There are a few historical stories about why the American ‘rust belt’ of industrial cities fell apart, and many of them contain fragments of the truth. The difficulty involved in unraveling all of them is that understanding exactly what happened with the enormous tangle of laws heaped upon the United States in the 20th century requires enough research to fill more than a dozen books. Understanding the intersections between labor law, environmental regulation, global trade law, monetary policy, changes in public attitudes, and more is just more complex than can be contained in a Michael Moore documentary.
I don’t expect to get through those in a blog post, but I’d like to outline my thoughts to be expanded upon later here. This is a follow up to my earlier post “Not Post-Industrial.”
The strongest argument that I can think of to roll back globalization is that, while in theory peaceful world trade is desirable, in practice, it requires an enormous empire, centralized international banking, and an inane tangle of foreign policy relationships to maintain for a large country like the US.
Libertarians will often argue that trade with China is enormously positive while simultaneously arguing that the United States should pull back from its foreign military bases and dismantle its blue water Navy. That same military-industrial complex is what pressures China to continue to trade with the US and accept American paper in return for tangible goods.
While it may be true — ignoring the costs of maintaining that quiet empire — that trade is positive — it’s stupid to ignore those costs, or to decry those costs as morally wrong, while praising the benefits.
It also assumes that peace is permanent, whereas history tells us that war — and continually swapping allegiances — is what’s normal in international relations. Formulating policies based on the assumption that world peace will be permanent is incredibly stupid.
So, why do manufacturers and other corporations prefer to send operations overseas — incurring shipping and coordination costs — rather than keep them closer to the domestic American market?
One chief reason, widely acknowledged, is that foreign countries often have laxer labor regulations and fewer wage controls. Labor unions also often have weaker or just rather different sets of legal rights in these foreign countries. Labor regulations tend to be quite popular in part because everyone in America learns in school that labor conditions for Americans before those regulations were put in place were “terrible,” ignoring that the 19th century was a period during which the American population exploded while becoming much more prosperous also, despite a massive civil war and a very weak position relative to the European empires.
Despite this widespread acknowledgment, there’s virtually no desire to roll back those regulations. Those regulations make the uncomfortable, strenuous, and dirty labor that often characterized America’s period of high growth illegal. There’s a marked tendency for a democratic people to prize comfort above everything else, and this transition is a good example of that principle in action.
The people want ‘industrial jobs,’ but they don’t want the pain, dirt, danger, and tedium that goes with those jobs. For that, they are happy to give those jobs to foreigners who will suffer the consequences — all the while griping about it.
Welfare Crowding Effect
If your choice is to either collect a welfare check or work 16-hour days in a dirty factory — and the amount of money you earn is roughly the same — you’d have to be a masochist to go in to the factory. This is one of the reasons why manufacturers often have trouble finding suitable workers despite widespread underemployment in the US. Because these programs are highly popular, and because they also have almost universal support among intellectuals, there is little chance of much welfare reform which isn’t motivated by imminent financial collapse.
Protectionist policies typically have the opposite of their intended effects. For example, the United States attempted to prop up U.S. Steel and other domestic producers even though they had stopped being economical under the weight of environmental and labor regulations. In the short run, it was good for the domestic producer which would have gone bankrupt. In the longer run, Japan and other marginal countries — which didn’t even have significant iron resources — managed to edge out American producers from the global market.
Protectionism tends to weaken companies and industries in the long run, depleting natural advantages. Even a champion boxer will become a wimp if you keep him locked up in a box, feed him nothing but cheese doodles, and forbid him from training.
Education Is Mostly Waste
Education tends to train young people in an entirely orthogonal direction to what their actual station in life will be. The best arguments for mass education were in terms of political formation rather than in preparation for work. Given the results of about one and a half centuries of mass education in the US, it’d be prudent to make dramatic changes in how the system works and tracks different classes of student. In countries like Switzerland, students tend to be tracked separately based on their capabilities — funneled into apprenticeships or the professions depending on their demonstrated capacities.
Attempting to funnel everyone — regardless of capability — into the professions is wasteful. It denies countless young people of a good path in life appropriate to their abilities and interests.
Because highly successful capitalists tend to have the greatest influence in American legislation, we have a tax structure that favors established capital and that punishes workers — especially high wage workers. Warren Buffet’s quote about being taxed at a lower rate than his secretary is really all that needs to be said here.
Environmentalism, while to some extent is necessary, has been implemented in such a way that pushes industry into foreign countries while pretending that science and technology have ‘advanced’ so as to make industry obsolete. Labor-intensive industries like textile manufacture tend to be done in poor countries rather than giving the domestic poor something to do with themselves other than collect welfare checks.
