By ANN MARKUSEN
Star Wars/Trade Wars no good for Illinois
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Table 1. Illinois job loss, 1978-1985
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Sector
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Job loss
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Percent loss
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Primary metals
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43,200
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44%
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Fabricated metals
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36,300
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25%
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Nonelectrical machinery
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84,400
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37%
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Electrical machinery
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40,600
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24%
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Transportation equipment
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15,200
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28%
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All manufacturing
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325,300
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26%
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Total net job loss in Illinois
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81,700
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2%
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Source: Bureau of Labor Statistics.
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Table 2. Growth rate differentials, 1979-1984
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United States
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Illinois
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Population
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+ 4.2%
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+ 0.7%
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Nonagricultural employment
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+ 4.8%
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- 5.1%
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Manufacturing employment
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- 8.2%
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-22.5%
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Service employment
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+ 21.4%
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+ 13.5%
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Wholesale/retail employment
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+ 9.1%
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+ 0.2%
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Finance/real estate/insurance employment | +14.6% | + 7.7%
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Source: Northeast-Midwest Congressional Coalition, 1985.
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Table 3. Manufacturing job growth, 1972-1984
(States with gains or losses exceeding 10 percent)
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Nevada
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114.2%
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Oklahoma
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23.3%
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Arizona
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74.5%
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Kansas
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21.1%
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Utah
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55.7%
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Minnesota
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20.5%
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South Dakota
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55.4%
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Arkansas
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15.2%
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Colorado
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46.2%
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Georgia
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14.4%
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North Dakota
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43.5%
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Massachusetts
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10.7%
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Florida
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42.9%
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New Jersey
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-11.9%
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New Mexico
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40.2%
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Maryland
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-12.3%
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Alaska
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38.2%
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Indiana
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-12.4%
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New Hampshire
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35.7%
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Michigan
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-13.8%
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Texas
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34.9%
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Ohio
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-16.4% -16.9%
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California
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33.2%
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New York
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Washington
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27.0%
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Pennsylvania
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-22.4% -23.1%
-26.1%
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Vermont
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26.4%
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Illinois
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Idaho
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24.3%
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West Virginia
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Source: Bureau of Labor Statistics.
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Does Illinois have a place in the fast growing international economy? As the share of our economy traded over national borders increases and imports surge, can Illinois hold its own as the capital of the industrial heartland? In the 1980s, the boomer states are those whose products have found a receptive market abroad and have been insulated from import competition at home. For a century Illinois and Chicago have been major engines of national growth, fueled by agriculture and industry. But Illinois, along with its midwestern neighbors, has borne the brunt of recent trade setbacks, with job losses and population outmigration at unprecedented levels. Our state still has tremendous potential, but we face a formidable set of problems. In the next few years, the courses charted by our national leaders will be critical to the state's economic future.
Just how bad has the Illinois economy been? At the end of 1985, the state had 80,000 fewer jobs than it had in 1978 (see table 1). The losses have been staggering in the core durable goods industries (steel, machinery, consumer appliances), where the jobs of more than one in four workers disappeared. Illinois lost manufacturing jobs three times as fast as the nation as a whole (see table 2). While the nation showed a job gain of 5 percent in the first half of the decade, Illinois lost 5 percent of its jobs. Illinois and surrounding Great Lakes states lost 3 percent of their population to net outmigration in the same period.
. . . we are relying too much on our
military sector, particularly the high tech
spin-off from the Strategic Defense Initiative,
and on the so-called free
market to solve our
economic problems
Nor do services promise to take up the slack. While Illinois service employment has grown by more than 10 percent in the 1980s, the pace of its service sector growth is far below that of the nation (see table 2). That's because service jobs are tightly linked to manufacturing vitality. Under pressure to improve performance, many manufacturing firms have spun off construction, maintenance, distribution, wholesaling, accounting, data processing and even research functions to independent firms or contractors, most of whom are enumerated in the service sector. But their survival is dependent upon the persistence of manufacturing. Since the late 1960s the states which have grown the fastest are those which have enjoyed job growth in manufacturing (see table 3).
