In Praise of Hard Industries (Fingleton)

Eamonn Fingleton

In Praise of Hard Industries
Why Manufacturing,
Not the Information Economy,
Is the key to Future Prosperity


This is an excerpt from the 1999 book
In Praise of Hard Industries:
Why Manufacturing, Not the Information Economy,
Is the key to Future Prosperity

by Eamonn Fingleton.
The emphasis is added.

The following uses suffixes
G = giga = billion = 109,
T = tera = trillion = 1012.

Part I
Postindustrialism Versus Manufacturing

Chapter 1
Three Strikes Against the New Economy

You can hardly pick up a newspaper these days
[Again, this was published in 1999, during the height of the dot-com bubble.]
without reading yet another glowing account of
the golden prospects supposedly in store for the United States
in the so-called postindustrial era.
If media comment is any guide, almost everyone these days is convinced that
new information-based businesses and other postindustrial activities
have superseded manufacturing as the font of prosperity.

There is, it seems, a natural progression here.
Just as in the early nineteenth century the United Kingdom
exploited the bountiful possibilities of the manufacturing age
to become the world’s leading economy,
a far-sighted United States is now poised to lead the world
in a leap to a still more sophisticated level of economic endeavor
in the postindustrial age.

This euphoric cast on America’s so-called New Economy
has been subjected to remarkably little reality checking.
But the truth is that

America’s steady retreat from manufacturing
cries out for close scrutiny.
For there are major holes in the case for postindustrialism.
Not only do those who advocate postindustrialism
overestimate the prospects for postindustrial services,
but they greatly underestimate the prospects for manufacturing.
A major problem with the argument of postindustrialists is that
they do not understand how sophisticated
modern manufacturing really is.

Before looking at the reality of modern manufacturing, however,
let’s first be clear about postindustrialism.
The term covers a bewildering variety of businesses
whose only obvious shared characteristic is what they are not:
they are not manufacturing.
Broadly defined, virtually all service industries
might be considered part of the postindustrial economy.
For the purposes of this book, however,
we bend over backward to be fair to the postindustrialists
and to judge their case on
those advanced or sophisticated areas of the service economy
whose prospects they regard as particularly promising.
We therefore focus mainly on the information industry,
which, as defined for statistical purposes recently by the U.S. government,
consists of
publishing, movies, broadcasting, telecommunications, and computer software.
We also include within our definition of postindustrial services
such other advanced areas of the service economy as
financial services, database management, the Internet,
consulting, accounting, advertising, and the law.

One confusing point that ought to be cleared up right away is that
some statisticians have recently started classifying computer software
as a manufacturing industry.
This is obviously a perverse use of words,
and one that is explicable only
as an effort by embarrassed government officials
to cover up the extent to which
real manufacturing has declined in certain key Western countries.
Throughout this book,
we treat software for what it obviously is—a postindustrial service.

Our task is to weigh the economic merits of postindustrial activities
against those of what might be called hard industries.
This term is intended to denote
capital-intensive, technically sophisticated forms of consumer products,
which is generally a labor-intensive and unsophisticated activity.
This distinction needs to be emphasized
because postindustrialists implicitly define manufacturing as
merely labor-intensive work of the assembly type.
In so doing, they set up a straw man, for there is no question that,
in an increasingly integrated world economy,
many kinds of consumer products
can no longer be assembled economically in high-wage nations.
What the postindustrialists overlook, however, is that
assembly is only the final, and generally by far the least sophisticated, step
in the making of modern consumer goods.
Earlier steps such as the making of components and materials
are typically highly sophisticated.
And the making of components and materials
is preceded by a still more sophisticated step—
the manufacture of the production machines
that make the world’s components and materials.

These higher levels of manufacturing used to be
the backbone of American prosperity
in the days of undisputed U.S. leadership of the world economy in the 1950s.
Unfortunately for the United States, they have now migrated elsewhere—
and in particular
to nations that have adopted carefully honed national strategies
to boost their manufacturing prowess.

One nation that has been outstandingly successful
in expanding its share of advanced manufacturing in recent decades
is Japan.
The history of the Japanese electronics industry in particular
is an object lesson in how a nation can climb the ladder
of manufacturing sophistication.
Having started out in the 1950s as
a lowly assembler of imported components,
the Japanese electronics industry long ago
phased out most of its assembly operations
to make way for more sophisticated activities—
albeit activities that are almost entirely overlooked by consumers
and even by business reporters and economic commentators.
Among the most notable of such activities is
the manufacture of high-tech electronic components.
The Japanese electronics industry has also moved heavily into making
the advanced materials and production machinery
used throughout the world electronics industry.
Among the other nations that have been similarly successful
in advancing to ever more sophisticated levels of manufacturing
are Germany, Switzerland, and Singapore.
As we will see, these nations, like Japan,
have generally outpaced the United States economically over the long run.

That said, we should make it clear that
this book does not seek to disparage all postindustrial activities,
let alone all service industries.
Nor does it hold up all manufacturing activities as inherently superior.
In fact, advanced nations clearly need
a judicious balance of manufacturing and services,
not least postindustrial services.
Apart from anything else, many postindustrial services are necessary
to support and enhance a nation’s manufacturing base.
The point, however, is that
postindustrialism should not be embraced blindly
just because it is fashionable.
Nor should nations lightly allow their manufacturing prowess to drain away.

For as we will see, postindustrialism entails many hidden drawbacks.
Of these the most important are
  • An unbalanced mix of jobs
  • Slow income growth
  • Poor export prospects
These drawbacks constitute—in baseball terms—
three strikes against the New Economy.