The ideology-religion of environmentalism also tends to favor large corporations which are capable of interfacing with the labyrinthine regulations over small producers who are critical to the innovation process. Environmentalism as a whole has also put the brakes on promising avenues of research and development like nuclear power generation — which could make many large sources of pollution actually obsolete.
Crime, Diversity, & Immigration
Industrial development requires a certain baseline of law and order. The Great Migration of African-Americans that began during World War II and ended in the years following the Civil Rights era also coincided with the collapse of Detroit, Cleveland, Pittsburgh, Newark, the Empire State cities, and more. The breakdown of law and order lead to the creation of the suburbs as a mass phenomenon. It also made it much more difficult to operate an industrial society which requires large, secure plants which can be physically sabotaged and require big physical supply lines.
The Great Migration was supposed to be a great story of African-Americans escaping the evil racist South and delivering stupendous growth to the Yankee industrial machine. Instead, many of those formerly great cities are now in ruins owing to the decline in public order.
If your trucks full of valuable inventory keep getting hijacked, it stops being possible to maintain heavy production. If your workers keep getting mugged on the way home from work, they won’t be able to continue working at the factory.
Factory owners also often use immigration to evade some of the other laws which curb production. It’s easier to evade the minimum wage and environmental regulations with illegal immigration laborers — they have an incentive to conceal violations of the law along with their employer, whereas citizens might be more eager to cooperate with the authorities. Immigrants themselves also tend to dissipate political order — make it more expensive — which further exacerbates some of the other issues mentioned in this section.
An excessively diverse workforce also requires the same sort of challenging political management at the micro level as it does at the macro level. The countless conflicts and factional difficulties that emerge when people have entirely different notions of how to live — and may speak different languages — is essentially an added tax on production.
Corporate leaders say that ‘diversity is a strength’ to comply with political directives, but we know that they would rather send heavy industry to more homogeneous nations thousands of miles away. Diversity is not a leading principle in China — rather, it’s more the opposite.
Antitrust Prevents Vertical Integration
Antitrust law encourages corporations to avoid ‘rolling up’ their suppliers to create vertically integrated companies. This makes it much easier for them to focus on single functions domestically — Nike mostly handles marketing, branding, and design while outsourcing production and retail. This outsourcing makes it more likely for them to just send orders to whichever factory provides the lowest bid. The efficiency that would come from vertical integration and a tighter feedback loop with the production side would be legally risky to undertake.
Monetary Policy & Banking
The most that I can say about contemporary monetary policy as compared to policy in the 1970s — the period of greatest US de-industrialization — is that it’s marginally less insane, or rather that it practices a different type of insanity.
Heavy industry requires long term investment. Long term investment requires a relatively predictable monetary environment for it to bear fruit. Otherwise, false monetary signals encourage people to build up industrial complexes which can’t be sustained. Industrial complexes which are unsustainable don’t build up into strong, stable economies.
Rollback Is Possible
If Deng Xiaoping could roll back much of the Maoist insanity of the 20th century, it should be also possible to roll back the Western economic insanity which has chased countless industries away.
Advocates of globalization tend to make it seem like an inevitable process rather than an unhappy consequence of misrule. Many advocates of globalization use it as a sort of patch for the difficulty of political reform in the Western world. They say to themselves “we know our home countries are all fucked up, but at least we can keep the show going by offshoring production and leaning on foreign leaders.”
This only remains a winning strategy so long as foreign leaders are pliant, their countries are stable, and the American military is globally dominant enough to ensure that foreigners continue to accept American commercial paper. Because this global dominance is fading, we also have to consider what must be done to adapt to the ongoing failure of globalization.
Doing that would require recognizing that Deng’s economic liberalization without ‘political liberalization’ was not actually aberrant. Political liberalization is what displaced the liberal economic order. People enjoyed the fruits of relatively free markets, but they hated the process that bore those fruits, and voted accordingly.
Essentially, what Western elites did over the course of the 20th century was to offshore the economic support mechanism for their governments, because it was both popular to do so and impossible to reform domestically. By spreading American paper all over the world, it also increased the effective tax base that the state could draw from through the process of monetary expansion. Given that this strategy has run up into diminishing returns and chaos, a dramatic rollback of the legal and cultural accumulation of the 20th century — and probably much of the 19th and 18th as well — is the only path that’s likely to work.
