Unemployment Japanese Style

By George P. Brockway, originally published May 9, 1994

I REPRODUCE above in its entirety a news article that appeared on page D4 of the Business Day section of the New York Times for Friday, April 29, 1994. Don’t feel badly if you can’t recall seeing the story in tile paper. It was easy to miss. It ran in the gutter at the very foot of the page and was surrounded at its top and left by an article from a stringer headlined “Denver Airport Date Firm” (on Sunday the date turned out for the nth time not to be firm). If you were the editor of what you proudly and properly referred to as a newspaper of record, and you had a story you wanted to kill yet had to print in order to complete the record, you would handle it in just this way.

I leave to others the task of speculating why the Japanese unemployment story was in fact buried; why, given its explosively dramatic contrast with American and European unemployment records, it was not run as the lead on the first page of the Business Day section, if not on the front page of the entire paper; why the bare numbers were not accompanied by a backgrounder explaining how the Japanese manage such a low unemployment rate even in the midst of a recession; why nothing about the story has appeared among the concerns of the editorial page or the Op- Ed page; why the Times economics columnists have found nothing to remark on in a report that renders suspect the barbaric but fashionable theory of a natural rate of  unemployment, a smattering of whose arcane details they dazzle us with now and then.

Although I will not speculate, I am interested in that last point. For as I have said often enough, I follow Keynes (and indeed everyone at all capable of empathy with a fellow human being) in holding that an outstanding fault of the economic society in which we live is its failure to provide full employment. The theory of a natural rate of unemployment, subscribed to by almost every conventional economist in the United States, argues that this outstanding fault cannot be corrected without igniting an inflation that would destroy the economy.

The news from Tokyo tells us that the current unemployment rate in Japan, while the highest in six years, is nevertheless lower than the lowest unemployment rate the United States has posted since World War II. I do not have at hand Japanese figures earlier than 1967, but after that date Japan’s unemployment has never been higher than 2.9 per cent and U.S. unemployment has never been lower than 3.4 per cent. The American low was registered during the Vietnam War. Our present rate (achieved during a sluggish peacetime recovery that has scared the Federal Reserve Board silly with nightmares of future inflation) is almost three times the present Japanese rate (achieved during a persistent recession).

These facts strongly suggest that the so-called natural rate need not be accepted as immutable. What the Japanese have done is surely within our capabilities; and given the freedom, not to say volatility, of American life, a 2.6 percent rate would be as near full employment as never was.

The natural rate theory has from the beginning allowed that the rate is not really natural but depends on “market characteristics” that are, as Milton Friedman has said, “man-made and policy-made.” What man and policy make they presumably can unmake. The chief market characteristic complained of by natural rate theorists is a minimum wage law. Emboldened by my recent adventure in investigative reporting (see “Ending Welfare As We Know It,” NL, March 14-28), I phoned six Japanese agencies (four of them official) and one American labor union to find out whether Japan has a minimum wage law. No one knew offhand, but the consulate called me back a couple of hours later to report that indeed Japan has such a law. It is a national law, and it specifies minimum wages for different trades and different localities. I doubt that natural rate theorists, who are firm believers in market discipline, would think it an improvement on the American law.

Let us therefore consider the reaction of conventional theory to a 2.6 per cent unemployment rate. Without doubt the prescription would be for a high-very high-interest rate to contain inflation. Has that been prescribed in Japan? Indeed it has not, nor has such a regimen been followed. Rather the contrary, the interest earned by a 1O-year government bond in Japan is now 4 per cent; with us, the corresponding rate is, as I write, 7.10 per cent and will go higher before you read this, if the present majority of the Federal Reserve’s Open Market Committee has its way.

Well, then, since Japan has comparatively low unemployment and comparatively low interest, it must, according to conventional theory, have comparatively high inflation. But Japan’s price index changed 0.0 per cent in April and, at least from 1967, has never climbed as fast as ours.

IT IS OF COURSE possible that other elements contribute to the differences between Japan and the United States. I can name three that may: import policy, productivity and saving.

We all know about Japanese import policy. It is difficult, devious, protectionist, and successful. Twelve years ago I wrote the first of several columns arguing for a protectionist policy for the United States (“America’s Setting Sun,” NL, June 14, 1982). I don’t propose to repeat myself now, except to remark that Japanese protectionism has obviously not prevented the success of Japanese policies directed toward low unemployment, and may well have been a factor in their success.

Productivity is another question I have addressed several times (first in “Productivity: The New Shell Game,” NL, February 8, 1982). In the present context all that need be said is that American productivity is now, and as far as I have been able to discover has always been, greater than Japanese. In fact, among the leading industrial nations, only British productivity has generally been outranked by the Japanese.

On the other hand, Japan’s GNP has, until the last couple of years, grown faster than ours.  Conventional economic theory, though, is possessed of the altogether unintelligible notion that productivity is more desirable than production. It may work out that way in a mathematical model, but it certainly doesn’t on the dinner table[1].

I have also written about saving and shall do so again, but the problem with respect to Japan is special. In the first place, a 1990 study by Fred Block in the Journal of Post Keynesian Economics demonstrated that the figures usually published overstate Japanese saving and understate American. In the second place, as Block showed, an extraordinary amount of Japanese saving, however defined, goes into speculation rather than production. The real estate (land and improvements) of Japan, a nation whose area is no greater than that of Montana, is, at today’s prices, more valuable than the real estate of our 48 contiguous states (a not inconsiderable amount of which is owned by Japanese). The Japanese stock exchange is notoriously volatile, with daily spikes (or spike holes) of 5 per cent or more not uncommon. Keynes thought Americans were addicted to gambling, but the Japanese seem to have it worse.

