Excerpt: Failure to Adjust

Chapter 1: The End of the World’s Greatest Autarky

I was born into the most prosperous autarky in the history of mankind. Wikipedia, which has replaced Webster’s as our go-to source for definitions, says that “autarky” is derived from the Greek αυ’ τα´ ρκεια, which means self-sufficiency. “Autarky exists whenever an entity can survive or continue its activities without external assistance or international trade.” The listing cites several recent examples, including Albania under Communist Party leader Enver Hoxha in the 1970s and 1980s, Burma from 1962 to 1988 under dictator Ne Win, and North Korea to this day. What sets the autarky into which I was born apart from those cited by Wikipedia is that its people were generally well-off and growing wealthier. In the other great autarkies of the day—the Soviet Union and China—most people were poor, and opportunities for economic advancement were few. My autarky, in contrast, was one in which a large middle class bought houses, drove cars, took vacations, and saved for retirement. A lucky and ambitious few even became rich.

Unlike the countries in the Wikipedia examples, the United States had not become self-sufficient out of ideological conviction; indeed, its leaders had for some years believed strongly in trade with the world and encouraged it. It was just that it had no particular need to buy much of anything from anywhere else and plenty of customers at home to purchase the things it made. The “Survey of Current Business” for April 1961, the month I was born, made only passing reference to imports and exports and instead focused on the state of internal demand for domestically produced manufactured goods such as steel, automobiles, textiles, television sets, radios, and vacuum cleaners. In the first two months of that year, overall steel production averaged 151,000 short tons daily—about enough to build two Golden Gate Bridges—of which just 6,000 tons were exported. Of the nearly $6 billion in cars and car parts made in those two months, less than $200 million worth, or just 3 percent of total output, was exported. There were almost no imports of cars and trucks. Gross national product for the previous year had been just over $500 billion, and all exports and imports combined had amounted to less than $50 billion, or just under 10 percent of the size of the total economy.

Economists will probably object that a trade-to-GDP (gross domestic product) ratio of nearly 10 percent does not constitute a true autarky, and that is certainly true. But it was pretty close. Trade-to-GDP is the standard measure of an economy’s openness to trade. China, which was then pursuing autarky as a matter of national policy, had a trade-to-GDP ratio of about 5 percent. In the Soviet Union, which also had a policy of self-sufficiency, it was about 4 percent. No other wealthy country of the time traded so little as did the United States. In France, trade was equal to more than 25 percent of GDP; in Canada it was more than 35 percent; in the United Kingdom it was 41 percent. Smaller countries depended even more on trade. In the United States of the early 1960s, foreign markets mattered only at the margins. All of the big economic questions—employment, incomes, inflation, and profits—depended on conditions at home. Foreign economic policy was primarily a matter of diplomacy and defense, of encouraging trade as a means of strengthening overseas alliances and bolstering the economies of allies.

Autarky has acquired a bad name because authoritarian political leaders have used it to increase their control over society. Keeping out foreign goods also helps dictators keep out unwanted foreign ideas and influences. But high self-sufficiency in a large country with relatively free markets and a liberal political system is not a bad thing. Such a market can still be highly competitive internally, and its size allows for economies of scale that generate improvements in productivity—making more with less—which is how a country’s wealth grows. International trade allows smaller countries to replicate the advantages of size, but it comes at a cost. Competition within a single country permits adjustments that are not possible with competition across borders. Historically, for example, the northern US states were more industrialized than those in the South, and the need for employees was stronger. The result was an enormous internal migration that raised overall living standards by relocating people from poorer regions with few jobs to richer ones where labor demand was strong. By the 1960s, the flow had shifted and was going in the other direction, with jobs moving from a higher-wage North to the lower-wage but more rapidly growing southern states. In contrast, Europe today has faced repeated economic turmoil in part because it has both freed up trade and created a common currency, but labor mobility remains limited due to language and skill barriers. In any given year, just 0.2 percent of Europeans move to another country, compared with nearly 3 percent who move each year to another US state.2 Greece and Spain have endured crippling unemployment rates for years, and while there has been some movement of their peoples north, it has not been nearly enough to compensate for their weak domestic economies.

Such mobility tended to level wages within the United States as well since industry was just as mobile as labor—though, very importantly, not more so. While people could move to take advantage of higher wages, companies could also move to take advantage of lower labor costs. Labor-intensive industries such as clothing and shoemaking, for instance, were already heading to the southern states in the 1950s and 1960s. Between 1959 and 1970, the northern states lost more than 200,000 jobs in textile and apparel manufacturing, while the southern states added nearly 250,000 jobs in those same industries. While such jobs were not high paying, they offered a decent income in many smaller cities and towns where the cost of living was much lower than in the big cities. As with labor migration, the effect of this capital mobility within a single national territory was to smooth out economic adjustments. Those who lost their jobs in the inevitable churn of a competitive market generally found other jobs, even if they had to move to do so. Wages had risen steadily as well. Real average hourly earnings rose by some 75 percent between 1947 and 1973, an extraordinarily rapid gain. Productivity growth was similarly strong, indicating that a highly competitive internal market was driving both efficiency and innovation.