There’s not much for me to add to your post (I, too, have a long history in manufacturing), but I will say this: the positive psychological aspects of work have long been ignored. The creative outlet of work is far preferred to the destructive outlet it replaces. And the money isn’t bad, either, or at least it was.
Manufacturing was once a vital force economically too, as it contained a wealth of diversity of occupations. From truck drivers to machinists to engineers, there were many opportunities for advancement and no college degree was required.
Sadly, the incompetents we elected knew nothing about it (probably the “ick” factor of working in a shop, not a clean office) and thought we were beneath such dreadful work. As a result, instead of supplanting our stable manufacturing base, they replaced it with a service economy, forcing many out of their careers for no reason.
Thanks. If you could point me in a specific direction to dig for more material, I’d appreciate it.
The other thing that people miss is that it’s important to have that tighter feedback loop between design and manufacturing. That can’t happen with outsourcing and offshoring.
As you mention, it also creates a larger social gulf between ‘icky’ truck drivers, machinists, line workers, etc., and managers.
Putin is rolling back globalization in Russia. He passed a privacy law for companies employing Russian citizens that says their personal data has to reside in Russia. The enforcement of this law is making international companies split their Microsoft Active Directory domains with a subdomain hosted in Russia. The strategy looks to me like the goal is to make every large company have a subsidiary for business in Russia that can easily be broken off and nationalized. Combine that with the current legislation being pushed to disallow the Dollar and the Euro for transactions in former USSR nations. I can’t help but think that Russia is going into international negotiations saying “Please don’t create any more sanctions” like “please don’t throw me in the briar patch!”
As more of manufacturing gets automated, I expect we’ll see a rise in the countries where the natural resources are high and the environmental regulations are low, since the cost of labor will no longer be a factor. I wonder if the people leaving the Middle East and Africa are an engineered plan to get rid of whoever is capable of objecting to a few large companies running rampant with zero environmental regulation. Whenever I see non-mainstream coverage of the well-dressed, smart-phone carrying “refugees” that we are getting, I have to think, “Is that what a muslim hipster looks like? What could we do to make all our hipsters flee to another continent?”
One difficulty with globalization is just law and compatibility between legal systems. The US doesn’t and can’t enforce its IP in China, but it can in Europe.
Globalization is not really ‘globalization’ — it depends on the extent to which all countries accept and enforce American law. To the extent that they do, they lose sovereignty.
Another great post. I hope to comment more later.
I have some points (mini lecture?) to make about IP that many people do not understand. this does not undermine ANYTHING posted above, but people often whine about foreigners and US IP. I just feel like expounding.
If a country, say the US, established a tariff on Japanese cars this harms both Japanese producers and American consumers of Japanese cars. I am NOT saying there are no benefits or that there can/cannot be net benefits to the US people. I.e. there is some reciprocal harm in tariffs.
If a country, say China, allows Chinese people to pirate copies of Microsoft Windows this is good for China, absent retaliation from the US. I.e. there is no reciprocal harm to copying the software and paying nothing to Microsoft, absent retaliation.
The Chinese sign copyright treaties agreeing to implement and enforce copyright in their country but how hard they try provides a lot of wiggle room. It makes sense to screw the foreigner so they do. If you were a party official and you had a choice to pay Microsoft $100 or pay $100 to buy vitamin D to cure rickets, what would you do?
The Chinese sign patent treaties in which they promise to treat foreigners no worse than Chinese. Yeah right. Even then, In a country big on manufacturing but light on R&D it makes sense to treat ALL patent holders poorly. It also attracts more manufacturers who can copy inventions from all over the world and only have to be careful where they export.
In a patent infringement case, a court in location A can say that a plant in location B is to be shut down, the workers fired, and money seized and given to the other party (damages). I have not kept up but there is a reluctance to have a EU court sitting in Germany shut down a plant in France. For this reason ‘international patents’, at least in the enforcement phase, are joke. Countries do not like to outsource power like that to courts sitting in other countries.
In summary, countries often do what is best for them and screwing US holders of Chinese patents is often best for them.
SFC Ton says
Once again, well.worth reading though I need to go through it a few more times
“Warren Buffet’s quote about being taxed at a lower rate than his secretary is really all that needs to be said here.”
Is that really true when you include the double taxation of corporate profits? (First taxed by the corporate income tax at ~30%, then taxed at ~15-20% when the money is returned to the shareholder as dividends or capital gains).
When I first heard of just-in-time manufacturing long ago I wondered about the risk, especially in international supply lines between different parties. N N Taleb commented on this, saying that profits/costs had been hyper optimized to the point of making the system very fragile and subject to failure. An earthquake in Japan can shut down an auto plant in the US.