All of their speculation absorbs enormous amounts of money, but it does nothing for the economy. The money is saved in the sense that although it was earned in the producing economy, it is withheld from use in the producing economy. The withholding is achieved by underpaying large classes of workers, especially women, and by underfunding social services. Because of its hierarchical distribution of wealth and its systematic maldistribution of income, Japan cannot consume all it produces and must sell overseas; thus when foreign markets falter, Japan suffers recession.

In short, neither Japanese import policy, nor Japanese productivity, nor Japanese saving can account for Japan’s low unemployment coupled with low inflation. So is there nothing we can learn from the Japanese record? There are, I think, a couple of things. In the circumstances, the actual virtues (as opposed to the theoretical vices) of some sort of protectionism are very hard to deny, as are the virtues of a steadily low interest rate.

Regarding the latter point, we are told that we cannot afford a low rate because it would stimulate a flight of capital to the Bahamas or the Caymans or perhaps some more exotic land farther overseas. I don’t know about that. Even in the early ’80s, when the prime rate here hit 21.5 per cent, and the Japanese rate was as low as it is now, only a small proportion of the yen flew here. Why did most of it stay home? For the good and simple reason (as Tom Swift used to say) that with a low interest rate Japanese industry could be happily profitable, while the “strong” American dollar caused by high American interest made it easy to penetrate our unprotected market.

A high interest rate (and our recent supposedly low rate was exceedingly high by Japanese standards, as well as by our own pre-1960 standards) is a market characteristic that makes for a high “natural” rate of unemployment. A low rate, contrariwise. The news was barely fit to print. Still, we’d be wise to pay attention to it.

The New Leader

[1] Ed.:  I can’t help but wonder what the author would have thought of Clayton Christensen’s concerns with corporate focus on margins instead of profits as in the Innovator’s Dilemma, and his more recent thoughts on The Capitalist’s Dilemma.

Catch a Falling Dollar

By George P. Brockway, originally published February 8, 1988

I SEE BY the papers that many a pundit, from the President on down, thinks the dollar should fall a bit more-but not too much more. How much is too much? Two answers are given: (1) We don’t want to scare foreign investors into pulling their marks .and yen out of our economy, and/or (2) we don’t want to do anything to start inflation again. Quick rejoinders are: (1) There are dollars but no marks and yen in our economy, and (2) no one who has had occasion to buy anything thinks inflation has ever stopped. Let’s take a look at the problem in a little more detail.

Those foreign investors were a big concern of former Federal Reserve Board Chairman Paul A. Volcker (see “Vale, Volcker,” NL, June 1-15, 1987). The story was that we needed them to finance the budget deficit because, as pundits keep telling us, we don’t save enough to finance it ourselves. And the foreigners, being strangers in a strange land, had to be offered bait in the form of high interest rates. It is possible to argue that our maneuver was self-defeating, since the annual interest on the Federal debt is now close to double the annual deficit. Yet mistake or not, the bonds have been sold, some with coupons as high as 15.75 per cent, and there is nothing that can be done about it; so we should (as the President plaintively pleads about a great many things) put it behind us.

At this point we are supposed to worry that foreigners will pull out if the dollar falls much lower, and it is certainly understandable that the Great Crash of 1987 may have made them skittish. Getting their money out could, however, be a bit more complicated than it appears.

Say Mr. Togo has some of those nice 15.75 per cent 20-year bonds (payable November 15, 2001) and so does Ms. Falck[1], and they want to sell them. No problem. The quote this morning is 153 bid, 153 6/32 asked. Although the price may shift a bit one way or the other by the time our foreign friends contact a bank or a broker, they can be confident of selling the bonds at 153, give or take a few cents. Cents? Well, yes, and naturally the 153 is dollars. They’ll get $15,300 for each $10,000 bond they own – a nice capital gain on top of the 15.75 per cent interest they’ve been receiving since purchasing the bonds in 1981.

But Mr. Togo and Ms. Falck don’t want dollars and cents. The whole idea is to pull their money out of the United States, because the financial tipsters they read tell them Washington isn’t going to put its house in order (whatever that means). They want good old yen and marks, respectively.  Again, no problem. This morning the yen is quoted at 127.90 to the dollar, and the West German mark at 1.6805 to the dollar. There may be a slight fluctuation before the exchange is made; still, Mr. Togo and Ms. Falck will have their familiar currency back.

Now, when Mr. Togo and Ms. Falck are given yen and marks for their dollars, it is because someone buys their dollars for yen and marks. Obviously. But look you: The numbers of dollars, yen and marks remain the same (this is one place where money has a quantity). Mr. Togo and Ms. Falck can get their money out only if some other foreigners put theirs in.

Should all foreigners try to get their money out simultaneously, the exchange rate of the dollar would surely fall, and fall very fast (this is the one place where the law of supply and demand works). It wouldn’t be a free fall. At some stage Mr. Togo’s compatriots would get so few yen for their dollars that, say, $40 million wouldn’t be worth much to them, and they might just as well use it to buy a painting of flowers that van Gogh never got around to finishing. Or Ms. Falck’s compatriots might think it smart to buy an American publishing house or two[2] with their cheap dollars.

In the end, the only way all foreigners can get their money out of the States is by buying something we have to sell. Of course, this is how they got the dollars in the first place: We bought some of what they had to sell. It is also well to remember that, budget deficit and all, ours is a pretty stable society and therefore not altogether a bad place to keep your money. Moreover, our debts are denominated in dollars (except for some worrisome ventures of our biggest borrowers), which distinguishes us from Third World debtors (see “Becoming a Debtor Nation,” NL, February 24, 1986).

The pressure is not all one-sided. We’re eager to buy Hondas and BMW’ s, and they’re eager to buy American securities, both public and private. They may not be so eager to buy more securities if the Federal Reserve lets the dollar continue to fall, but they’ll have to buy something we have to sell-unless they intend to give us Hondas and BMW’s for free.

