. American tools processed American parts for American customers. People were wary of foreign products; their instinctive patriotism fully applied to the economic realm. Divorce was virtually unheard of—I knew one divorced family on our street. People did not often change employers, so few people moved off our street. Most of us were able to see our relatives on a regular basis. I saw my paternal grandparents at least once per week, and my mom’s parents regularly. Also missing from our street were liberals, although many of our neighbors voted Democratic. In 1972, we had a mock election at my grade school, and the children voted as their parents would, with Richard Nixon crushing George McGovern by a four-to-one margin. Our congressman was Ron Mottl, a crew-cut-wearing Democrat who came home each weekend, slept on a cot in his Washington office during the week, and was best known as an opponent of forced busing. He also represented his constituents by voting for the Reagan tax cuts, a move that cost him his seat after vengeful Democrats in the state legislature redrew the boundaries of his district.
Of course, all of this has changed. Private-sector pensions and job security have largely disappeared. Most colleges are so expensive that no one could earn enough over the summer to pay the tuition. People change jobs regularly, often moving far from home. As a result, many children grow up seeing their grandparents only a few times per year and their aunts, uncles, and cousins not at all. Divorce is commonplace, and women who stay home with their children are in the minority. But for years, we were told—by Democrats and Republicans, the New York Times and the Wall Street Journal—that we should not worry as manufacturing dwindled and trade deficits mounted. We were creating a new economy, where the loss of dirty manufacturing jobs no one wanted to do would be more than offset by all sorts of wonderful high-tech and service jobs. Any problems could be solved by more education, which would enable all of us to find our place in the “global economy.” The relentless drumbeat of globalization was designed to change attitudes, to divorce patriotism from economic decisions, and to accustom Americans to foreign goods displacing American goods and foreigners taking jobs from Americans. Feminism proved a handy way to disguise a declining standard of living, since the entry of mothers into the workplace was presented as social progress rather than economic necessity.
For a time, it even seemed to work, as the tech and real-estate bubbles pushed the stock market ever upward. In 1999, an incredulous Tim Russert asked Pat Buchanan on Meet the Press how he could square his economic warnings with the soaring Dow. Buchanan’s response was that America was selling off the family silver, and that we could only do that once. We can now see that Buchanan was right, and that the promise of the New Economy was a mirage: The average hourly wage for American workers, adjusted for inflation, has risen only 36 cents in 33 years, from $16.39 per hour in 1973 to $16.75 per hour in 2006. There has been no growth in real income this century. Although entertaining yourself with electronic gadgets is far cheaper today than it was in 1973, the reverse is true for healthcare, housing, and education. In 1970, the price of an average home was twice a young couple’s income; by 1998, that price was four times a young couple’s income. The cost of healthcare and education has greatly outstripped inflation for many years. Many families have maintained a middle-class lifestyle only by going deeply into debt. As David Hartman—another Case engineering grad—noted in Chronicles (“Anatomy of a Meltdown,” News, April 2008), from 1997 to 2007 there was a “49-percent increase in household debt compared with incomes, as Americans spent their money on imports and unaffordable residences.”
The decline of the U.S. manufacturing sector in the era of globalization has been undeniable. Over five million American manufacturing jobs have disappeared since the beginning of this century. To take the seven sectors that have formed the backbone of the economy in my home state of Ohio, 1997-2007 saw imports of motor vehicles and parts increase by 36.7 percent, imports of fabricated metals increase by 64.7 percent, imports of chemicals increase by 29 percent, imports of primary metal products increase by 52.5 percent, imports of food products increase by 39.9 percent, imports of machinery increase by 39.9 percent, and imports of plastics increase by 61.3 percent. Of the 1,344 major industries tracked by the Department of Commerce, America runs a trade deficit in two thirds, and the cumulative trade deficits between 2000 and 2007 were a staggering $4.5 trillion, in large part because of the many ways our foreign competitors protect their home markets. One way they do so is through a border-adjusted value-added tax, under which imports are taxed and exports earn a tax rebate. By 2006, a foreign VAT applied to 94 percent of U.S. exports and imports, and the combined amount of rebates earned by foreign companies for their imports to America and taxes imposed on U.S. exports was $428 billion. Besides decimating American manufacturing, our trade policies have undermined American independence. Foreign interests now own over half of the debt of the U.S. Treasury, a third of U.S. corporate bonds, and a sixth of U.S. corporate assets. Indeed, as Pat Choate writes,
The profile of the U.S. trade position today is that of a nation being economically colonized—one that is purchasing high value-added commodities and manufactured goods from abroad and paying for them with the export of agricultural commodities, massive foreign borrowing, and the liquidation of its own national assets.
