The Third Chapter of
How Americans Can Buy American - 2nd Edition
by Roger Simmermaker
All four presidents carved into Mt. Rushmore warned of the folly of free trade and endorsed protectionism for the U.S. market. British Economist John Maynard Keynes in the 1920's turned his back on free trade in favor of protectionism. Thomas Jefferson, who once endorsed free trade, said "…experience has now taught me that manufactures are now as necessary to our independence as to our comfort…" in 1816. When such well-respected men agree to change their long-held views, it is evidence that once popular theories do not match reality. Today's advocates of free trade advocate what was widely ridiculed by our founding fathers.
Pre-September 11 polls showed that most Americans today don't support free trade either, and believe that too many "old economy" jobs have to be destroyed for the "new economy" jobs that are created. And they are right. One only has to look at the constantly increasing trade deficit as evidence that America's trade policy is not working for America. If our free-trade policy was working, our exports would outpace our imports and we would eventually narrow our massive trade deficit down to a trade balance. But this is not the case. For the first 26 years after WWII, the U.S. reaped the gains of trade surpluses every year, resulting in a total of $98 billion. After our new-found dedication to free trade, we have suffered accumulated trade deficits literally in the trillions of dollars. Under a protectionist trade policy, America churned out trade surpluses every year between 1893 and 1971. Everyone seems to benefit from America's love affair with free trade except America and her people. Even the economies of developing nations, excluding protectionist China, despite huge amounts of foreign investment, are growing at their lowest rate since 1982.
The Asian crisis of 1997 has been called the worst financial crisis in 50 years. Free trade President Bill Clinton admitted in 1999 that even though he believed "A failure to expand trade further could choke off innovation and the very possibilities of the information economy," (emphasis added). "Unfortunately, working people the world over don't believe this," he added. We should not be increasing our trade volume with other nations just for the sake of trade. Our trade volume has never been greater, and our trade deficit has never been worse.
Of course the information economy of which Bill Clinton spoke is also known as the "New Economy," which turned out to be a bubble that brought harsh realities on many investors and stockholders when it finally burst. Bankers, for instance, were not surprised that the Asian crisis of 1997 took place, since they knew many Asian countries were living beyond their means. It is unfortunate that America finds itself in a similar situation today. Still, many bankers are in favor of free trade. This is less surprising when one realizes that banks simply lend money for those who want to consume, and enabling corporations and individuals to consume is their business.
The information economy may not be the savior America is looking for to solve her trade problems. A quick look at the number of workers employed by one of America's leading manufacturing companies - Ford - and America's leading software company - Microsoft - reveals what should be a heavy blow to "New Economy" advocates. Microsoft, even though it has been exalted as an information technology success story that points to the theory we should pursue to build America on such companies, only employs 1/20th the workers that Ford employs and ranked below 400 in the Fortune magazine's ratings of the top 500 American companies. Over 5000 India-born engineers were instrumental in developing Windows 98 software. Despite America's hope that software will be a significant export industry for the United States, Ireland is currently the world's number one exporter of software. Such sobering statistics should point to manufacturing as having the most potential for American employment - not software.
This comparison between Ford and Microsoft also does not take into account that American workers missing in the numbers comparison who supply parts for Ford cars and trucks since many are employed by companies other than Ford. This is an especially important factor since the number of workers in the parts sector for the automobile industry is fast approaching the number of workers required to assemble the finished product, and software has no parts content. This makes the argument for manufacturing as the key to American employment even more credible.
Even though we were fortunate enough to escape the Asian crisis of 1997 without too much problem, we have not always been totally immune to crises given our policy of increasing interdependence. When Russia defaulted on its government debt in 1998, it was enough to seize up the U.S. bond market. And even though Mexico's peso crisis wasn't as serious as the Asian crisis of 1997, it cause Latin America's markets to fall 38% in sixty days.
Although there is an appearance of national prosperity, every nation appears to be prospering when they are living beyond their means. The flaw in measuring prosperity today is that it is measured by an accumulation of things, rather than by real wages, and we should be paying less attention to the unemployment rate and more attention to what the workers who are employed are actually earning.
It could be that many laid-off Americans have realized that the majority of new jobs available for them to replace their old jobs pay less money. According to the Bureau of Labor Statistics, the number of workers discouraged because they believe there is a lack of jobs available to them increased 40% between June 1999 and June 2000.