They may buy goods we produce, and that will certainly be fine with us. On the other hand, they may buy or build factories to make a Stateside version of the Honda. Or they may put their excess dollars into real estate. Large chunks of our major cities are already Japanese owned, just as large chunks of London are Arab owned (and substantial pieces of Manhattan are British and Canadian owned). Patriotic sentiment aside, should we be upset by foreign investment in American industry and real estate?

From the standpoint of American working men and women, it makes no difference who their employers are (unless they’re self-employed) so long as the employers are fair and decent. From the standpoint of American consumers, it makes no difference who produces the merchandise they buy so long as the quality is good and the price is fair. From the standpoint of American investors- well, they’ve shown themselves more interested in speculating on the stock market, anyhow. From the standpoint of the American government, taxes on foreign-owned income could be as good as taxes on domestic-owned income (I say “could be” because the Administration has wimpishly restored breaks for foreigners that we’ve canceled for ourselves).

There remains the problem of the profits earned by these foreign-owned factories and buildings. Our payments to foreigners are already in the tens of billions of dollars annually. If they go even higher, won’t they drain the lifeblood out of the economy? Hardly. These profits are in dollars and thus only exacerbate the foreigners’ difficulty in converting dollars to yen or marks or whatever. The profits will have to be spent on American goods or invested in American industries or exchanged for yen or marks at increasingly unattractive rates.

Mr. Togo’s and Ms. Falck’s last option is worth a moment’s notice. It is their ultimate option; and if the dollar continues to fall, it won’t be worth much. In an unexpected way it will fulfill Keynes‘ prophecy of the “euthanasia of the functionless  investor.” As Keynes explained in the closing chapter of The General Theory:

“Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.”

Unfortunately for Mr. Togo and Ms. Falck, capital denominated in dollars is overabundant and will accordingly be ill paid. (It happens to be overabundant in their homelands, too, but that’s not our worry.) Of course, Mr. Togo and Ms. Falck still have the penultimate option of leaving their money where it is, in which case there is no need for the Federal Reserve Board to “defend the dollar.”

BECAUSE DOLLARS will mean so little to them, our Japanese and German friends will be increasingly able to outbid us for paintings and publishing houses and such that come on the market. That will be a blessing for those of us who have things for sale, but it brings us to the second problem of the falling dollar-inflation.

Conventionally, this is seen to result from the rising dollar cost of imports. The effects are both direct and indirect. Directly, to the extent that the price of a Mercedes is a factor in the Consumer Price Index, an increase in the number of dollars it takes to buy a Mercedes tends to increase the CPI. Indirectly, if it becomes necessary to put up $85,000 worth of marks to import a Mercedes, General Motors might feel safe in bumping the price of a Seville to $75,000. There is little in the history of General Motors to suggest a reluctance to do the bumping, nor can I think of any likely reason for them to hang back.

Potentially more serious are increases in the costs of raw materials, principally oil. The effect here is somewhat mitigated by the fact that OPEC quotes its prices in dollars. It is also mitigated by the fact that sluggish economies around the world have made oil a glut on the market. It could be further mitigated, if not eliminated, by the pursuit of rational conservation policies-but that’s probably too much to expect us to undertake.

The inflationary effect I call your attention to is the bidding up of the prices of American industries. That happens when companies are bought outright and also when shares are bought on the exchanges. The Great Crash of 1987 is one sort of consequence. A much more dangerous consequence is the compulsive reaction of American managements to increased valuation of their companies. They feel obligated-and indeed are obligated by their investment bankers- to try to raise profits to match the increased valuations. They can do this in two ways, neither of them desirable -by raising prices, which is inflationary, and by holding down wages, which is stagnatory.

In the space remaining I can only suggest that the conventional solution of protecting the dollar by raising interest rates is precisely wrong-headed: It is merely another prescription for stagflation. The hopeful solution would combine a monetary policy of low interest rates (that would tend to encourage industry) with a fiscal policy of steeply progressive taxation (that would tend to discourage speculation by foreigners as well as by Americans).

If such a solution incidentally soaked the rich, it’s about time, for it must be acknowledged that they have not performed faithfully as stewards of the inordinate share of the common wealth they have engrossed over the past 15 years, and especially over the past seven. Their wanton misuse of their increased riches mainly to create a bull market and a crash was, and is, a passionless prodigality.

The New Leader

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[1] As far as the editor can determine the names Togo and Falck are intended to represent generic Japanese and German investors and do not refer to actual individuals.

[2] Editor’s note, the author had been chairman of “an American publishing house,” at the time, and now, still privately held by the employees

The Way to Protect

Originally published September 19, 1983

LAST MONTH (NL, August 8-22) I suggested that the world’s Less Developed Countries might be better off if we denied their manufactures (mostly produced by multinationals) unlimited access to our markets. Here I propose to look at the problem from our point of view, starting with the reiteration of some observations I made a year ago about the Atari Democrats’ notion of inventing “sunrise” industries to replace “sunset” industries lost to foreign competition.

One of my points was that whatever we devise can also be devised or copied or, it is occasionally claimed, stolen elsewhere, particularly in the Orient. I must confess my astonishment at some people’s reluctance to accept this point, which seems to me as obvious as a sore thumb-now rendered somewhat sorer by the decision of Atari itself to start moving to Hong Kong. For again and again we have lost our domestic markets to multinational competition, with the results that millions of us are out of work and that our industrial plant is operating at 70 per cent of capacity.

The New York Times ran a story recently about the Sinchu Science-Based Industrial Park, currently being developed in Taiwan. “Sinchu has all the ingredients of Silicon Valley 20 years ago,” says Irving Ho, the park’s director. That may be commercial puffery, but why not? And how could anyone fancy it might be different with the as yet uninvented sunrise industries?