22/November 1987/Illinois Issues
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Table 4. Department of Defense shares of industry output, 1979-1987
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Industry
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Share of output:
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1979
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1987
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Tanks*
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78.1%
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95.0%
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Missiles*
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71.0%
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79.4%
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Shipbuilding
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47.9%
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62.1%
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Communications equipment
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44.8%
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62.5%
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Aircraft
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35.0%
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46.1 %
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Engineering instruments
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23.5%
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33.6%
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Electronic components
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12.0%
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19.8%
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Computers
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3.6%
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12.7%
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Fabricated metals
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5.0%
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6.8%
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Chemicals
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5.5%
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7.1%
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Steel
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4.5%
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6.7%
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Machine tools
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5.0%
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6.3%
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Source: U.S. Industrial Outlook, 1983. Projected.
*This includes Department of Defense share only. It does not include purchases by foreign countries or by other U.S. agencies such as the National Aeronautics and Space Administration (space defense) or the Department of Energy (nuclear warheads).
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Table 5. Selected states' per capita prime defense contracts relative to U.S. average
(100 equals national per capita average)
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1951
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1958
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1967
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1977
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1984
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Connecticut
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440
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300
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350
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310
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330
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Massachusetts
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100
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120
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130
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200
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230
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New Hampshire
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70
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50
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120
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90
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130
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New York
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190
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120
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100
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120
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100
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New Jersey
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160
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120
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90
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80
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80
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Maryland
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130
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130
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120
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130
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180
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Virginia
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30
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50
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80
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190
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160
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Texas
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40
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130
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180
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100
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100
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Arizona
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30
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130
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80
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110
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110
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Utah
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20
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80
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90
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80
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100
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California
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180
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250
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180
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220
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210
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Indiana
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240
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80
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90
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70
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90
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Michigan
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200
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60
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60
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70
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50
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Ohio
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140
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90
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80
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50
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50
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Wisconsin
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100
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30
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50
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40
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40
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Illinois
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90
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50
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50
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20
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20
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Source: Compiled from Department of Defense and U.S. Census Bureau Data.
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Put bluntly, Illinois has been doing badly. Why this should be so is not immediately obvious. Illinois' producer goods industries (farm and construction machinery, industrial equipment, electronics) have been major exporters, particularly to Third World countries. Nationally, these industries still contribute on the order of $72 billion to our net export trade balance, and Illinois is the center of gravity for this production complex. Chicago, still the nation's third largest city, ranks second as home to corporate headquarters and is a top center for corporate research and development labs. Illinois is the nation's second largest high tech producer, albeit in more mature and non-defense-oriented industries. Indeed, the state's technology-intensive steel and machinery industries are among the most modern and sophisticated in the world. So it's worth asking why the state's economy should be in such deep trouble and what can be done about it.
Overall, these policies
have been good for bankers and
traders, but disastrous for producers
and blue collar workers and
small businesse
in Illinois and throughout the nation
The chief source of Illinois' competitiveness problem is the ensemble of macroeconomic policies which have been pursued over this decade by the federal government. These policies can be characterized as a Star Wars/Trade Wars approach to the emerging international economy. In other words, we are relying too much on our military sector, particularly the high tech spin-off from the Strategic Defense Initiative, and on the so-called "free market" to solve our economic problems. Even if we take into account some of the other causes of our difficulties, the effect of these federal policies on Illinois, and on industrial and agricultural states generally, has been devastating.
It is true that our companies have had to scramble to overcome the bad habits brought on by 30 years of considerable market insulation. These include poor marketing practices, an aversion to risky new technologies and a preoccupation with market sharing and price stabilization. It is also true that the financial squeeze levied on manufacturers in the 1980s via takeover mania has contributed to their difficulties. But the maintenance of high interest rates, the tolerance of a severely overvalued dollar, the preoccupation with controlling inflation and lack of will to match foreign subsidies or to forcefully respond to unfair trade practices have stacked the deck against manufacturers just when a nurturing environment is essential to their recovery. The only U.S. goods-producing sector not in trade trouble in the 1980s is arms and military equipment. Those exports ballooned from $10 billion in 1980 to more than $24 billion by mid-decade.