Section 1.1
Strike one against the New Economy:
a bad job mix

The most obvious problem with the New Economy is that
it creates an unbalanced mix of jobs.
Whether we are talking about
financial engineering, legal services, computer software, Web site building,
health care, broadcasting, database management, consulting,
scientific research, or telecommunications,
most postindustrial jobs are for people of considerably higher than average intelligence—
typically people whose IQs rank in the top 20 percent on IQ tests,
if not in the top 5 percent or even 1 percent.
In this regard,
postindustrialism contrasts sharply with manufacturing,
which, of course,
generally creates a well-balanced range of jobs.

Thus, for workers who lack
the rarefied talents needed to succeed in postindustrial services,
America’s shift to the New Economy is little short of a disaster.
In fact, the job prospects for such workers are so discouraging
that even the postindustrialists don’t bother to sugarcoat the pill.
As estimated by the postindustrial economic commentator Michael Rothschild,
up to 20 percent of the American workforce will be marginalized
by the move to an information-based economy.
That amounts to a shocking 25 million people—
or roughly four times the total number of jobless workers in the United States
as of 1998!

Yet Rothschild and his cohorts
see the sacrifice of so large a share of the workforce
as not only inevitable but even acceptable—
because the collateral advantages of postindustrialism for the rest of the economy
are supposedly so large.
The postindustrialists imagine in particular that
postindustrialism is a formula for generally fast growth in incomes.
Would that it were so.
For subpar income growth is the second strike against the New Economy.

Section 1.2
Strike two against the New Economy:
slow income growth

That the drift in the United States into postindustrialism
results in weak income growth
is one of the most serious, albeit one of the least recognized,
drawbacks of the New Economy.

Yet the evidence is undeniable.
Nearly two decades after the United States began
its fateful drift into full-scale postindustrialism,
international economic comparisons consistently show that
Americans have lagged in income growth in the interim.
The ultimate authority on this is OECD in Figures,
a yearbook published by the Paris-based
Organization for Economic Cooperation and Development.
[A 2012 Google search shows that was last published under that name in 2009.
There is now, naturally, only an on-line web edition:
http://www.oecd.org/statistics/, titled “OECD: Statistics from A to Z”.]

For those who believe in the superiority of the U.S. postindustrial strategy,
the 1998 edition of this yearbook makes distinctly chastening reading.
It shows that,
with a per capital income at last count of just $27,821 a year,
the United States trailed no fewer than eight other nations.
These include Japan, Denmark, Sweden, Germany, and Austria,
all of which devote a larger share of their labor force to manufacturing
than the United States.
Most telling of all is the performance of Switzerland,
a manufacturing-oriented economy
whose per capita income of $41,411 is the highest of any OECD country.
[Fingleton doesn’t mention this,
but no doubt a large part of that high average income is due to Swiss banking!]

Although in the popular mind Swiss manufacturing
is more or less synonymous with cuckoo clocks [and chocolate!],
Switzerland’s real strength lies elsewhere.
A world leader in machine tools and in sophisticated equipment
for the textile, chemical, and electricity-generating industries,
Switzerland is the very model of an advance manufacturing economy.

That said, not all the world’s high-income nations
are noted for their large manufacturing sectors.
In fact, the same OECD yearbook shows that
the United States is surpassed in income by
two countries with quite small manufacturing sectors,
Norway and Luxembourg.
But even in these cases,
there is little to encourage the postindustrialists.
Take Luxembourg.
With 17.0 percent of its labor force in manufacturing
compared with 17.3 percent in the United States,
it is hardly more deindustrialized than the United States.
Moreover, it owes its income edge to
a unique factor that the United States cannot hope to [sic: does not choose to] emulate:
it is a major international tax haven
whose receipts of foreign financial flows—
many from questionable sources—
are vast in relation to its tiny population of 418,000.
Norway’s nonmanufacturing prosperity is an equally special case.
Because with a population of just 4.4 million,
Norway ranks as the world’s second-largest oil exporter after Saudi Arabia!

In any case,
the absolute levels of incomes we have been discussing so far
are less important than
the pace of income growth.
And here the facts are even more clearly against the postindustrialists.

A particularly appropriate starting point for any analysis of income growth
is 1980.
This was the year when the merits of postindustrialism
were first widely debated in the United States.
The debate began after the social philosopher Amitai Etzioni
published a gloomy analysis of U.S. deindustrialization.
His concern about America’s incipient drift out of manufacturing
was widely challenged by many feel-good commentators,
who proceeded to enunciate the now widely accepted doctrine that
a shift to postindustrialism would boost U.S. income growth.

Yet with almost no exceptions,
manufacturing-oriented economies
have outpaced the United States in income growth in the interim.
Take the sixteen-year period to 1996,
the last year for which full OECD figures are available as this book goes to press.
In that time,
the United States boosted its per capita income at current prices—
that is, before adjustment for inflation—
by a total of 134 percent.
Although at first sight this growth seems impressive,
it was bested by no less than twelve other OECD nations.
In order of income growth, these were
South Korea, Japan, Portugal, Ireland, Luxembourg, Austria, Italy, Spain, Denmark, New Zealand, Germany, and Switzerland.
And with the single exception of Luxembourg,
all these nations boasted a greater commitment to manufacturing employment
than the United States.
In fact,
many of them are renowned for their outsized manufacturing sectors—
most notably Germany, Japan, and South Korea.
Less well known, but perhaps even more significant, is that
Spain and Ireland have determinedly pursued national policies to build their manufacturing sectors
in the last three decades,
and they too have been rewarded with notably superior income growth.