In the famous peroration of The General Theory of Employment, Interest, and Money, Keynes wrote: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” The almost universal obeisance to the doctrine of free trade confirms this observation. Adam Smith lives, defunct though he has been these two centuries.

Adam Smith indeed lives – that is, has a place in history – and we will better understand our own place if we understand his. The first eight chapters of his Book IV [of The Wealth of Nations], where his thoughts on foreign trade are laid out, are not written in a vacuum. They are an explicit, devastating attack on the mercantile system and especially on Thomas Mun‘s England’s Treasure by Forraign Trade, the leading exposition of that system.

Foreign trade, as Smith saw it, served two purposes: it enabled countries to exchange surpluses, and it facilitated the division of labor by expanding the market. In furtherance of these ends he opposed the monopolies and bounties and other restraints on, or inducements to, trade that were root and branch of the mercantile system. And he advocated independence for the colonies, largely because he judged trade with the nearby Continent more profitable.

But a lot has happened in the past 200 years, especially in America, and this makes The Wealth of Nations a historical document, not a present help in trouble. Our domestic market is now far larger than any world market Smith could imagine, and the division of labor has gone far beyond the 18 operations in the manufacture of pins that he immortalized. More important, his merchant adventurers have been succeeded by our multinational conglomerates.

Today’s problem with foreign trade is that our industries are losing out to foreign competition or are being shipped abroad by the multinationals. This happens because foreign labor is cheaper than ours. We are told by the three Harvard Business School authors of Industrial Renaissance: Producing a Competitive Future for America that the members of the United Automobile Workers had better shape up because they are paid 80 per cent more per hour than their Japanese counterparts, who are, in addition, more productive. The American man in the street reads this and says, “Just what I always suspected. American automobile workers are way overpaid. No wonder we’re having this depression.” The American man in the board room reacts a bit differently. “It’s a healthy thing we’re having this depression,” he says. “Now we’ll be able to get those wage scales back down where they belong.”

I venture to suggest that there is another way of looking at these figures (whose accuracy I will not question at the moment, though I may do so another time). One might as logically conclude that Japanese auto workers are underpaid as that our fellow citizens in Detroit are overpaid. Indeed, on the basis of the history of industrial relations, I’d lay even money that a better case could be made this way than that. When you stop to think of it, the idea that a working stiff anywhere is overpaid is not, on the record, over plausible.

Everyone talks about automobiles, but they’re comparatively well off. Sol C. Chaikin, president of the International Ladies’ Garment Workers Union, points out that 25 years ago imports accounted for 5 per cent of the sales of ladies’ and childrens’ apparel, but it is estimated that this year they will account for over 50 per cent. In the Peoples’ Republic of China, garment workers are paid 16 cents an hour; in the Federal Republic of China, the rate is 57 cents; and in Hong Kong it’s a little over a dollar. Does anyone seriously propose to reduce American wages (which in the garment industry are already low) to these levels? If not, what does the incessant chatter about “productivity” mean?

Fashionable economics tells us we should be delighted to buy cheap textiles from the Orient and should concentrate on selling “information” in return. Information about what? one wonders. Books are not meant, because they happily pirate whatever they want right now. Nor is hi-tech (as we’re learning to call it) meant, because our multinationals are already manufacturing “hardware” there. That leaves “software,” but that’s easy to pirate, too. And if Orientals should perversely take an interest in the data we busily beam at each other, they can pick up all they want off a satellite, with a disk they can make cheaply.

We’d better face it: until the world standard of living is brought up to ours, there is nothing whatever that cannot be manufactured less expensively abroad than here. Nothing whatever. How long will it take for the world standard to approach ours? If you’re old enough to read this, you’re too old to live to see the day. The question is, what do we want to do about it now?

There’s no doubt what the National Association of Manufacturers wants to do about it, or the Business Roundtable, or the Reagan Administration. They want to lower labor costs every way they can think of: cut wages, cut fringe benefits, cut safety regulations; and to keep those who still have jobs in line, cut unemployment insurance and welfare generally.

Let’s assume, however, that you and I don’t find labor-baiting attractive. Let’s assume we think it a good thing that the American standard of living is higher than the Japanese or the Taiwanese. If we make these assumptions, how can we protect our standard?

Well, the way to protect is to protect. First, we decide that certain of our important industries are threatened in our home market by severe competition from foreign industries. Second, we determine whether that threat is made possible by wages or conditions that we would consider exploitative. Third, we refuse entry to goods produced in grossly exploitative conditions.

The proposal is not complicated. It does not cover all industry but only the industries we declare to be important and threatened in our home market. It does not require elaborate cost accounting (as do the reciprocal trade provisions against “dumping”) but simply straightforward questions of fact: What are the wage scales? What are the working conditions? Is child labor employed? It does not interfere with foreigners’ or multinationals’ trade anywhere else in the world. In every respect the proposal is analogous to our present laws refusing entry to contaminated foods or dangerous drugs or unsafe automobiles. Those laws protect Americans as consumers; the proposed law would protect us as workers and, incidentally, as entrepreneurs.

IT WILL be objected that the proposal can’t work because it is impossible to compare foreign wage scales and working conditions with ours. In reply, I would enquire how, if the comparisons can’t be made, the noisy critics of the American workingman know he is overpaid. What is proposed is merely the reverse of the critics’ coin. The fact of the discrepancy in wages is accepted; but instead of saying that our fellow citizen Americans are overpaid, we say that our fellow-human Orientals are underpaid. Mathematically, there is no difference in what is said; morally, there is an astronomical difference.