Replying that the United States survived the disappearance of buggy-whip makers misses the point: The industries we have abandoned have not disappeared; they have only disappeared from America. Indeed, communist China is becoming a world power by manufacturing the products our elites thought were beneath us. The decline of American manufacturing is not the natural result of Japan and Germany rebuilding their factories after World War II, but of our decision to allow Japanese and German goods unfettered access to our market. Nor can the outsourcing of manufacturing be justified by Ricardian comparative advantage, which assumes the immobility of labor and capital. Instead, as Paul Craig Roberts points out, it is a form of labor arbitrage, as mobile capital seeks the cheapest labor it can find. And the same mentality that led to the disappearance of much of manufacturing is now leading to the disappearance of the service jobs we had been told would sustain us. Princeton economist Alan Blinder has estimated that 28-39 million jobs are offshoreable in the near future. Industries are being told that the smart thing to do is to send their accounting and computer and engineering jobs overseas. I recently came across a trucking-industry publication that chided American trucking companies for being too patriotic and ignoring the profits that could be made by sending their accounting work to India. Then there is the other side of globalization, the mass importation of foreigners to drive down the wages paid to Americans. This phenomenon is hardly limited to agricultural laborers. We import 65,000 H-1B visa holders each year to do engineering work in the United States, and legislation has been introduced to triple that number. Since the U.S. government is simultaneously importing foreigners to drive down engineering wages and pursuing free-trade policies that destroy the manufacturing sector, is it any wonder that Americans with an aptitude for engineering are getting degrees in law or business?
Of course, not all parts of our New Economy are faring poorly. As John Derbyshire keeps reminding us, government is doing very well. The average government worker now makes more than the average employee in the private sector. The richest metropolitan area in the country is the D.C. metro area. Of the 50 counties with the highest percentage of people aged 25-34 earning over $100,000 per year, 16 of them are in the Washington area. Then there is the financial sector. Between 1973 and 1985, the share of domestic profits going to the financial-services industry was never higher than 16 percent. That number has risen to 41 percent. And there is this arresting statistic, which a commenter noted on Steve Sailer’s website: In 2008, the three top U.S. hedge-fund managers earned $2.5 billion, $2 billion, and $1.5 billion respectively—in total, more than the 70,000 people who graduated with bachelor’s degrees in engineering in 2008 put together. Their average starting salary was $56,921.
Is an economy dominated by the government and financial sectors good for America? The downside of too much government is well known to conservatives, and the downside of having too large a financial sector should be increasingly clear. Wall Street does not do much for Main Street. Lawrence Mitchell, a professor of business law at George Washington University, notes that
empirical evidence is clear that the American public stock market rarely has been a significant factor in financing industrial enterprises in the United States. The only American business sector to rely upon public stock issuances as an important source of financing public activity is the financial industry itself.
Mitchell’s examination of data going back to the 1950’s leads him to conclude that “America’s economy is increasingly based on finance, and our public financial markets principally are financing finance.” That is not to say that Wall Street does not have an impact on Main Street. Wall Street has acted as a cheerleader for globalization for many years.
And Wall Street helped trigger the latest recession. As University of South Carolina law professor William Quirk noted in Chronicles (“The Financial Crisis,” News, February 2009),
There are two crises. One is the “troubled asset” crisis, caused by subprime mortgages. That problem is finite and should be fairly easy to solve: Either let the loans fall where they may or guarantee the bad mortgages. But amazingly, the total losses from the crisis far exceed the bad mortgages, which brings us to the second crisis—the derivative crisis where “sophisticated” parties bet on anything.