If these manufacturing-oriented nations
had outperformed only the United States,
the evidence would be convincing enough.
But in fact, they have also outperformed
several other nations that have embraced postindustrialism
almost as enthusiastically as the United States.
Perhaps the most notable case in point is the United Kingdom,
whose cumulative income growth, as measured in current dollars,
in the sixteen-year period
came to just 106 percent.
This put it twenty-first in a field of twenty-six OECD nations.
Canada, another rapidly deindustrializing nation,
came in second to last
(ahead of perennially ill-starred Mexico),
having mustered income growth of just 81 percent.

Given the strength of the statistical evidence to the contrary,
why did the postindustrialists ever consider the information economy
a superior formula for income growth in the first place?
They have been blindsided by a subtle fallacy in economic reasoning.
This fallacy is clearly apparent in the views of, for instance, John Naisbitt,
the author of Megatrends and one of the earliest cheerleaders for postindustrialism.
Noting correctly that the wages of America’s postindustrial workers
are generally much higher than the American average,
Naisbitt jumps to the completely fallacious conclusion that
a general shift by the United States into postindustrialism
will result in a general boost to wages.
The fallacy here is Naisbitt’s assumption that
postindustrial wages are high
by dint of
the innately superior economic virtues of postindustrial services.

In reality, of course,
the high wages paid in typical postindustrial businesses, such as software,
merely reflect the fact that
such businesses generally recruit exceptionally intelligent and capable workers,
in essence workers who could expect to earn superior wages
in almost any field they chose to enter.
[I.e., workers who can add signficant value to
a wide range of efforts.]

In particular, such workers
could earn at least equally high wages in a manufacturing-based economy.
Naisbitt utterly overlooks the plight of the rest of the workforce,
especially the millions of ordinary workers left out in the cold
by the shift to the New Economy.
It is their plight, of course, that is behind
the persistent underperformance of the United States
in international comparisons of income growth.

The end result of postindustrialism is
not only poorer income prospects for individual American workers
but a general decline in U.S. economic strength.
This decline is greatly compounded by
the New Economy’s tendency to weaken the nation’s trade position.
To that subject we now turn.

Section 1.3
Strike three against the New Economy:
a dearth of exports

The third big drawback of postindustrialism is that
it weakens a nation’s prowess in overseas trade.
It is a problem that has received remarkably little attention
from the postindustrialists.
In fact, such leading advocates of postindustrialism as Daniel Bell, John Naisbitt, and Kevin Kelly
make virtually no reference to exports in their writings.
But there is no getting away from the fact that
the export problem is not only obvious but extremely serious.


The conclusion, therefore, is that,
from the point of view of the American balance of payments,
the shift to postindustrialism is double trouble.
it weakens the nation’s export strength.
it exposes the United States to the prospect of rapidly increasing imports.
[And boy, have we seen that!]
That said, many Americans find it easy to overlook the fact that
postindustrial businesses do not do much for the balance of payments.
After all, the huge U.S. current account deficits
do not directly affect the quality of life within the nation—
at least not in the short run.
But in the long run, trade matters—and matters fundamentally.
A nation that allows its trade position to deteriorate too far for too long
cannot expect to remain the world’s leading economy indefinitely.

In truth, almost anywhere the postindustrialists’ case is tested,
it turns out to be more sizzle than steak.
Having understood the New Economy’s weaknesses,
let’s now consider the crucial and much-overlooked strengths of manufacturing.

Section 1.4
In praise of hard industries

As we have already noted,
the most obvious advantage of manufacturing is that
it creates jobs for a wide range of people.
In fact, even in the most sophisticated areas of manufacturing,
jobs abound for the sort of blue-collar workers
who are being increasingly marginalized in postindustrial economies.
Take the most advanced areas of the steel industry.
Many steel industry jobs have become simpler and easier to carry out
as steelmakers have moved to ever higher levels of automation over the years.
In many manufacturing industries these days
so much knowledge can be built into the production machines
that even a worker of less than average intelligence
can operate them effectively.

As Bennett Harrison of New York’s New School has pointed out,
all conventional wisdom to the contrary,
unskilled workers “barely off the farm”
can be readily trained to operate computer-controlled presses
and similarly sophisticated production machinery.
In Harrison’s terms,
today’s high-tech production machinery is not “skill-demanding”
but “skill-enabling.”
Quoting a study by the economist David Howell,
Harrison rebuts the widespread belief that
a move to more advanced production techniques
necessarily results in
the marginalization of workers of average intelligence.
Referring to the trend for low-paid workers
to suffer declining real wages in the United States in recent years,
he comments:
“If wages of poorly educated workers are falling,
we need to look for explanations other than technology.
After all,
the same technologies have penetrated factories and offices in Europe and Asia,
yet nowhere outside of the United States
have low-end wages fallen so far and so fast.”

Of course, high-tech manufacturing is necessarily very capital-intensive.
To the postindustrialists, this seems like a major disadvantage.
But this view could hardly be more wrong.
Remember that in general
the more capital is invested in a factory,
the higher its labor productivity is likely to be.
And superior productivity is, of course,
the royal road to high wages.
the fact that an industry is capital-intensive
almost automatically elevates it
beyond the reach of competitors in low-wage nations.
The truth is that
many manufacturing industries
are becoming ever more capital-intensive all the time,
thereby raising ever higher
the barriers to entry for poorer nations.

Even quite mature manufacturing industries can be notably capital-intensive --
and particularly the more advanced sectors of such industries.
Take the textile industry.
Although the production of textiles is generally regarded as labor-intensive,
many of the textile industry’s subsectors
are highly capital-intensive
and therefore tend to be dominated by rich nations.
Spinning is a good example.
As recounted in the Wall Street Journal,
the capital required in a state-of-the-art spinning mill these days
can amount to as much as $300,000 per job.
It is hardly surprising, therefore, that
the world’s most productive spinning mills
are located in affluent northern Italy,
not in dirt-poor India or Pakistan.