Of course the comparisons can be made, and they will be invidious. The real question is, as the lawyers say, who should have the burden of proof? I am reminded of Thaddeus Stevens‘ reaction to proposals that the North tell the South eliminating slavery was not its war aim. “Ask those who made the war what is its object,” Thad growled. In the present case, I think we could reasonably ask those who want access to our markets to prove that their workers are fairly paid and fairly treated by our standards. American unions and American companies would have the right to challenge the proof. No need to make a big fuss about it, any more than a big fuss is now made about determining that certain foreign automobiles don’t meet our emissions standards or that certain drugs are impermissible.

No doubt many will argue against protecting the American standard of living. Two arguments stand out. The first purports to be consumer oriented. Cheap imports, it says, benefit everybody. But they don’t benefit those millions whose jobs are taken by the imports, and those other millions who are being forced back to the poverty level.

The second argument purports to be producer oriented. Restrictions on international trade, it says, threaten all our industries, because exports now represent our margin of profit. To this argument there are three answers: (1) Our really threatened industries-automobiles,

steel, textiles, etc.-have already lost their export markets; (2) our biggest export business-agriculture will continue because the world needs it; and (3) we have at home an unexplored market larger than any we might lose.

Our 14 million unemployed, plus the millions of working poor, plus their dependents, comprise a “nation” of up to 50 million people-bigger than all but a handful of the 157 members of the UN. In spite of our failures, these people are better educated than the rest of the world, have a better understanding of the work ethic, and are closer to the rest of us in needs and wants. If our national and industrial policies were directed to helping these our fellow citizens, there would be plenty of domestic business to keep U.S. industry fully occupied and highly profitable.

 

The New Leader

The Wages of Exploitation

Originally published August 8, 1983

LAST SUMMER I wrote a couple of columns questioning the Atari Democrats‘ notion that we should write off our “sunset” industries (automobiles, steel, textiles, what have you), where we’re losing dominance in even our own market, and concentrate on some “sunrise” industries to be invented by a commission of unemployed economists. You will be astonished to hear that in spite of those pieces, the notion is still around. Now, the unstated premise of the Atari Democrats’ notion is the belief that protectionism is unthinkable in the modern world. We learned this in those high school courses on Problems of American Democracy we took instead of history. Even President Reagan learned it. In this year’s Economic Report he said, “I am committed … to preventing the enactment of protectionist policies in the United States.”

I am pained to suggest that President Reagan is wrong once again. In explanation, I am going to start with what the consequences of American protectionism might be for the rest of the world, particularly for what are euphemistically called Less Developed Countries, or LDCs. It is, make no mistake, the LDCs that would ultimately be most seriously affected by a rebirth of protectionism. Most of the talk now is about Japan, but that is merely because most businessmen and most business commentators don’t remember yesterday and can’t imagine that tomorrow may be different from today. It was only yesterday (let us remember) that the Germans were the Wundermenschen. The VW bug had bitten off a piece of the American market long before Toyota mastered the pronunciation of Corolla, Everyone had a Leica before Cheryl Tiegs taught us to prefer Olympus. The cognoscenti turned up their noses at Avery Fisher’s consoles and rushed to get the latest components from Telefunken. German productivity was proverbial.

But now all that is forgotten. The Germans are having a depression just like us, and the Japanese are selling cars and cameras all over Europe. VW is losing money hand over fist, and Telefunken is on the verge of bankruptcy.

A moderately reflective person might wonder whether what happened to the United States, and then to Germany, might not one day happen to Japan. As a matter of fact, it is already happening. The Japanese are writing off their textile industry and are manufacturing electronic components in Singapore and South Korea, just like the rest of us. Aha! says standard economics, this will benefit the Japanese. The benefit will come from lower consumer prices, and the Japanese who lose their jobs to Koreans will turn their hand to things the Koreans want but can’t make. That is the way standard economics thinks things work, and next month we’ll consider why they don’t work that way.

For the present, let’s step back a bit. The factors of production, we learned from standard economics, are land, capital, labor, and perhaps technology. Which of these factors do the multinationals seek in strange strands? Not technology, certainly, and not land, especially if they’re doing their seeking in Singapore. Not capital, either, though a sheik here or there may have more than he can think what to do with. No, the factor sought is labor.

Well, everybody knows that. Asian girls, especially young ones, have remarkably nimble fingers and are wiry and strong and able to work long hours, and they’re smart and eager to learn. Moreover, they’re fresh from the bush or the slums and never saw regular pay before and so are easily pleased. They don’t fuss about safety regulations or health insurance or sex discrimination or any of that stuff. Nor is this so bad as it may sound to us liberals, because these people are in for a tough life any way you look at it, and work in an electronics sweatshop is a lot better than their alternatives, and that is true even without mentioning prostitution.

Overworked and exploited though they may seem by our standards, these girls may have been chosen by destiny to use their nimble fingers to scratch out the first painful steps toward the establishment of a middle class in their underdeveloped lands. Such steps were not easy in the 19th-century Northern Hemisphere, and there is no reason to expect them to be easy in the 21st-century Southern Hemisphere. And unless the steps are taken, the LDCs will continue to be at the mercy of imperialist or neoirnperialist powers. This is the standard view of the situation-hard-nosed, perhaps a bit regretful, but above all forward looking.

Now, I will contend that neither standard economics nor Marxian economics understands what is wrong with imperialism. The thing about imperialism, I propose, is that it is extractive. It extracts the produce of mines and of agriculture, and it pays for these products whatever the market will bear[1]. Sometimes the market will bear a lot, mostly it won’t. Some American farmers are old enough to remember how it was in the days before price supports;  that’s the way it is now and always has been with LDC producers of copper and bauxite, cocoa and bananas and sisal. If you’re puzzled by this performance of the market, you will find it beautifully explained in the works of John Kenneth Galbraith, particularly Chapter VIII of Economics and the Public Purpose. Meanwhile you can rely on the avouchment of your own eyes that somehow prosperity has not come to Guatemala or Guinea or Bangladesh.