A state agency in Minnesota seeking to diversify its economy in the wake of 4,000 potential steel-related job losses found that as they tried to attract new jobs into the area to soften the blow of the layoffs, most did not pay as well as the old steel jobs. The majority of the 3,000 jobs to be provided by new employers attracted to the area are in the service sector. Former steelworkers simply aren't going to make the same money working in call centers, which make up the majority of jobs coming to the area. And if steel is one of the hand-picked losers in America, former steelworkers won't find call center jobs more stable. Calls placed to call centers from many areas of the country are just as likely to reach an operator in Canada or elsewhere as they are an operator in America.
Another thing to keep in mind is that each manufacturing job lost creates a ripple effect that costs at least 4 other jobs, and the ripple effect in the steel industry in particular is argued to be even higher. University of California at Santa Cruz Economist Lori Kletzer estimates that the average American worker who loses a job because of trade or technology earns 13% less in their new job, and close to one-fourth earns a whopping 30% less. This of course does not take into account the income that was lost while trying to land that new job, and even if a new job is found at the same pay, workers will not be able to replace income that was lost in the transition. Further research showed that laid off manufacturing workers who were forced to take jobs in the retail sector experienced and average wage decrease of 34%.
Other Americans in the manufacturing sector who don't lose their jobs suffer pay cuts instead. Workers employed by Trico Products Company, currently a subsidiary of Britain's Tomkins PLC, started to see their jobs migrate south to Mexico as early as the mid-1980's. By 1995, only 300 jobs remained, and the remaining workers took pay cuts to keep their jobs. Wages at $14.50 an hour were cut to $12.50 an hour and remained frozen for at least 4 years. Americans might wonder how an economy is supposed to grow in an atmosphere of mass layoffs and forced wage reductions.
These examples are all the more reason why the unemployment rate is increasingly an unreliable indicator of national prosperity. Our trade policies force many American workers to take pay cuts or find new jobs that pay less, but the unemployment rate in each of these cases remains unchanged. The result, however, is a nation of less affluent consumers that pay fewer taxes to support the increasing cost of government with their new, lower-wage jobs. Again, we should be less concerned with how many Americans are working and more concerned with what the Americans that are still working are actually making. Still, the inaccuracies of the unemployment rate in America should not go unnoticed. According to the September 11, 2001 issue of the Wall Street Journal, the unemployment rate in August 2001 of 4.9% did not take into account an estimated 70 million potential workers who had stopped looking for work for one reason or another.
Many workers find their only option is to work more than one job. Barbara Ehrenreich, author of "Nickel and Dimed," tried to make ends meet working two jobs in Minnesota with no children, living in a cheap $245-a-week hotel, and driving a Rent-A-Wreck car, but she found the exhausting experience absorbed all her energy and failed to pay the bills as well.
Even Clinton worried that the U.S. trade deficit could halt national prosperity while at the same time admitting to using the U.S. as a buffer to prevent what he believed could turn into a global recession. Clinton admitted that he purposely allowed the U.S. to "run quite a large trade deficit" so we could "help our friends in Asia and Russia get through this crisis," and that "with a lot of exposure overseas, and a lot of our wealth in the stock market…difficult events in one place can have a big reverberating effect in others." But what steps were taken to help Americans who worked in industries that were being hit hard by imports get through this crisis? Then Treasury Secretary Robert Rubin said "I think it will take the world a long time to work through the effects of this financial crisis." Recurring crises like the Enron scandal further highlight the dangers of relying too heavily on the stock market for wealth creation.
With all these sobering announcements highlighting the risk of continuing with a free-trade, globalized new economy, why do these leaders continue to push free trade, and why do Americans continue to elect legislators with nearly identical views?
"I have heard of patriotism in the United States, and I have found true patriotism among the people, but never among the leaders of the people."
Alexis de Tocqueville
One possible answer, summed up amazingly well by Motorola's Malaysian country manager, Roger Betelson, is that "Americans don't have the foggiest idea what is happening to them and why." Most Americans don't realize they are being led down the gradual path of transferred or stolen prosperity. Alan Greenspan said "What is happening amongst our trading partners has a greater effect on the United States than we can understand directly," and that "Leads us to be, obviously quite sensitive to what we see going on abroad."
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