Perhaps the ultimate example of high capital intensity is
the components side of the electronics industry.
As we will see [Chapter 5],
the investment per job in some Japanese component factories
can reach well over $1 million —
or more than one hundred times the rate of capital intensity
in some parts of the world software industry.

It goes without saying that
in capital-intensive businesses
factory wages are likely to represent only a small proportion of total costs.

They are dwarfed by depreciation, financing charges, royalties for intellectual property, research and development expenses, and other high overheads.
Just how small the wage component of costs can be
was startlingly illustrated in the case of a cellular phone factory
built by Motorola a few years ago.
After looking at many alternative sites around the world,
Motorola decided to locate the factory in ultra-high-wage Germany.
Germany’s high wage costs mattered little because
wages accounted for only 3 percent of the company’s total expected costs.
In truth,
from the point of view of an advanced manufacturing company,
the need to offer superhigh wages is a small price to pay
for the many advantages of a German location.
Whereas higher German wages add only slightly to total costs,
Germany offers a world-beating manufacturing infrastructure complete with
superb utilities,
reliable delivery services,
honest regulators,
and a pleasant residential environment for expatriate executives.
And of course, there is also the advantage of
Germany’s well-educated and disciplined workforce.
As Norbert Quinkert, chairman of Motorola’s German operations, points out,
the advantage to the company of choosing a lower-wage location such as Britain
was actually negligible in the larger scheme of things.

If capital intensity were the only advantage
that manufacturing had over postindustrial services,
the case for manufacturing would be strong enough.
But manufacturing boasts another key advantage:
it enables incumbents in an industry to build up
a huge endowment of proprietary know-how
that gives them a wide productivity edge over new entrants to the industry.

Some of this know-how is explicitly protected by patents,
but often the most valuable know-how
is unpatented proprietary production technology.
Typically such know-how can be acquired only by dint of
many years of learning by doing.

Just how formidable an advantage superior manufacturing know-how can be
is best seen from the point of view of
a new entrant to an industry.
Lacking the benefit of the incumbents’ know-how,
a new entrant is condemned to achieve notably poor labor productivity rates.
Thus, even if a new entrant operates from a developing nation
and therefore enjoys a large advantage in lower wages,
its unit costs will start out considerably higher than those of the incumbents,
and it will probably have to continue to absorb losses for many years
as it struggles to catch up in know-how.
In practice, the struggle is an unequal one —
and unless the new entrant enjoys
the full support of an extremely far-sighted, nationally organized effort,
such as that mounted by the Japanese government over the last one hundred years,
it will undoubtedly think twice about entering the field in the first place.

It is difficult to exaggerate
what a great advantage incumbents typically enjoy
in many areas of advanced manufacturing these days.
Take a product like liquid-crystal displays.
Most familiar as the flat screens used in notebook personal computers,
these seem at first sight
to pose no great manufacturing challenge.
In one sense this is correct.
Basically an adaptation of semiconductor technology,
they are made using similar manufacturing equipment.
In theory at least, many companies around the world
could enter this extremely fast-growing business.
But in practice, few have done so,
with the result that the world market is utterly dominated by
a handful of Japanese manufacturers.
In fact, Osaka-based Sharp Corporation alone
enjoys a world market share of close to 50 percent.

Why such market concentration?
The key to the mystery is something called “yield” —
the percentage of flaw-free products in a given production batch.
A liquid-crystal display is flaw-free only if
all of the countless “dots” that constitute its screen are fully functional.
The misbehavior of even a single dot
is not only noticeable to the human eye but intolerably distracting.
Since each dot is controlled by a separate tiny transistor;
every single one of hundreds of thousands of transistors must function as advertised.
Given that, among other things,
the tiniest contamination, such as a microscopic speck of dust,
can render such transistors dysfunctional,
the quality-control challenge in producing these devices is enormous.
A new entrant to the industry would be lucky to get a yield of good screens
of as much as 10 percent.
By contrast, the leading incumbents in the industry
are believed routinely to achieve
yields of 90 percent or more.
Thus, differences in yield alone
can give incumbents in this industry
a nine-to-one productivity advantage over new entrants.

One obvious step a company can take to improve yield
is to filter the factory air with extreme care.
But this is easier said than done,
and even when a liquid-crystal display company takes all obvious precautions,
it can still end up with a notably poor yield.

Admittedly, not all manufacturing involves entry barriers as formidable as this.
Bur even the manufacture of relatively simple materials
often requires a great deal of valuable proprietary know-how
that is difficult for would-be entrants to an industry to acquire.
Take something as simple as adhesives.
As an expert at the Shell/Royal Dutch oil group has pointed out,
the exact chemical structure of an adhesive
is often almost impossible for competitors to determine.
A manufacturing company may literally need to have
unrestricted access to its competitors’ factories
if it is to understand their production processes.
In the nature of things, such access is generally denied;
thus, in seeking to close the technology gap with more advanced competitors,
manufacturing companies often resort to amazing —
and often highly controversial -- tactics.
Take, for instance, some Japanese aerospace executives
who wanted to acquire American aerospace know-how.
As recounted by Larry Kahaner in Competitive Intelligence,
these executives wore shoes with especially soft soles
when touring American aerospace factories.
Their objective was to pick up from the factory floor microscopic metal shavings,
which were later analyzed for clues to the Americans’ manufacturing secrets.

Of course, with reasonable luck,
a security-conscious manufacturing company
can keep most of its production know-how secret for years, if not decades.
Even in mature manufacturing industries,
proprietary know-how often provides incumbents
with enduring protection against new competition.
The photographic film industry provides a striking example.
Because its product is based on
nineteenth-century breakthroughs in silver chemistry,
this industry might seem like an easy target for, say,
the East Asian tiger economies.
But in reality,
it has remained all but impregnable to them.
Even the Koreans are no more than a negligible force in the industry:
although they make some film at home,
they do little exporting
and are highly dependent on inputs imported from Japan and the United States.
A key problem for the Koreans, as for other would-be entrants, is that
they cannot match the enormous endowment of know-how
that the incumbents have built up over several decades of learning by doing.