November 1987/Illinois Issues/23
Equally important, but less well understood, are the adverse consequences of our national policies toward Third World countries. Foreign aid helped build export-oriented complexes that undermined our own domestic producers. At the same time, austerity policies forced upon Third World countries because of the debt crisis dramatically curtailed their purchases of machinery and equipment from U.S. producers. Furthermore, our military aid policies have encouraged these countries to shift from industrial equipment to arms purchases. Overall, these policies have been good for bankers and traders, but disastrous for producers and blue collar workers and small businesses in Illinois and throughout the nation. A related cause of Illinois' industrial ills is the dramatic shift in the 1980s federal budget away from social spending and infrastructure programs toward military programs. It used to be a truism that defense dollars stimulate steel and capital equipment sales. When we fought "hot wars," including Viet Nam, we mass-produced tanks, transports and weapons which stimulated midwestern industry. But today's ultra-high tech weaponry — and the fact that the Pentagon buys only a few dozen fighter planes in place of hundreds — means that small amounts of material are involved. The metals and machine parts have dwindled to a miniscule share of the cost. Nor is weaponry mass-produced. Instead, it is hand-crafted in predominantly sunbelt locations by technicians and engineers, many of whom graduated from midwestern engineering schools. Few machinery orders thus work their way back into Illinois.
Even with the Reagan build-up, less than 7 percent of the nation's steel output and less than 6 percent of its machine tools will directly or indirectly end up in military-oriented output. Thus the defense industry does little to help Illinois. For computers, instruments and communications equipment, on the other hand, defense shares range from 13 percent to 63 percent (see table 4). These latter sectors have prospered from our nation's closet industrial policy. They are the only industries which have persistently benefited from federal support. The support includes large, publicly subsidized research and development budgets, guaranteed government markets, "Buy America" restrictions, subsidies for new plant construction, export promotion, bailouts for toubled companies like Lockheed, and funds to help communities recover from a defense plant or base closing.
For Illinois, the shift towards military spending and arms sales has been disastrous. This state has continually lost ground in prime contracts, while the miracle growth states of Massachusetts and California have gained dramatically (see table 5). The Great Lakes states are 55 percent below the national average for procurement receipts and 86 percent below for military research money. Even with subcontracting, relatively few dollars flow back into the Midwest. This region is less dependent upon military spending than almost any other.
24/November 1987/Illinois Issues
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Beyond the free trade v. protectionism deadlock
A major culprit for Illinois' current economic problems is federal government policy — namely its reliance on military research and development and "free market/free trade" strategies to promote economic growth. Because Illinois is now part of an international economy, its legislators and mayors cannot solve the state's economic problems alone. We need forceful, far-sighted federal policies. Instead we are faced with false and largely rhetorical choices. We are told we must accept either "free trade" with disappearing industries and drastically lower wages or "protectionism" with stagnating industries, higher consumer prices and increasing isolation from the rest of the world. It is time to break out of this deadlock and look for a strategy based on real strengths and needs. We have workers, industries, farms and communities; we need prosperity, innovation, performance and orderly adjustment. To respond to these needs and to reverse the erosion of our strengths, there are two major initiatives that we could take now as a nation. The first is a set of innovative policies which I call "managed trade." The second is a development strategy with teeth.
