"We have got to stop sending jobs overseas. To those of you in the audience who are business people, pretty simple: If you're paying $12, $13, $14 an hour for factory workers and you can move your factory south of the border, pay a dollar an hour for labor, have no environmental controls, and no retirement, and you don't care about anything but making money, there will be a giant sucking sound going south."
-- Ross Perot on free trade during the 1992 election.
Barring another foreign policy flare-up, the state of the economy figures to be the top issue of the 2012 elections. In every poll this spring and summer, voters have chosen "the economy/jobs" as the top issue by at least 3-to-1 margins. The Great Recession already helped the Republicans win big last year. When I asked Ohio businessman Dave Lindeman why Ohio Gov. Ted Strickland lost in 2010 after starting out so popular, he had a simple answer: "no jobs."
Almost every state now has a higher unemployment rate than in the fall of 2008 -- and it was the bad economy that helped elect Barack Obama. The painfully slow recovery has been hobbled by the fact that so many U.S. manufacturing plants have closed over the last generation. There may not be enough factories left here to hire back the unemployed due to a phenomenon known as outsourcing.
On the national scene, the stubbornly high unemployment figures in 2011 have been the leading cause driving President Obama's job approval into the danger zone below 50 percent. With more than 70 percent of Americans telling pollsters that they believe the nation is on the wrong track, Republicans are licking their lips in anticipation of repeating Ronald Reagan's question from the 1980 debate: "Are you better off now than you were four years ago?" A majority of Americans thought they weren't, and Jimmy Carter was bounced out of office a week later.
The current opposition may be able to capitalize on the severe economic problems facing President Obama. But the Bush administration's policies of tax cuts and free trade did not create a sustainable economic order in the last decade. True, Americans have more homes, cars, computers, cellphones and big-screen TVs than ever before, but most of them were bought with borrowed money -- loans that we're having great difficulty repaying.
In fact, Ron Brownstein of National Journal called 2001-11 a "Lost Decade," when the real income of the average family dropped 5 percent and there are 1.5 million fewer Americans working now than when Bill Clinton left office in 2001 -- despite the fact that the population grew by roughly 10 percent or nearly 30 million people.
Over the past generation, conservatives and moderates of both parties have advocated "free trade" agreements with Latin America and Asia to create jobs. Some new service jobs have undeniably been created, but the Economic Policy Institute (which is allied with organized labor) asserts that more than 50,000 factories have closed and 6 million manufacturing jobs have been lost since NAFTA was signed in 1993. It appears that Perot was right to fear job losses, though the biggest gains in industrial jobs were made in China, not Mexico.
The sharp decline of American industry has made the recovery from this latest recession that much more complicated and painful. Simply put, there are many fewer factory jobs to call workers back to. In their relentless search for low wages, businesses may have outsmarted themselves because unemployed or underemployed consumers don't have much money to spend on anything but bare necessities.
The drive for lower labor costs also repudiates Henry Ford's theory that the best way to ensure a future market for American industrial products is to pay the workers well enough that they can buy the products they make. As the founding father of the American auto industry put it: "There is one rule for the industrialist, and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible."
This theory, dubbed "Fordism," was the basis of the extraordinary economic boom that lasted from the World War II until the late 1970s. Industrial cities like Detroit, Pittsburgh and Buffalo peaked in terms of population and wealth in this era.
Free trade commands much support from the establishment press. Steve Chapman wrote in the Chicago Tribune that, "International trade has been one of the most powerful forces for prosperity in the history of the world." Defenders of free trade argue that "globalization" results in rising living standards, especially in the Third World, and much cheaper consumer goods for the First World. Both are undeniably true.
But an equally undeniable side effect of free trade is the loss of some American jobs, a process dubbed "outsourcing" by critics. The nation has obviously lost more jobs than it has been able to replace. That's why the unemployment rate is stuck at close to 10 percent and the "under-employment" rate (those working only part time or for much lower wages) is also close to another 10 percent. This isn't the deepest recession since 1945 -- unemployment briefly hit 11 percent in 1982 -- but it is the longest. Populists in both the Republican Party (Pat Buchanan) and Democratic Party (Dennis Kucinich) plus Ralph Nader have called on the Obama administration to take another look at outsourcing.