It is obvious enough that imperialism extracts the minerals of the earth and the fertility of the fields and ships them abroad. What it does to the factor of land, it also does to the factor of labor. The only reason for employing LDC labor is that it’s cheap. It’s far away and not always very efficient, and usually in need of an embarrassingly brutal dictator to keep it in line. But it is cheap.

Its cheapness is revealed by what it is exchanged for. When the labor of an LDC is used to manufacture products for export to the developed countries, the LDC earns foreign exchange that it spends in the developed countries on what it wants or needs – often on food it once produced itself – until seduced into maximizing exports. To understand what such an exchange means, we can compare the average hourly wage in the LDCs with that in the industrialized world. The precise numbers of course vary from place to place, but a ratio of one to five won’t overstate the differential and will do for purposes of illustration. This requires the LDCs to exchange five hours of their labor for one hour of our labor. The produce of the four-hour labor difference is in effect extracted, no less than the produce of their land was (and still is) extracted.

It is important to understand that this is not a situation of temporary unfairness, or of an imbalance that will be righted even in Keynes’ famous long run. What is extracted is gone forever. The situation, furthermore, has grown steadily worse in our time, much to the bewilderment of everyone who had great hopes for the results of liberation.

WHY HAVEN’T the newly liberated colonies been able to duplicate the success of the U.S. following its freedom? Wasn’t our position right up to World War I just like that of the LDCs? Didn’t we need and use British and European capital, just as the other former colonies need and use the multinationals’ capital today?

No, and again no. We used British and European capital, all right, and for the most part they were handsomely rewarded, but we used it first to build our infrastructure – canals, then railroads, eventually even street railroads. And we were inevitably the ones to employ that infrastructure; there was no way that benefit could be extracted. When foreign capital went into steel and soap and thread and chemicals, those products were for our own market; their benefits were not extracted, either. An interesting short book with a long title published last year, European Direct Investment in the USA before World War I by Peter J. Buckley and Brian R. Roberts, is able to discuss all the details of its subject without once considering the possibility that Europeans invested in the U.S. to manufacture for their own consumption. A sign that our development was not extractive is the fact that throughout the period in question – and indeed until very recently-our wage scales were the highest in the world. (That used to be a proud boast.)

In contrast, when GE manufactures plastic-frame irons in Singapore or Atari makes mind-boggling games in Taiwan, the irons and games do not stay in the underdeveloped world. They are shipped out, and with them is effectively extracted the wage differential between the underdeveloped world and the developed world.

The United States was able to escape similar domination by Britain and Europe in the 19th century mainly because of the sheer size of the country. A chronic shortage of labor kept wage scales relatively high, and a large internal market encouraged the use of foreign capital to produce goods for our domestic demand rather than for export. To duplicate the U.S. performance, the LDCs must duplicate the conditions. This won’t come naturally; they will have to be driven to it. Nevertheless, their objective should be to use their labor to produce what they themselves need. They should be manufacturing equipment for an equivalent of the Rural Electrification Administration. They should be developing trade within the LDC world and reducing their trade with the industrial world. The LDCs will always lose in trading with the industrial world (though a few of their citizens may become filthy rich); by trading among themselves they can pull themselves up by their bootstraps, just as we did a century ago.

Such quasi- internal trade would require cooperation on a scale that appears implausible. But the industrialized world-particularly, as I’ve said, the United States – could enforce such cooperation on the LDCs by the simple expedient of denying their manufactures unlimited access to our market. If GE could not sell its Singapore-produced irons in the U.S., it would find it necessary either to produce something else in Singapore, or to pass up the opportunity to employ its capital there in a highly profitable way. Even if it opted for the latter solution and pulled out, the Singapore economy would be, literally and figuratively, healthier.

The proposal to deny unlimited access to our market goes against everything we used to be taught. It also goes against what the publicists for big business continue to teach us. It is, however, merely an extension of the anthropologists’ commonplace that subsistence farming is better for peasants than is a one-crop plantation system. In my next column, I will take up more fully how a change might be implemented, as well as what its effect would be on us.

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[1] Editor’s note:  Those who knew the author, and his wife Lucile H. Brockway, my parents, know that these ideas were discussed between them and that she published a ground breaking book, “Science and Colonial Expansion” in 1979, four years before this article appeared, that makes these points, and others, at length from an anthropological perspective.  The two of them were quite a pair….

Reply to Netzer – Letter re How Our Sun May Rise Again

Originally published September 20, 1982

Dear Editor

Oriental Labor|

The apparent clincher in George P. Brockway’s “How Our Sun May Rise Again” (NL, July 12-26) is his rhetorical question about explaining “the steadily increasing prices of electric irons and TV sets and cameras and automobiles, despite their being produced in the allegedly more efficient and assuredly lower wage Orient.” Steadily increasing compared to what? All the items he mentions have had small increases in price over the years relative to either the overall price level or disposable income.

Consider the following data on average annual increases from the end of 1970 to the end of 1971: Disposable income climbed 10.2per cent and the consumer price index for all items rose 8.1 per cent. Meanwhile, the prices of new automobiles and footwear went up only 5.1 per cent; household appliances, 4.8 per cent; apparel, 3.8 per cent; and television sets, a scant 0.3 per cent. All these are consumer goods that were heavily affected by imports from East Asia, especially the last two items. The answer to Brockway’s question is that his factual premise is all wet, not for the first time.