The most recent major entrants to the business,
Fuji Photo Film of Japan and Polaroid of the United States,
got their start as long ago as the mid-1930s —
and their stories only serve to underline how high the entry barriers truly are.
Fuji Photo would probably never have gotten off the ground
but for the fact that
Japan’s then-military government deemed photographic film
an essential war materiel; thus,
Japan spared no expense in establishing an indigenous source of supply
ahead of Pearl Harbor.
Polaroid’s rise was propelled by a similarly unique force:
the enormous creativity of Edwin Land,
one of the most brilliant inventors of the twentieth century.
Yet even with the benefit of Land’s technological innovations,
Polaroid has remained no more than a niche player
that continues to depend on competitors for certain key inputs.

The fact remains that, at the end of the twentieth century,
the global photographic film market is still dominated by just three companies,
Eastman Kodak, Fuji Photo Film, and Agfa-Gevaert.
Based, respectively, in the United States, Japan, and the European Union (EU),
these are all quintessential First World manufacturing employers.
Admittedly, Eastman Kodak has been losing market share in recent years
[It filed for Chapter 11 bankruptcy in January 2012],
but it is important to note that it is being challenged
not by a low-wage competitor but by Fuji Photo,
a Tokyo-based company whose wage rates
are considerably higher than American levels.
[Of course, what finally did it in was the exploding popularity of smartphones, etc.]

The same pattern of large entry barriers is apparent
right across the board in advanced manufacturing.
It is obvious, therefore, that
nations with a heavy orientation toward advanced manufacturing
enjoy a fundamental edge in world economic competition —
hence, for instance, the pattern we have already noted whereby
manufacturing-oriented economies
have shown remarkably strong income growth in recent years.
And the result is that both Japan and Germany
have now decisively passed the United States in wage rates.
As recorded in the 1998 edition of
Japan: An International Comparison [Caution: Takes a while to download.],
a publication of the Japan Institute for Social and Economic Affairs,
the average hourly wage was
$21.01 in Japan,
$14.79 in Germany, and just
$12.37 in the United States.

Moreover, Japan,
in common with such other advanced manufacturing economies
as Austria, Switzerland, and Singapore,
has generally enjoyed lower unemployment than the United States in the 1990s.
Admittedly, one notable manufacturing-oriented economy
has been doing less well in this regard.
That country is Germany,
whose unemployment rate was running at 11 percent as of 1998.
Germany’s problems, however, stem
not from its manufacturing orientation per se,
but rather from the fact that
its economy has been suffering continuing dislocation
following German reunification.
(In 1998, nearly a decade after reunification,
unemployment in the territories of the former East Germany was still running
more than double that of the rest of the country.)
An additional problem has been
the increasing burden that Germany’s leadership role in the European Union
places on the German economy;
in particular,
Germany suffers disproportionately from the fact that
EU nations have been exporting unemployment to one another for decades.
Germany apart,
unemployment rates in most other high-wage manufacturing economies
have remained notably low in the 1990s.
Take Japan.
Although Japanese unemployment in 1999
slightly exceeded that of the United States,
it has averaged less than 4 percent for the decade as a whole.
American press commentators sometimes suggest that
Japanese unemployment figures are understated,
but as research by both the U.S. Department of Labor and the OECD has shown,
this is a dogma-driven assertion unsupported by the facts.
That there is no large hidden army of unemployed people in Japan
is also confirmed by the experience of foreign employers,
who consistently complain of shortages of many types of labor.

If manufacturing merely delivered high wages and low unemployment,
its contribution would be impressive enough.
But it also delivers another crucial economic blessing:
a powerful trade performance.
This reflects the fact that
manufactured goods are generally much more universal in appeal than services
a fact that is abundantly apparent in
the consistently large current account surpluses
that most of the successful manufacturing-based economies
have achieved in recent years.
It is a notable fact, for instance,
that of the eleven manufacturing-oriented member nations of the OECD
that have surpassed the United States in income growth in recent years,
all but three were running current account surpluses at last count.
Meanwhile, the two great postindustrial economies,
the United States and the United Kingdom,
have consistently been running large current account deficits for many years.

To sum up, whether judged by jobs, wages, or trade,
manufacturing scores over postindustrial services.

Section 1.5
The future of manufacturing:
a historic challenge

We have seen that manufacturing industries are highly effective
in boosting the prosperity of many major economies today.
But can manufacturing continue to deliver a superior economic performance
in the decades to come?
The postindustrialists, of course, think not.
Insisting that the world economy is already suffering from
an acute excess of manufacturing capacity,
they predict that this excess will only worsen in the decades to ahead.
It is a frightening picture—but one based on
a wholly mistaken reading of how the world economy works.

In reality, the long-term outlook for manufacturing is for expansion
almost right across the industrial waterfront.
Perhaps the easiest way to understand the truly bright future of manufacturing
is to remember that about 90 percent of the world’s population is poor.
As the world’s developing nations bootstrap themselves out of poverty,
how will they spend their money?
Do they ache to acquire such postindustrial products as
Wall Street’s latest portfolio hedging services,
personal home-page software, or databases of American newspaper clippings?
Probably not.
More than anything,
what developing economies want is, of course, material goods.
[Some possible exceptions: In Africa, improvements in health.
In much of Islamia, greater faithfulness to the will of Allah.]

