The American Way of Growth Part II

The political winds in the United States began to change early in the 20th century. J.P. Morgan, John Rockefeller and others created huge corporations such as Standard Oil and U.S. Steel. This led to public hostility towards the so-called “trusts”.

Under Woodrow Wilson the Democratic Party with roots in the South began moving America toward free trade. The turning point came in 1934, when Secretary of State Cordell Hull succeeded in getting Congress to pass the Reciprocal Tariff Act, enabling the State Department to begin negotiating tariff reductions with many countries.

From 1945 to 1973, the U.S. economy grew strongly despite the low tariffs of the new free-trade system. Robert Gordon, an economist, attributes real wage growth to the continued growth of auto manufacturing and industries related to home networking (including kitchen appliances and gas and electric network) and telecommunications. Gordon points out, however, that the period of strongest growth in real wages was 1920-1940 when, despite the Great Depression, the automobile industry and mass production revolutionized American industry.

By the late 1970s, though, it became clear that these growth industries had run their course and new growth drivers were needed. Two new trends emerged in the business world: globalization and financialization. The new focus on financial returns meant that business had to be able to make short-term investments. Every large company could attempt to reduce international price and cost differences through production in low-wage countries and sales in as high-waive nations as possible.

Globalization acquired more aggressive momentum in the 1990s, with the arrival of Bill Clinton in the White House, the NAFTA agreement with Mexico and Canada, creation of the World Trade Organization, and the 2001 admission of China into the global trading system. Dani Rodrik, economist, and others called this period “hyperglobalization”. Hyperglobalization and globalization created a new wedge between labor and management that was unlike anything else. While the century from the 1890s to the 1990s featured many aggressive, sometime violent, battles between labor and management, both sides knew that their interests depended on their industry doing well as high profits had enabled companies to pay high wages.

This has changed dramatically under hyperglobalization. With American workers earning $25 an hour and Mexican workers $3 an hour, U.S. corporate management was now able to reduce costs by shifting production to Mexico and other low-wage nations. You only need to look at the public business plans of General Motors or Ford to understand that moving production from the U.S. today is and will continue to be a major part of their future plans. American wages need to fall over time in industries such as automobiles that must be competitive globally. They must match low-wage countries’ levels.

But the problem is much greater. China has access to a large pool of low-wage workers. China also benefits from huge subsidies worth billions of dollar to help support its industries. This allows it to sell goods at a lower cost. China is also keen to be a dominant player on a larger number of international markets. China already has a dominant position in the production of aluminum and steel as well as solar energy equipment. Its “Made in China 2025” plan identifies ten industry sectors where China is seeking self-reliance and arguably global superiority, too.

Economists played an important role in pushing the cause for hyperglobalization by arguing academically in favor of free trade. According to the so-called Law of Comparative Advantage, each country can choose what its best at. Andrew Carnegie, a simple explanation of how dumping works, explained that China used large subsidies in the past century to seize key industries such as 4H (High Growth, High Profits, High Productivity and High Wage) industries. Carnegie wrote before the First World War about shipping steel from Pennsylvania to Belfast shipyards in order to construct Britain’s Royal Navy fleet.

Under present conditions America can produce steel as cheaply as any other land, notwithstanding its higher-priced labor… One great advantage which America will have in competing in the markets of the world is that her manufacturers will have the best home market. They can rely on this for a return on capital and can export surplus products with an advantage even if the actual costs are not covered by the price. The country that has the most home market can quickly outsell foreign producers, particularly if the products are standardised, like ours. In Britain, the expression I used was “The Law of the Surplus.”

China has today the largest (i.e. most) domestic market for steel, automobiles and computers. It also owns the biggest home market in telecom networks, aircrafts, drones and ships. It does not need subsidies to allow China to acquire foreign markets in these sectors. China must make a profit on its own market, then use Carnegie’s “Law of the Surplus “.

A lesson in British Economic Decline

For a long-term upward shift in national economic growth, it is essential to find a mechanism for long-term growth in labor productivity, since labor accounts for some 70 percent of economic output in modern economies. American labor productivity does not rise with increased imports. They actually tend to decrease it by driving workers from high-productivity sectors. Robert Lucas, Nobel laureate for Economics and Business was adamant that human capital-based industries would be the best option. These increase productivity through the expansion of human capital. know-how and expert) in the process of growing.

My own solution is practical and more historical. Any country that wants to increase its growth rate should identify growth industries and pursue them.