Brockway is also careless in describing the theory he sets out to overturn (by assertion). Like other valuable insights, the principle of comparative advantage was elucidated somewhat imprecisely by its formulator, David Ricardo, and has been refined in the 165 years since 1817. The principle does not depend on the trans-national immobility of capital. It is valid as long as some factors of production are geographically immobile to some extent: physical capital, mineral resources, skilled labor, entrepreneurial talents, whatever. Clearly, such immobilities are ubiquitous, otherwise there would be no differences in wages and other returns to factors of production among nations or among the regions of one nation. (The principle, pace Ricardo, does apply within a single country.)

Ricardo would not have discarded his law, nor would he have been as pessimistic as Brockway is about the American capacity to come up with “sunrise” industries. More likely, he would have remarked upon our repeated success over the years in replacing “sunset” with “sunrise” industries. To be sure, the international transmission of industrial knowledge and skills, as well as capital, is swifter than it was in the past. But that swiftness tends to raise, not lower absolute standards of living here “and elsewhere, although it reduces the disparity among industrialized countries’ standards of living, which is a good thing, not a bad one.
New York City

 DICK NETZER
Director
Urban Research Center
New York University

 George P. Brockway replies:

 Dick Netzer is agile at the old debater’s trick of answering resoundingly a question different from the one asked. When I said that various items produced in the Orient are steadily increasing in price, I meant precisely that. Netzer says that their prices haven’t gone up so much as disposable income, which is another question. Since his statistics, if they prove anything, prove my point, I’ll refrain from questioning his choice  of dates or inquiring into the effect of shifting exchange rates or comparing the behavior of the prices of American-made versions of these products  with those of the same products produced in the Orient.

As to the history of the Law of Comparative Advantage, I certainly do not question that refinements have been made in it since David Ricardo formulated it 165 years ago. As a practical matter, however, these are beside the point: The present putative Oriental advantage is the result of cheap labor and often unsafe working conditions. (Chinese doctors are good at reattaching chopped-off fingers and arms, because they have so much practice at it.) It would be dishonorable to treat American workers as Oriental workers are treated, and it is dishonorable to throw our citizens out of a job in furtherance of Oriental exploitation.

The Ricardian argument, moreover, implicitly requires that workers displaced by the transfer of their industries abroad will immediately find comparable positions in industries that (for some reason the theory cannot explain) stay home. My factual premise, which Netzer  unaccountably thinks is “all wet,” is that millions of Americans are out of work because we have exported their jobs, and that billions of ‘dollars’ worth of American plants are standing idle because we have exported their industries.

It may be that, as Netzer says, I am too pessimistic about the prospect of coming up with sunrise industries to replace sunset industries. If the real world were as optimistically fast-paced as he pretends, I should think he would at least have suggested a few sunrise industries to relieve my gloom. And I’d dearly love to have him explain why certain industries are sunset here but sunrise in the Orient, unless the difference lies largely in wage scales and working conditions.

Finally, I must diffidently point out that the rhetorical question Netzer has tried unsuccessfully to answer is only one of three that I asked, and the least important at that. And I really must object that I did not and would not rely on a rhetorical question in the middle of my essay as a “clincher.” I have more respect for my readers than Netzer allows.

America’s Setting Sun

Originally published June 14, 1982

I FIRST became conscious of the Japanese as supermen many years ago, when the 240th Coast Artillery of the Maine National Guard, in which my late brother-in-law was an officer, stood ready to be mobilized because of an uproar, as I recall it, over the exclusionary immigration law. A Japanese fleet was expected to steam over the horizon into the teeth of the 10-inch disappearing guns of Fort Williams, originally emplaced, some time after the event, to protect Portland Harbor in the Spanish-American War. Then as now, the Japanese were regarded as miracle-workers.

Today it is Japan’s industry that evokes awe. It has become fashionable to contrast the performance of that country’s labor with ours-particularly with Detroit’s. Even American management has come in for some criticism. Inventories of parts and components in Japanese factories, it is pointed out, are much lower than those in their U.S. counterparts. It is further claimed, by economists like Lester C. Thurow, that America is doomed to fall behind Japan if we try to support our” sunset” industries, where the Japanese are already beating us (automobiles, steel, electronics), rather than our “sunrise” industries (unspecified), where we can have a lead. Why automobiles are necessarily sunset with us and sunrise with them is not explained.

A new fashion (also popularized by Thurow, among others) emphasizes the fall in the American standard of living. Of course, we are still the world’s richest nation; our GNP remains far higher than anyone else’s, yet that is because there are so many of us. If we look instead at our standard of living, as we should, we have less to brag about. As Thurow observed in a recent New York Review: “German workers have twice as many paid holidays and vacations as American workers. American males can expect to live four years less than those of Switzerland, while American females lag ‘only’ three years behind. America ranks 18th in infant mortality [he doesn’t mean exactly what he says, and what he does mean is no longer exactly true, but no matter). Air pollution in the United States exceeds that in other industrial countries. The homicide rate is eight to nine times that of other major industrial countries.”

These depressing (if somewhat disjointed) statistics can be roughly summed up in one category: GNP per capita. A relevant table, using ordinary exchange rates to convert from one currency to another, was included in a study released a few months ago by the Organization for Economic Cooperation and Development. A more recent OECD report uses an index based on a market basket of some 1,300 items, and as I have previously made clear (“Let’s Put Indexing on the Index,” NL, April 5), I am wary of indices. The point here, though, is that one set of figures is as funny a hook on which to hang an argument for adopting Japanese industrial methods as the other. In the latest, for example, we are number one in 1960, ’70 and ’80. The earlier table, usually referred to in “setting sun” arguments, showed us number one in 1960 and ’70, but only 1Oth in 1980.

Strangely, the people crying up Japan do not seem to have noticed that it is toward the bottom of both lists in all three decades. Even Great Britain, everybody’s whipping boy, has continued to out produce Japan. Can it be that the Japanese performance is as much mirage as miracle? It can be.