Earlier this summer, I interviewed Marvin Salter, whose company, CMS Inc., was the first to offer administrative assistance via outside contract labor to American businesses in the 1960s. Salter can be considered the father of outsourcing -- although he stresses that he was only offering services within the United States and never intended work to be assigned to foreign countries. But the economic logic of finding sources of ever-cheaper labor would naturally drive companies to first search for lower costs (including taxes) in the South and then the Third World.
Some of the jobs lost in the manufacturing sector (such as to automation) were probably inevitable. Many Americans moved up from blue-collar work to white-collar, technical and service occupations that were safer, better-paying and more interesting. Professor Daniel Bell called this "the Coming of Post-Industrial Society" where the economy would shift from manufacturing goods to providing services. Bell hit the nail on the head when he predicted that construction workers would become the last bastion of blue-collar labor because those jobs couldn't be outsourced. Hence, the housing boom (and bust) of the last decade. The other source of manufacturing work that can't be outsourced is defense spending, which by definition produces "Made in America" jobs.
Shortly before his death in 1963, President John Kennedy gave a speech where he noted the rise of new industrial competition from Germany and Japan. He advocated free trade with the European Common Market and Japan to boost U.S. exports and said that even if we lost a small percentage of factory jobs, we could make it up by being the "bankers, engineers and teachers" of the world.
The idea of Americans doing more advanced work in the manufacturing process makes a certain sense for a more technically advanced society because American educational achievement has steadily risen since 1945 and white-collar, managerial and technical workers are generally better paid than blue-collar ones. And rising incomes in the Third World, where the factories are going, would presumably lead to more American exports.
The problem was not necessarily the vision of a post-industrial economy, but the botched execution. It's awfully hard to be the world's banker when you're running trillion-dollar deficits that require record-breaking borrowing and your financial system is on the verge of collapse. It's difficult to be the leading designers when your educational system isn't producing enough capable engineers. It's hard to keep white-collar jobs in fields like accounting when computers allow this work to be done 24 hours a day around the world, often at cheaper rates.
There are also serious problems with this generation of American business leaders: their focus on short-term profits, their uncontrollable appetite for cheap labor, declining inventiveness and frankly, general lack of patriotism. The "Robber Barons" of the 19th Century -- John D. Rockefeller, Andrew Carnegie, Cornelius Vanderbilt, et al. -- certainly had their faults of greed, corruption and intolerance of worker rights. But at least they employed Americans in their factories and plants.
Perot may have been a buccaneer capitalist who made his $3.5 billion fortune with government contracts, but the vast majority of his offices created jobs and revenue in this country. And any new American technological breakthroughs could be very short-lived triumphs. For example, if some young American genius invented an engine that ran on ocean water, wouldn't the technology quickly be copied in Asia and the factories built in the Third World? This pattern raises the question of whether Perot was right that any economic stability of American manufacturing in the Brave New World of trade with the Third World is virtually impossible.
Is there any way out? Certainly, no quick and easy answers come to mind for a problem that has clearly been years in the making. A full-scale trade war with East Asian countries could well lead them to stop financing our debts and further erode the value of the dollar. Getting our national balance sheet back in balance will likely take a decade or more. Similarly, it will likely take years to rebuild our manufacturing capacity.
Here are some possible ideas:
Massive financial incentives for technology advances, say a $1 billion bonus for designing an engine that get 100 miles per gallon in a mid-sized car or a permanent 100 percent tax reduction for an engine that gets 200 mpg.
Having organized labor agree to significant wage concessions for a guarantee of no layoffs.
Increasing exports in fields where we excel, i.e., natural resources and popular culture.
The country obviously faces severe economic problems; it will be a long road back. That so many factories have been shipped abroad makes the road that much tougher.