They are not alone in this preference.
Even in the most developed parts of the world,
there are plenty of material wants waiting to be satisfied.
In fact,
almost no one anywhere feels as affluent as he or she would like to be,
and asked to compile a wish list of wants they would like to satisfy,
most people would place more emphasis on material goods
than on postindustrial services.

Thus, manufacturers face an enormous and highly exciting challenge.
As in the past, they must aim to create ever more goods,
but now they must strive, in the process,
to use fewer of the earth’s scarce resources.
They must create ever greater abundance
by developing more inexpensive materials
and more efficient production technologies.
The extent of the challenge can be summed up in one sentence:
If the rest of the world is ever to enjoy an American-style standard of living,
the world’s output of material goods will have to increase at least fivefold.
This formidable challenge will be made even more so by the fact that
manufacturing will have to become
much more environmentally friendly in the future
than it has been in the past.

Of course, to many the idea that
poor nations can ever hope to enjoy an American-style standard of living
seems utopian at best.
But is it?
Certainly there is no question that even with the best luck in the world,
many nations will remain poor as far ahead as anyone can see.
On the optimistic side, however,
there is nothing utopian about assuming manufacturers
will continue to improve the efficiency of their production processes
and thereby spread prosperity ever farther around the world.
This is exactly what manufacturers have been doing
since the beginning of the Industrial Revolution,
and they are clearly continuing apace in our own time.


For as long as scientists and engineers
continue to make new technological discoveries,
the process of creating more with less is clearly set to continue
and can be counted on to create similarly exciting opportunities
for a host of other advanced manufacturers
as the developing world increases its share of consumption of
countless products that the First World has long taken for granted—
most notably consumer durables such as
motorcycles, cars, refrigerators, air conditioners,
washing machines, television sets, heaters, telephones,
and personal computers.


The expansion of world manufacturing opportunities will be accelerated by
the high savings rates that characterize many parts of the developing world.
A high savings rate enables a nation to invest heavily
not only in private industry but also in public infrastructure.

Either kind of investment provides a boost to total output,
particularly to exports.
All this in turn enables such a nation
to increase its imports of foreign products.
High savings rates look likely to prove particularly enduring in East Asia,
where one nation after another
has launched notably effective policies in the last fifty years
to buttress its citizens’ savings habit.
In Singapore, for instance, workers and employers
have for many years been required by law
to invest an effective 34 percent of wages
in the government’s Central Provident Fund.
Other East Asian governments
have similar if less direct ways of promoting savings
(typically with measures that directly suppress consumption).

Given high savings rages and various other positive factors at work
in the global economy today,
the proportion of the world’s population
that enjoys a full First World-style standard of living
is likely to jump from about one-tenth today
to nearly one-third by the mid-twenty-first century.
At the end of the day,
the success of the First World’s most advanced nations
in performing more-for-less alchemy in manufacturing industries
will be the single most important force
driving the world’s increasing prosperity.

Thus, beyond the economic case for manufacturing,
there is a crucial political one
that has been overlooked by the postindustrialists:
leading manufacturing nations enjoy enormous scope
to project economic power beyond their borders.
This power derives from control of production know-how,
which, when transferred abroad,
can greatly improve other nations’ productivity
and by extension their income levels.
Such know-how is so coveted that a great manufacturing nation
can pick and choose which nations to bestow it on
and can insist on extensive favors from them in return.

Just how significant this sort of power can be
was already apparent several decades ago
when, in the aftermath of World War II,
the leading nations of both Western Europe and East Asia
assiduously courted the United States
for transfers of American production know-how.
In return, they were prepared to sign off on
most of the U.S. foreign policy agenda—
including even such controversial geopolitical gambits as the Vietnam War.

Of course,
these days the ability of the United States to project economic power abroad
has greatly diminished
as it has withdrawn from one advanced field of manufacturing after another.
although the United States is still courted
for transfers of production know-how,
increasingly nations like Japan and Germany
are the focus of even more ardent wooing.
The reason is clear:
these nations now possess
a huge fund of valuable manufacturing technologies
that can be shared with other nations to considerable mutual advantage.
Such sharing has clearly bolstered Japan’s sway around the world,
particularly in East Asia.
Germany’s sway in both Western and now Eastern Europe
has been similarly bolstered as other nations vie with one another
for direct investment by German manufacturing companies.

In the long run, therefore, the huge economic patronage
enjoyed by the great manufacturing nations of the future
will serve as a power full counterweight
to the vaunted position of the United States
as the world’s sole remaining military superpower.

Section 1.6
Trusting the market:
the tyranny of a treacherous ideology

We have seen that the postindustrialists’ case for the New Economy
is a tangle of misinformation and choplogic.
Why do so many otherwise intelligent and well-informed people
fail to recognize the obvious holes in their theories?
As we will see in chapter 8,
the postindustrialists suffer major blindspots concerning everything from
the true state of American deindustrialization to
the extent of the Japanese economic challenge.
[Note that Clyde Prestowitz uses the analogous phrase “willful blindness”
repeatedly to describe
this same pathology of the thoroughly Jewified American “elite”.]

But more than anything, their problem is that
they place a childlike faith in the efficiency of free markets.
They assume that since postindustrialism has emerged first
in the avowedly free-market economy of the United States,
it is a self-evidently good thing.
They have been led astray by advocates of extreme laissez-faire, who believe, echoing Alexander Pope’s admiration for the work of the Creator,
that in a free-market economy, “whatever is, is right.”

Admittedly, at first sight the idea that
the rise of postindustrialism in the United States reflects
the superior efficacy of the American free-market system
seems sound enough.
But to anyone who is familiar with the economies of America’s main competitors,
an entirely different—and immensely troubling—
explanation for the U.S. shift into postindustrialism is suggested:
by dint of far-sighted economic policies,
these competitors have been consistently preempting
the world’s most exiting new manufacturing opportunities.