In the well-propagated view of things, the Japanese economy turns on a lifetime commitment of worker to company and of company to worker. The relationship is recognized to be a trifle cloying for modern American tastes. A century and a half ago, our mills in places like Lawrence and Lowell, Massachusetts provided dormitories for unmarried “hands,” and that would not be appreciated today. Indeed, the company towns that are pointed to with pride in Japan have long been anathema in the U.S., and no one on either side of our bargaining tables is eager to resurrect them.

Nevertheless, the stability of the Japanese labor-management relationship is much admired. A special virtue of it, we are told, is that the Japanese worker- unlike workers elsewhere since the beginning of the Industrial Revolution- does not fear the introduction of new and more efficient machinery. He knows that if his present job is automated out from under him, his company will find him another job, and will train him for it if necessary. One result is that Japan has 70 per cent of all the robots in the world today. “With that head start,” Thurow remarks darkly, “others are unlikely ever to be able to compete successfully.” (He doesn’t say why, but I suppose it has something to do with momentum, of whose importance I am aware from listening to sports announcers.)

If we look at this arrangement a bit more closely (as in The Japanese Company by Rodney Clark, published by Yale University Press), it does not appear quite so idyllic. It seems that the “lifetime” commitment runs only to age 55, whereupon the worker is either demoted, farmed out at a lower salary to a supplier of his old firm, or turned loose with a couple of years’ severance pay. In all three cases he faces old age without a pension.

This is not the worst situation, however, it is the best. The Japanese economy is hierarchical in an idiosyncratic way. Automobile manufacturers can keep their inventories of components say, fuel pumps-low because they subcontract most of the work. The big companies dominate their suppliers, who have no other market for their products. A fuel pump designed for a Toyota is so much scrap metal if it isn’t put into a Toyota. The suppliers have to carry the inventories to meet the big companies’ shifting needs, and they have to be satisfied with the prices the big companies will pay. Consequently, the suppliers cannot offer lifetime employment. Their workers are laid off when business is slack and are fired outright when technological improvements are made. They are second-class citizens with a vengeance, and you don’t hear much about them in the American business press; yet they make up, in the Japanese automobile industry, roughly 70 per cent of the labor force.

Some will have noticed that I’ve been using the masculine pronoun. That is because men alone are meant. Although women comprise about 36 per cent of the non agricultural work force in Japan, they do not have the men’s guarantees and perks (such as they are), and they neither get a shot at the better jobs nor are paid well for the jobs available to them. That they know their place of course makes them especially attractive to our New Right.

Another turn of the screw: As always happens when you have two classes of citizens, people scramble to get into the favored class and scramble to stay there. So the big companies have the pick of the young men entering the labor market, and we will not be surprised to learn that they select the best trained as well as the most “cooperative.” Nor will we be surprised to find that fear of falling out of the favored class leads to brisk and careful work on the assembly line, whence comes the vaunted Japanese defect-free production.

This is not a very pretty picture. If it is what is required to create a sunrise industry, we’d better at least think up a new metaphor. And we’d better pause a moment to consider the fact that in spite of all of Japan’s sunrise industries (automobiles, steel, shipbuilding, textiles, electronics, optics), its GNP per capita is still well below ours-even though we are, for various foolish reasons, running our economy at less than 75 per cent of capacity. As Gus Tyler has shown (in “The Politics of Productivity,” NL, March 22), the notion that the Japanese are “catching up” is a statistical flim-flam.

THERE ARE other statistical flimflams lurking in most comparisons of the performance of various national economies.   Switzerland, for instance, is held up as an ideal. Its rate of inflation and rate of unemployment are relatively low. Is this because the sturdy and intelligent Swiss are imbued with the work ethic? Workaholics they may be, yet that is not the secret of their success. The secret lies in their importation of Italian labor for menial and unskilled and ill-paid jobs. As is true everywhere with people holding such jobs, the Italians are the first to be laid off when business slows down. But they don’t then draw Swiss unemployment compensation; they are simply dumped back into Italy. Hence the Swiss unemployment rate is very low and the Italian extra high.

Moreover, when the Italians are working in Switzerland they obviously help swell the Swiss national product. On the other hand, because they aren’t Swiss citizens-and can’t apply for citizenship- they aren’t counted in the denominator used to calculate the Swiss GNP per capita. That the latter is proclaimed to be the highest in the world is therefore to a considerable extent a statistical flim-flam.

The same phenomenon operates in West Germany (where Italians, Greeks, Turks, and Yugoslavs are imported), and in many more high-ranking countries. To some extent it operates in the United States, too, given the uncounted millions of Hispanics eking out precarious existence, especially in the Sunbelt. But because our native labor force is so large, and because the immigrants who go on the relief roles here are counted among the unemployed, our GNP per capita figure is more reliable.

The American style has been different. In addition to importing cheap labor, we have taken to exporting expensive capital. A segment of 60 Minutes the other night showed the shutdown of a GE electric iron factory in California. GE’s pretense was that the market had shifted from steel- frame irons to plastic ones, so it was forced to open a plastics plant in Singapore to meet international competition. Since the molding of plastics is not beyond American know how, there can be little doubt that the real reason for the shift to Singapore was that teen-age girls there will work longer hours, in less pleasant (if not more dangerous) conditions, for less pay than mature men and women in the United States. When all is said and done, similar reasoning is crucial in each of our sunset industries. Also important (as I noted in “How Micro Minds Make Macro Mistakes,” NL, May 3), is our burgeoning practice of making financial rather than productive decisions.

Neither the exploitation of foreign teen-age girls nor the abandonment of our fellow citizens is an honorable objective of public policy-or of private policy. Colorful talk of the sun rising and the sun setting only masks the real problem.

The New Leader