Some countries protect their agriculture with tariffs/whatever. This upsets the free trade dogma people and some agribusinesses. Is it really stupid for a country to want food grown within its borders? Do they really want every wheat grower potentially wiped out by wheat from Kansas?
My understanding is that the old steel mills had pension obligations greater than the projected present value of their future profits, and that this was the crucial factor in shutting the mills. It is very difficult to make the math work in any company that accumulates pension obligations; they can never get as high a return on capital as younger competing companies with lower obligations, even when the competitors are domestic and pay the same wages and obey the same regulations as the older companies. Add in the wage, tax, and regulatory advantages of offshore operation and it the old companies aren’t even close to being competitive.
One Irradiated Watson says
“The strongest argument that I can think of to roll back globalization is that, while in theory peaceful world trade is desirable, in practice, it requires an enormous empire, centralized international banking, and an inane tangle of foreign policy relationships to maintain for a large country like the US.”
I get how one could roll back globalization via the rest of your post. What I don’t understand is what alternative you are proposing to “peaceful world trade”. War? More localized trade? Empire? Colonialism? What is your imagination for an alternative?
World trade is great, and I’m not proposing either autarky or mercantilism. It really depends on the country in question. I don’t really have a grand idea in my back pocket for how to replace it — this was more about trying to knock away some pervasive myths about why the US became less competitive.
Frank Gappa says
I really enjoyed this entry. Why can’t a political leader stand up and propose an agenda like this? Sure the liberal media and corporations would decry this but it would give the American people the opportunity to think about these concepts and decide for themselves. One thing I have noticed with Donald Trump is that when he says something that offends the elites it stays in the press for days and people get the opportunity to discuss the issue more openly, like immigration for example. I just don’t think Trump is able to convince a majority of these concepts effectively but we’ll have to wait and see.
That’s a good question. It should be easier to make these kinds of cases in the press (without making the standard NRx dismissal of mass democracy) — trying to map out the relationships between different issues that make a given political impasse difficult to resolve.
I think the subject of protectionism needs to be seen beyond its economic dimension. Businesses aren’t just accounting entities but are repositories of other intangibles. I mean how do you measure the benefit of “know how” which only comes from the actual practice of production. Or the social benefits that work creates. Stable paid employment facilitates family formation and encourages aggregate demand.
Furthermore, the economic arguments against protectionism simplify the world into a marketplace ignoring that the participants may engage in “extra marketplace activity’s” to secure advantage. Australia sold Iron to Japan prior to WW2 only to find it returned back by Japanese bombing. Japan currently supports an inefficient rice growing industry which makes no sense from an economic perspective but makes complete sense when viewed from the perspective a country that faces the real prospect of starvation if militarily blockaded. The difference between the “market efficient” price of rice and the “protectionist” one should be viewed as the insurance premium paid to protect the country from famine.
Not a criticism, just my 2 cents.
There are also positive externalities that are difficult to account for.
In software, there can be benefits for developers to be familiar with how hardware works, and to be close (physically, mentally, intellectually) to the hardware production side of things. This was how software developed in the United States as an industry — Silicon Valley was Silicon because it was a manufacturing hub.
Now it’s the ideas-Valley, with people increasingly unmoored from the hardware side of things, because that’s something to be outsourced to people who speak Mandarin rather than English and are over the Pacific ocean rather than down El Camino Real.
As that manufacturing fled due to regulatory issues, many of the firms that relied on that integration faded in importance. The knowledge base has also gone elsewhere, making it so that the younger generation is far less familiar with that sort of methodology than the older generation. There can be no Wozniak equivalent without that kind of integrated production community, and it arguably degrades overall product quality and efficiency.
Entire knowledge-communities go extinct so that they can only be revived by copying foreigners, which is again a wasteful and difficult process, especially considering that we enabled and paid many of the costs of that copying procedure.
Dovetailing for why the Japanese farm rice unprofitably, in America, we import oil from the Gulf Arabs. We also guarantee their security at incalculable expense. Why do we need to import their oil? There’s more pressure on us to do that because we can’t drill off the coast of California, and the Arctic + Antarctic is off-limits due to red tape.
There’s also the demand side of things — the grossly inefficient and corrupt FHA system boosts demand for gasoline. It also permits truckers and companies that rely on them to externalize the costs of that road system onto taxpayers while causing much of the need for maintenance.
What are alternatives to the FHA system?