“Sophisticated parties” is a reference to Lawrence Summers’ testimony to Congress during the Clinton presidency, in which he urged that derivatives be unregulated, because they concerned only “sophisticated financial institutions.” The cost of this second crisis continues to mount. As Quirk notes, the Office of Special Inspector General for TARP pegs the cost of shoring up the financial sector at $23 trillion, and 40 percent of bank profits still come from the murky world of derivatives, with who knows what time bombs waiting to explode. Suddenly, having an economy dominated by finance rather than manufacturing no longer seems like such a good idea.
Those who led the cheers for globalization did not see the collapse that was coming. Phil Gramm, who once called Wall Street “a holy place,” dismissed the looming crisis in July 2008 as a “mental recession” and castigated those worried about the economy as “whiners.” Of course, Gramm himself is somewhat removed from the realities of economic life, having been an investment banker and lobbyist for a foreign bank since 2002, and a government employee for the preceding 35 years. Even more incredibly, Gramm asserted that “We’ve never been more dominant; we’ve never had more natural advantages than we have today.” Oops.
Thomas Friedman, the grand panjandrum of globalization, recently admitted that education is not enough to help most Americans overcome the negative effects of globalization. Friedman quoted Lawrence Katz, a labor-market expert at Harvard, as saying,
If you think about the labor market today, the top half of the college market, those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations, have done great. But the bottom half of the top, those engineers and programmers working on more routine tasks and not actively engaged in developing new ideas or recombining existing technologies or thinking about what new customers want, have done poorly. They’ve been much more exposed to global competitors that make them easily substitutable.
Friedman continues with the bad news:
Those at the high end of the bottom half—high school grads in construction or manufacturing—have been clobbered by global competition and immigration, added Katz. . . . Just being an average accountant, lawyer, contractor or assembly-line worker is not the ticket it used to be. . . . So our schools have a doubly hard task now—not just improving reading, writing and arithmetic but entrepreneurship, innovation and creativity. Bottom line: We’re not going back to the good old days without fixing our schools as well as our banks.
Actually, the real bottom line is this: Why did anyone think that a system that is rendering more and more Americans economically redundant was a good idea?
The Reagan Democrats I grew up with have largely disappeared, and those who have benefited from globalization generally display little enthusiasm for any variety of conservatism. Another high priest of the globalization cult, Richard Florida, has argued that the key to prosperity is having a large homosexual community in your city, and David Frum approvingly quoted a friend as saying that one of the Motor City’s major problems was that there were “Not enough gays.” As Derek Leaberry, a commenter at ChroniclesMagazine.org, pithily wrote,
An economy dominated by the therapeutic state, government workers, schoolteachers, flabby-handed computer geeks, restaurant chefs, sommeliers, Wall Street gangsters, and mall securitymen will be one that is antagonistic to conservative values. That is what the future holds if absolute free trade reigns globally. Karl Marx would be overjoyed.
Digging out of this mess will be difficult. It may be impossible. But any solution will have to include a return to the economic policies that made America the greatest manufacturing power the world has known. As Paul Craig Roberts wrote last February, “America’s 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism . . . and on British indebtedness, which destroyed the British pound as world reserve currency.” He added, “The American economy has gone away. It is not coming back until free trade myths are buried six feet under.”
Extricating ourselves from globalization is not just a matter of economic survival, but one of national survival. Back in December 1989, Sam Francis warned us of what was at stake when he advocated a new nationalism in his monthly column in these pages:
Some Americans, especially the cosmo-conservatives in Manhattan and Washington, may fantasize that globalization will yield another “American century,” with Yankee know-how tossing institutional and ideological candy-bars to fetching senoritas in the Third World. But blue-collar workers in Detroit and construction men in Texas probably have a better grip on the realities of globalization as they watch their own jobs disappear before Asian competition and illegal immigrants. Globalization doesn’t mean that America will prevail, but that it will vanish among the laser beams and electrons by which the planet is to be held together . . .
America has not yet vanished among those laser beams and electrons, but she will, unless we finally heed the words of Sam Francis and the other patriots who warned us of what was coming.
This article appeared in the April 2010 issue of Chronicles: A Magazine of American Culture. Mr. Piatak presented a version of this article at the H.L. Mencken Club and the John Randolph Club in November 2009.