How The Steel Industry Died
Posted by Chris Martin at 3/30/2009 8:12 AM 
Categories: Economic Systems, Industrial Policy, Economic History
Tags: Neoliberal Industrial Policy
Categories: Economic Systems, Industrial Policy, Economic History
Tags: Neoliberal Industrial Policy
President Obama has just announced a major reversal of national industrial policy. We will take steps to rescue and restructure the auto industry. These steps will include a change of management, changes in ownership, restructuring of labor contracts and restructuring of debt. Hopefully at the end of the day we will have a viable auto industry producing products that move us forward with our economic development.
But how can this be a reversal of national industrial policy when we all know that the US does not have an industrial policy and has not for the past 30 years? Aren't we the country that lets the market determine the course of economic development?
To which assertion Wonks Anonymous politely replies. Not!
Some readers may remember the 1980's when the country had a major recession and suffered under 10% unemployment. This was an era that also saw the death of the US steel industry and coined the term "rust belt". A large group of people worried about this but, we were reassured: This is just the working of the invisible hand moving us toward a new brighter world of modern jobs in the service sector.
And even now NPR assures us that things have worked out. Pittsburgh no longer makes steel but, golly gee, they sure have a lot of nice malls with plenty of jobs. The same thing will happen by market magic in all the towns that used to depend on autos. Isn't it wonderful how the market works things out.
Which would be a nice story except that no part of it is really true.
To begin with the steel industry did not die a natural death. During the 1980's the central bankers were dedicated to fighting inflation which meant that they had to drastically reduce the supply of money and credit available. During the 1980's the Federal Government was dedicated to reducing taxes for rich people and providing lots of contracts for the defense industry. This required lots of money and credit.
We got the money by borrowing from other countries. We paid high interest rates and the Fed's policies inspired confidence in the dollar's continuing value.
But borrowing money from other countries is the same thing as having a trade deficit with these countries. As Wonks Anonymous has previously discussed: We sell them IOUs and they give us goods in return.
People buy dollars to buy our debt and this raises the value of the dollar. Our goods become more expensive and their goods become cheaper. The Market effectively forces individuals to follow through on the government's policy of borrowing by reducing the attractiveness of US products. If this goes on long enough we stop making some goods entirely.
It appears that our industries are not competitive with their industries but really these industries are no longer competitive with the manufacture and sale of debt and securities. Indeed some old style industrial companies, GM and GE diverted large portions of their resources to their finance divisions.
This is the industrial policy that has created the bloated finance industry, the thriving retail outlets for imported goods and the inability of the US to produce for itself and pay its foreign debts.
Sometime in the next ten or twenty years we might get out of this hole. In the meantime Wonks Anonymous is glad that we have made a start. But Wonks Anonymous is cautious because it will not come easy. The industrial policies of the 1980's have created large vested interests who will fight to survive and thrive. The more real resources - like the financial sector rescue packages - we are forced to channel into propping them up, the less we will have for other purposes.
But how can this be a reversal of national industrial policy when we all know that the US does not have an industrial policy and has not for the past 30 years? Aren't we the country that lets the market determine the course of economic development?
To which assertion Wonks Anonymous politely replies. Not!
Some readers may remember the 1980's when the country had a major recession and suffered under 10% unemployment. This was an era that also saw the death of the US steel industry and coined the term "rust belt". A large group of people worried about this but, we were reassured: This is just the working of the invisible hand moving us toward a new brighter world of modern jobs in the service sector.
And even now NPR assures us that things have worked out. Pittsburgh no longer makes steel but, golly gee, they sure have a lot of nice malls with plenty of jobs. The same thing will happen by market magic in all the towns that used to depend on autos. Isn't it wonderful how the market works things out.
Which would be a nice story except that no part of it is really true.
To begin with the steel industry did not die a natural death. During the 1980's the central bankers were dedicated to fighting inflation which meant that they had to drastically reduce the supply of money and credit available. During the 1980's the Federal Government was dedicated to reducing taxes for rich people and providing lots of contracts for the defense industry. This required lots of money and credit.
We got the money by borrowing from other countries. We paid high interest rates and the Fed's policies inspired confidence in the dollar's continuing value.
But borrowing money from other countries is the same thing as having a trade deficit with these countries. As Wonks Anonymous has previously discussed: We sell them IOUs and they give us goods in return.
People buy dollars to buy our debt and this raises the value of the dollar. Our goods become more expensive and their goods become cheaper. The Market effectively forces individuals to follow through on the government's policy of borrowing by reducing the attractiveness of US products. If this goes on long enough we stop making some goods entirely.
It appears that our industries are not competitive with their industries but really these industries are no longer competitive with the manufacture and sale of debt and securities. Indeed some old style industrial companies, GM and GE diverted large portions of their resources to their finance divisions.
This is the industrial policy that has created the bloated finance industry, the thriving retail outlets for imported goods and the inability of the US to produce for itself and pay its foreign debts.
Sometime in the next ten or twenty years we might get out of this hole. In the meantime Wonks Anonymous is glad that we have made a start. But Wonks Anonymous is cautious because it will not come easy. The industrial policies of the 1980's have created large vested interests who will fight to survive and thrive. The more real resources - like the financial sector rescue packages - we are forced to channel into propping them up, the less we will have for other purposes.
You describe very accurately how US manufacturing was destroyed.
Then you leave uncontested the assertion that: "During the 1980's the central bankers were dedicated to fighting inflation".
I do not believe that you swallow this remark, having questioned Wall Street on exchange rate policy.
Yet this is the excuse put forward for all the pain, and you let it pass.
Do you need evidence for the creation of inflation and/or depression by high interest rates?
However, the burden of proof should be on those who are creating destruction. The proof should not be a requirement for the victims to avoid policy changes.
You might as well say that the victims of the gas chambers did not prove that they were the cause of 30% unemployment in Germany, Poland and the Balkans in 1932.
Stockport, England
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