In an insightful 2007 essay, Norwegian economist Espen Moe attributed successful economic growth among major nations to two forces: first, Schumpeterian “creative destruction” as new technology-based high-productivity and high-growth industries arose and replaced older industries; second, the game theorist Mancur Olson’s thesis that vested interests arise in every society and try to block or impede the entry of new disruptive industries into the economy. Moe stated that the primary function of the state is to balance out vested interests, preventing structural change from being blocked.

In this context it’s useful to consider the fall of Britain as an economically powerful country, because it was the precursor to American economic dominance. According to British economic historian Sidney Pollard, British leaders recognized as early as 1851 that their country faced economic decline. “‘The superiority of the United States over England,’ the Economist had declared as early as the year of the great British triumph, 1851, ‘is ultimately as certain as the next eclipse. ‘”

According to Pollard the British manufacturing industry failed in securing significant power within Britain’s political elite. These power centers including Parliament and the Civil Service and the Conservative Party were heavily influenced by the Financial Industry, where the intellectual elite was centered around Oxford, Cambridge and, to a lesser degree, the landed Aristocracy. The British textile industry had a direct interest in opposing support for a strong British chemical sector. It preferred to buy cheap dyes from Germany’s world-leading chemical industry. Despite this, the U.S. and Germany remained ahead of Britain with new industries and innovative products, which was supported by tariffs. Pollard says

By a careful “scientific” tariff, at least Germany and the USA were better able to concentrate resources in strategic areas for rapid development at moments crucial to the evolution of new products and new techniques. These countries could achieve greater sales stability, which gave them a strong incentive to invest. The free-trade economies of Britain, however, were left with more fluctuations.

The result was that Britain fell further into the hands of its financial sector, which made millions through international trade financing. Andrew Carnegie and JP Morgan started their careers in the large-scale sale of U.S. railway bonds to British investors. Pollard believes Britain’s fall is due to a series of earlier declines similar to the

.

The tendency for the leading industrial economy to shift, at the height of its power, to commerce and ultimately finance and foreign investment has been observed in earlier centuries also, particularly among the Italian cities and later in the case of the Netherlands. The Dutch… also suffered from the imposition of tariffs on their exports from other countries and accusations that their workers were not being paid enough and their entrepreneurs were lazy.

There are many uncomfortable parallels between the Britain of 1900 and the United States of 2022: the financial industry has too much influence over the government; the government has little understanding of how the economy works; the divisions between labor and management obscure the true challenges facing the nation; manufacturing, which can provide good jobs for the millions without college degrees, gets little respect; science and engineering, although often praised in public in the U.S., attract too little interest in universities.

The vested interests of the financial community and the great universities that blocked the British manufacturing industry have their parallel in America today in the combination of the banking, private-equity, technology, and pharmaceutical industries, all of which profit from open American markets that destroy millions of jobs in the heartland but make the top 20 percent, top 1 percent, and top 0.1 percent even richer.

In addition, Britain in 1900 faced in the U.S. a rival determined to eat its lunch. Many prominent Britons seemed to ignore this fact. Winston Churchill, Prime Minister of Britain seemed to be unaware of the contempt and disdain held by some members the Roosevelt Cabinet for Britain. Hull’s policies of free trade were influenced by this. Many Americans today are blind to China’s desire to control the leading industries in the world and place America in an inferior role.

But despite this, America has ample opportunity to reverse its declining trend. The strength of America’s domestic market was the key to American growth over the past two centuries. Therefore, the U.S. government should direct Americans to buy American products. There are 200-million Americans who want to work, and some 62 percent of them do not have four-year college degrees. The best 4H industries can be identified and provide employment for a large minority of that 200 million. These industries will encompass technology, machine, automotive, as well as support industries like primary metals. These industries could benefit from policies to help them grow again while meeting domestic demand. While other industries may be allowed to import whatever they want, balanced trade must be required.

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At home, the U.S. must pursue the most promising growth industries as well as the human capital necessary to ensure their success. Without a program that encourages thousands of young Americans to pursue engineering and materials sciences, it is not worth subsidizing semiconductor manufacturing in the U.S. The U.S. should be leading a global campaign to convince other major powers that each country’s national growth is the best way to maximise global growth.

This is basically a way to undo hyperglobalization while supporting friendly understandings that trade will naturally follow the national growth. But, national growth must first be encouraged and achieved. Voltaire stated, “We must tend to our own garden .”

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This article is part of the American System series edited by David A. Cowan and supported by the Common Good Economics Grant Program. This publication is solely under the author’s responsibility.