Thus, a great many American entrepreneurs
have been lavishing their talents on postindustrialism
merely as a passive adjustment to other nations’ behavior.
In essence, therefore,
the U.S. postindustrial drift is driven by
foreign nations’ industrial policies—
policies that often represent the very antithesis of laissez-faire.
As we will see, these policies are highly effective
thanks to complexities in the real economy that are utterly overlooked in the postindustrialists’ laissez-faire model.

The basic error in the laissez-faire model is that
it greatly overemphasizes the interests of capital over those of labor.

[I would add another basic error:
it overemphasizes the interests of consumers over that of producers and creators
(cf. ¶1.6.20).]

This bias has always been there, of course,
but in modern “global” conditions countervailing forces
that in former times tended to curb it
have now been largely eliminated.
the characteristic pattern of postindustrial society—
large profits for a tiny elite and low wages for the broad mass of the workforce.

The postindustrialists, of course, argue that profits are a good thing.
Up to a point, this is certainly true,
but we can have too much of a good thing,
a point that is notably apparent in many parts of the Third World.
After all, if a disproportionately heavy bias toward profits
were really a formula for superior economic performance,
we would expect nations like Mexico and the Philippines to be economic titans.
By the same token, if low profits were a recipe for economic dysfunction,
nations like Germany, Switzerland, and Japan would be paupers.

The most obvious way in which
America’s competitors systematically preempt manufacturing opportunities
is via subsidies.
These are most apparent these days in “strategic” industries.
Aerospace is a notable case in point.
The spectacular growth of Europe’s Airbus consortium, for instance,
has been driven in large measure by subsidies.
So successful has government support been that,
after less than three decades in business,
the consortium had drawn abreast of Boeing
in market share in large commercial jets as of 1998.
Of course,
subsidies are supposed to be banned under international trade rules these days,
but since the rules are largely unenforceable,
subsidies are likely to remain a factor in world economic competition
for a long time.
Certainly they are becoming an increasingly significant factor
in such promising fields as renewable energy and high-speed rail systems.
One thing is certain:
Europe is unrepentant about using subsidies to build its aerospace industry.
In its own eyes,
Europe has merely been emulating the United States, which, in an earlier era,
established a large lead in aerospace
with an unabashed program of direct and indirect government supports.

Beyond subsidies, other nations use a plethora of less obvious devices
to promote the growth of promising new manufacturing industries.
Many nations, for instance, protect their home markets
and thereby provide their manufacturers with a profitable sanctuary
from which to attack foreign markets.
Of course, in the view of laissez-faire advocates,
trade protection is counterproductive
because it featherbeds weak companies and bad managers.
Although this is indeed sometimes true, there is another side to the story:
where protection is structured intelligently
with an eye to boosting the national interest
as opposed to the sectional interests of individual businesses,
it can serve powerfully to invigorate a nation’s industries.
As long as an appropriate system of rewards and penalties is in place
to induce corporations to plow their large domestic profits
back into improving their production technologies,
worker productivity levels are bound to increase accordingly.

Besides subsidies and nontariff barriers,
manufacturing companies in many advanced economies also enjoy
the advantage of much greater access to outside capital
than do their American counterparts.
This reflects a fundamental macroeconomic fact:
most advanced manufacturing nations now boast
considerably higher savings rates than the United States.
Of course, for believers in the simplistic logic of laissez-faire,
the perennially weak U.S. savings rate
should no longer be a handicap for American manufacturers.
After all, capital markets around the world
have supposedly become “globalized” in recent years;
thus, in theory, savings now flow freely
from nations with a surfeit of capital
to nations with a capital shortage.
In the real world, however, things are different:
even in these days when billions of dollars of capital
can be moved across an ocean at the click of a mouse,
most of the world’s savings flows continue to be invested
close to where they are generated.
This comes as a surprise to the postindustrialists.
Blinded by their laissez-faire models, they forget that, in the real world,
bankers are not mathematical algorithms but people with families and friends—
factors that tend to encourage them to invest in manufacturing businesses
close to home.
Even David Ricardo, the ultimate nineteenth-century advocate of laissez-faire, considered it only natural that
people prefer to invest at home rather than abroad.
As he pointed out, at bottom,
investors like to keep a close eye on their money.
They fear the unknown
and are therefore naturally reluctant to invest in foreign lands,
where the rules and customs are not fully familiar.

[A famous exception to that generalization is the Jews,
who by their own declaration form a “Jewish nation”,
spread throughout the other nations of the world,
with common rules and customs which are quite familiar to other Jews.
The traditional explanation, and the one given in the Torah,
is that
the Jews are a nation.
The Torah and the rabbis used this term
not in the modern sense meaning a territorial and political entity,
but in the ancient sense meaning
a group of people with a common history,
a common destiny, and a sense that
we are all connected to each other.

Of course, the world has shrunk since Ricardo’s day,
but human psychology has not changed much in the meantime.
After all, contrary to their globe-trotting image,
modern bankers are no more likely than anyone else
to enjoy living out of a suitcase.
[I’m not so sure about that.]
It is surely natural that they should prefer to deal with borrowers
with whom they share strong cultural ties.
The closer these ties are,
the smoother and more productive the banking relationship is likely to be.

[Again, the remarks he just made
may have been more applicable to traditional Americans,
the “Neanderthals” as my ex-wife would have put it,
than to the new globalized, denationalized, deracinated “elite”.
Cf. also the remarks about Jews following ¶1.6.6.]