What is wrong with free trade? In principle, free trade is an excellent idea. But in a real world where most other countries have highly developed government trade restrictions, free trade for us means that we are willing to import other nations' unemployment and act as the sponge for products they cannot sell elsewhere. What is wrong with protection then? Protection — tariffs and quotas that shield U.S. firms from imports without asking them for anything in return — leads to higher prices for consumers and no assurance that those protected will raise productivity, make a better product or preserve jobs and communities. Managed trade, the superior compromise, would offer short-term relief from imports in return for verifiable and sanctioned agreements on the part of benefitting industries to retain capacity, retrain and reemploy displaced workers, preserve or raise existing wage levels and reinvest profits in the industry. There are four good reasons why we should switch to managed trade.
The rate of change which has been occurring since the late 1970s is simply unacceptable. The argument that free trade ensures the best use of our national resources does not hold if one can show, as is the case, that the resources released by plant closings and the movement of jobs overseas are not absorbed by other sectors in the economy. From society's point of view, it is tremendously wasteful to have large portions of our labor force and physical plant unemployed, especially since much of this burden must be absorbed by the taxpayer. A trade policy that would limit market shifts to a modest pace is highly desirable on economic as well as political grounds.
• American industry badly needs a breathing space to counteract years of less than salutary management, not to mention adverse fiscal and monetary policies and merger mania. Selective protectionism in the 19th century enabled infant industries to succeed. A similar interim protectiveness with performance guarantees is essential as a longer term investment in besieged U.S. industries and communities.
• The world, as well as the U.S., would be better off operating in an international economy with a relatively large number of suppliers and a plurality of relatively strong, diversified subeconomies. The OPEC price shocks, first up and then down, have wasted resources all over the world. Yet they are but a harbinger of the problems that would result in a world where only a few producers control the supply of many commodities. It's not hard to imagine that in 10 years, when we are entirely dependent on semi-finished steel slabs from Korea and Brazil, these two countries will decide to hike the price of steel in order to repay their debts. Similarly, Japan might use its dominance in computers and semiconductors to raise prices to fund ongoing research efforts.
By setting limits on the degree of international specialization, managed trade would guarantee the maintenance of a relatively diversified economy here and would encourage Third World countries to develop in a diversified fashion as well. This would prevent future OPEC-type destabilizations. And countries like the U.S. would not be driven to specialize in arms peddling abroad to earn their foreign exchange.
• A growing portion of our competitiveness problem is attributable to the dramatically lower wages received by workers in Third World countries. This has caused international capital, including many U.S. firms, to locate their production plants overseas. Such movement undermines our ability to stimulate our own economy through devices like tax cuts, since consumer dollars are now leaking out through imports at unprecedented rates.
Even worse, it eliminates the incentives in developing countries to raise wages and improve workers' living standards as a means of expanding their internal economies. Instead, the current trend encourages developing countries to hold wages down while their new investments go into making products aimed at markets in industrial countries, particularly the U.S. Since workers everywhere are clearly more productive than ever before, our policies must be aimed at raising wages in Third World countries rather than permitting the operation of the free market to erode wages and living standards here. Managed trade would help us internationally, but we also need an alternative here at home to our current "let-the-market-decide" approach to economic planning. Letting the market decide adds up to a de facto policy of subsidizing military research and development at the expense of all other sectors of the economy. For decades, we have been helping Third World countries plan for the future, yet we have been reticent to do so here at home. In this era of an ailing, relatively stagnant economy, it's time for the U.S. to have an economic development policy that offers a vision of where we want to be in 20 years. Rather than endeavor to merely stem the losses or to meet short-term challenges from emerging competitors, we ought to put our resources, size and know-how to good use by charting a long-term course. A long-term development strategy should include the following.
. . . our policies must be aimed at
raising wages in Third World countries
rather than permitting the
operation of the free market
to erode wages and
living standards here
• Research and development based on what we want for our society: cures for cancer and AIDS, for example, better home building techniques, safe disposal of toxic wastes, superior steelmaking processes. We ought to commit public money to basic research in these areas and spread such funds around to private as well as public research labs, including cooperative and nonprofit ones. This would ensure balanced research and development.