By the time I went off to college in the fall of 1979, however, the conditions that had produced this self-sufficiency had largely disappeared. In the decade from 1970 to 1980, international trade as a share of the US economy had nearly doubled to more than 20 percent. In 1982, one of the country’s most respected economic analysts wrote, “Job growth, price stability and economic security . . . all depend substantially on events abroad and the interaction with them of internal economic developments and policies,” a claim that would have seemed ludicrous just fifteen or twenty years earlier. Two big things had changed. First, the other large industrial economies that were still recovering from World War II had again become producers of such core industrial goods as steel and cars. US steel imports, for example, began to rise sharply beginning in the mid-1960s and by the end of the 1970s accounted for about 20 percent of steel consumption; steel exports, in contrast, remained very small. Imports of automobiles followed a similar pattern. In 1955, imports were less than 1 percent of all registered cars; by 1978, however, that number had grown to nearly 20 percent. A similar story was taking place for simpler goods like textiles, clothing, radios, and televisions, with imports rising from close to zero in the early 1960s to capture a significant market share by the end of the 1970s. Second, companies began moving across borders as well. In 1960, all American direct investment overseas was less than $34 billion, about 6 percent of GDP. Over the next two decades, it rose steadily, reaching $216 billion by 1980; by the mid-2000s US foreign investment was worth more than 20 percent of GDP annually. Unlike with the earlier moves from north to south, however, when companies moved to other countries, their employees could not follow. While all Americans benefited from the lower-cost and often higher-quality consumer goods that were increasingly imported, those who lost their jobs to import competition had a harder time finding new jobs at similar wages. Real wages stopped growing and even began to fall for many, especially men, who comprised most of the manufacturing labor force. The job and wage effects could possibly have been coincidental. Growing integration into the global economy coincided with two recessions and a spike in energy costs that slowed overall growth. But the shift from a full-employment economy with few economic links to the rest of the world to a volatile economy that was more integrated with the world touched off an inevitable public debate over whether such growing integration was a good thing. By the late 1970s, one of the country’s largest carmakers, Chrysler, teetered on the verge of bankruptcy and had to be bailed out by the government to avoid a collapse that would have thrown hundreds of thousands out of work. Other major industries were facing cutthroat competition from imports. The governor of California warned that these were “signs that the basis of our industrial prosperity—sustained economic growth that has allowed for a certain liberal politics in this country—is seriously eroding.”

The debate was often cast as a struggle between proponents of “free trade” and “protectionism,” but that was always misleading. The nearly self-sufficient United States of the early 1960s was not a “protectionist” country; by the standards of the time, it was one of the more open economies in the world. It simply had few competitors. As competition grew, presidents and Congress continued to favor open trade, even as some beleaguered industries demanded and occasionally received government protection from imports. The problem, rather, was how best to adjust to the new economic competition. In a relatively closed economy, the concept of national “competitiveness” is meaningless. If an economy produces most of the goods and services needed by its people, competition is something that concerns individuals and companies but not the entire country. Like other young people, I had gone to college to learn a skill (journalism) that would allow me to compete with other young people for jobs in my field. My employers (mostly newspapers) were competing with other newspapers and magazines, as well as television and radio stations, for the market share and advertising revenue that would allow them to pay salaries and turn a profit. The question of whether the country was “competitive” in journalism, however, was nonsensical, because there was virtually no foreign competition. If one newspaper went out of business, I could always go work for another or branch out into radio or television, as long as my skills were attractive to employers. If they weren’t, then I was the one with the competitiveness problem, not my country.

Two decades previously, that had been true for nearly every sector of the economy; by the end of the 1970s, it was not. For those who earned their livings making steel or stitching clothing or assembling TV sets, the nature of competition had changed profoundly. If one domestic car company gained market share at the expense of another, it had little impact on those who made cars; the employees let go by one company would likely be hired by another. But if the competitor was in another country, the impact was not so benign. Given the tight immigration restrictions in place in most countries, not to mention generally insurmountable cultural and linguistic barriers, laid-off auto workers could not simply pick up and move to another country where carmakers were hiring. The “adjustment costs,” in the antiseptic language of economists, were much higher than in a closed economy.

Technology was in theory equally disruptive—and would greatly disrupt my chosen profession when the Internet undermined the advertising model for many newspapers. If companies invested in machinery that required fewer workers, or if new technologies made some jobs obsolete, then those workers would not likely find jobs doing the same type of work they had done previously. But if the companies reinvested their profits domestically, other sorts of jobs would be created that would at least partly compensate. Technology would also improve the productivity of the workers who remained in those industries, thereby increasing their earnings. When those earnings were spent on consumer goods or services, this would create additional domestic employment. In a more global market, however, the circle could be less virtuous. If corporate profits were invested in other countries, or if the additional earnings of workers were spent largely on imported goods, or if competition from lower-paid workers abroad held down wages, the jobs lost from technology were less likely to be offset by jobs created elsewhere in the economy. Recent economic research suggests that import competition and technology have quite different impacts on the US workforce; while technology and trade are both disruptive, import competition has a much bigger impact on labor markets. Those who lose their jobs to computers are likely to find new ones, while those who lose their jobs to imports are much less likely to do so.

For several decades now, these challenges created by America’s growing integration into the world economy have been at the center of a highly divisive debate. The United States has faced increased import competition in a growing number of economic sectors that once employed millions of people at generally higher wages than they could earn at other jobs. And the competition is not just over trade but over investment as well. The ease with which companies can move across international borders has given them enormous leverage over their workforces; capital is far freer to move in search of investment opportunities, but labor cannot follow. That has given business far more power than it had enjoyed in the more self-sufficient economy of a generation ago. Finally, the scale of the disruption has called into question many of the country’s institutions. Education, science, universities, and government itself are now all judged in good part by whether they strengthen or weaken the country’s international competitive position. The question of how best to adjust to the competitive pressures of a global economy has moved from irrelevance to the center of a debate over the performance and prospects of the United States that still rages today.