• A commitment to reinvigorate and nurture a specific set of critical industries and products, both mature and pioneering. These might include high quality steel, mass transit vehicles and environmentally safe chemicals. Industries meriting such targeting would have a promising competitive outlook and/or produce socially useful products that are an investment in our long-term future. We cannot afford to ignore the lessons here from our more successful competitors, such as Japan, who have consciously chosen to engender specific industries as their passport into the emerging world economy.
• Integration of social policy concerns into economic policymaking so that economic choices are made with an awareness of their effects on different groups in the population, such as farmers, blue-collar workers, minorities, youth, small businesseses. Currently, economic policy is formulated without considering the social and taxpayer cost of firm failures, unemployment, skill obsolescence, human capital losses and underutilized streets, schools and housing in declining communities. Such costs must be incorporated into the policymaking calculus if we are to avoid waste and demoralization.
• Judicious use of procurement policies to achieve balanced economic, social and regional development. Again, almost every other industrialized country uses procurement for this purpose, and in indirect ways, we do as well through congressional pork barrelling. Better that we should do it on the basis of a public consensus about our joint development goals than haphazardly as now.
• A stronger commitment to education and reeducation as a means of investing in the future. An innovating society is one which relies upon human creativity, teamwork and adaptability. Currently, our educational system is both underdeveloped and highly inefficient, especially when it comes to reskilling older workers whose jobs have been automated or exported.
With such a base, it is not hard to imagine a vibrant economy once again, one that is future-oriented and distinguished by international cooperation and sharing. If we can budge policymakers in Washington off their conservative finance-oriented strategies and make the case for the producers of this country, we can expect an enthusiastic response from industrialists, farmers, workers and communities in Illinois and across the nation.
With the resurgence of Third World economic growth, aimed at developing internal markets rather than serving export ones, orders for Illinois farm products and machine makers will mount and so will second round orders for Illinois equipment, parts and steel. Similarly, maintaining middle incomes here at home and returning to a traditional mix of social vs. military spending will revitalize the demand for consumer goods and thus industrial investment. Finally, liberating basic research from dependence on the military will stimulate midwestern research labs, producing a new crop of basic inventions and restoring Illinois to its historic role as the nation's seedbed of innovation. Will Illinois be a major actor in the new world economy? Under such a scenario, you bet!
Ann Markusen
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November 1987/Illinois Issues/25
A major premise of the Reagan administration is that military research and development, which has grown enormously in the 1980s, will produce civilian spin-offs. But will we get what we need when we need it? Indeed, a large part of the Japanese success lies in their ability to take American military-underwritten inventions and commercialize them more rapidly than we can here at home.
A major premise of the Reagan
administration is that military research
and development . . . will produce civilian
spin-offs. But will we
get what we need
when we need it?
A striking example is in the area of robotics (an Air Force-funded invention) where the Japanese now dominate the U.S. market. They can do so because their engineering talents are focused on commercial markets, not on military ones. Pouring more dollars into military research is not, then, a solution to our competitiveness problem.
For Illinois, the question of national research efforts and money is crucial. While this state has a very large concentration of private sector research and development labs, it loses out to states like Massachusetts, California and Virginia in government and university labs, especially those favored by defense dollars. If U.S. innovation efforts continue to be defense dominated, the nation's more commercially oriented sectors will continue to lose their engineers and research dollars. And Illinois can expect to continue to lose ground in its capital goods and high-technology industries like industrial machinery, consumer electronics and materials.
The prominence of military priorities in the ongoing restructuring of U.S. industry has grave implications for the future. Currently, the only national development policy we have is one merged into the Strategic Defense Initiative (SDI), which has the dual goal of national security and economic strength. The latter is to be achieved by using technological spin-off from SDI to compete with the Japanese in the high tech arena. But treating Japanese competition as an analog to cold war with the Soviet Union, which the SDI does, is a dangerous way of conducting long-term economic planning.
Ann Markusen is an economist and professor of social policy at Northwestern University in Evanston. She has published extensively on economic issues.
26/November 1987/Illinois Issues
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