The tendency for high-saving nations
to invest in their own manufacturing industries
is generally bolstered by government policies.
As Richard J. Barnet and John Cavanagh have pointed out,
this is particularly so in the case of
such formidable manufacturing economies as Japan and Germany.
Indeed, much financial regulation around the world
is specifically aimed at boosting investment in local manufacturing.
Certainly, financial regulators tend to ensure that
the lion’s share of the local banking market is reserved for local banks.
In Japan, for instance, Japanese banks
enjoy a market share of fully 98 percent of the local savings deposits.
Moreover, even where American banks
have access to significant savings flows in foreign finacial markets,
they are under considerable regulatory pressure to lend the money locally
rather than make it available to manufacturers in the United States.

Another factor that has contributed to
the relative decline of manufacturing in the United States
an imbalance in the flow of
trade secrets and other proprietary know-how.

Here again,
this is a factor that is utterly overlooked in
the postindustrialists’ laissez-faire models.

If the postindustrialists think about these matters at all,
they imagine that know-how flows freely in both directions.
[When I mock the “elite”,
this is the sort of thing that causes my contempt
(not to mention some personal interactions,
where I found out their (PC) values).]

In reality, however, governments around the world try to ensure that
the flow is almost entirely one-way.
On the one hand,
they pry as much advanced know-how as possible out of the United States.
On the other hand, they make sure that
few if any of their own corporations’ leading-edge manufacturing technologies
leak abroad.
Of course, as we have already noted, nations like Germany and Japan
are increasingly transferring considerable amounts of know-how abroad,
but such transfers generally involve midlevel technologies
that have already been superseded at home.

All the evidence suggests that

a well-organized nation can be highly persuasive
in inducing American corporations
to transfer their most advanced production technologies
to factories within its borders.

Its trump card typically is access to its markets.
An American company will be presented with a choice.
If it tries to export into these markets
from its factory in the United States,
it will probably face significant trade barriers.
But if it chooses instead to manufacture within the nation concerned,
it will not only enjoy privileged access to the local market
but will probably also be offered many other important benefits,
such as investment grants and tax incentives.

The really troubling aspect of this pattern for the American national interest
is that in time
the production technologies concerned
may be entirely lost to the American economy.

Once American corporations
transfer their production technology to a foreign subsidiary,
they may find that it makes sense
to concentrate all future production in this subsidiary.
Such a decision typically is made
when the corporation faces heavy investment costs
in jumping to the next stage of the technology concerned;
it rarely makes sense to continue to maintain
two production facilities turning out the same product.
[Cf. “creative destruction”.]
Thus, the obvious choice is to close the original American factory—
obvious, that is, because American workers are much easier to fire
than their foreign counterparts,
who, thanks to tough labor regulation,
usually enjoy considerable protection against layoffs.
Thereafter, all the crucial learning-by-doing know-how
that is the essence of advanced manufacturing
accumulates in the overseas subsidiary,
to the benefit of the productivity of its workers.

Why don’t American executives fight harder against
the pressure to transfer their production technologies abroad?
Because they see little reason to do so.
After all, they can assure themselves that they are not losing a technology
merely because it is migrating to one of their foreign subsidiaries.
This is the spirit of globalism, and
almost everyone in corporate America’s boardrooms these days
is a true globalist.

Of course, from the point of view of American workers,
things look very different.
Clearly it is hard for American workers
to achieve world-beating productivity rates
if their employers do not equip them with
world-beating production technologies.

The whole trend of wages over the last fifty years
underlines the importance of pivotal production technologies
in the world income league table.
In the 1950s, when the most advanced production technologies
were typically deployed only within the United States,
American manufacturing workers were the worlds highest-paid,
earning about six to eight times as much
as their counterparts even in Japan and Germany.
By the 1980s, however,
Japan and Germany had caught up in production technologies.
Wages in these nations duly passed American levels
and have stayed ahead ever since.

Since American labor is not represented in American boardrooms,
the real losers from technological globalism have no say in the matter.
Moreover, workers’ interests count for so little these days that
American corporate executives
openly proclaim their commitment to utopian globalism
without the slightest fear of embarrassment.

The pattern was memorable exemplified a few years ago
by a Colgate-Palmolive executive who told the New York Times:
“The United States does not have an automatic call on our resources.
There is no mindset that puts this country first.”
A similarly outspoken disregard for the interests of American labor
was apparent in a remark by NCR’s president, Gilbert Williamson,
some years ago when he said:
“I was asked the other day about the United States’ competitiveness,
and I replied that I don’t think about it at all.
We at NCR think of ourselves as a globally competitive company
that happens to be incorporated in the United States.”

Many other examples could be cited of
how far the real world diverges
from the narrow world of the postindustrialists’ laissez-faire models.
Suffice it to say that
the world
is far from a level playing field in trade,
let alone in finance or flows of advanced manufacturing technologies.

Many of the distortions
tend to promote manufacturing outside the United States,
while the American economy,
constantly propelled by the pursuit of short-term profits,
drifts ever deeper into postindustrialism.

The worst part of it is that
free-market dogma has obscured from Americans
how far the United States has been falling behind its principal competitors
in recent years,

most notably Japan.
All press reporting to the contrary,
Japan has not ceased to challenge the United States
for leadership of the global economy.
Far from it.
As we will see in chapter 8,
Japan has continued to gain on the United States in the 1990s
in most of the ways that matter to top policy makers on both sides of the Pacific.

For now, let’s merely mention the crucial matter of trade,
where Japan’s performance has been even stronger in the 1990s
than almost anyone has noticed.
The result was that in the first eight years of the 1990s,
Japan’s current account surpluses totaled $750G.
That was more than two and a half times the total of $279G
it recorded in the first eight years of the 1980s.

When we remember that
  1. Japan runs a large surplus
    in almost every tradable manufactured product,
  2. Japanese manufacturers pay some of the highest wages in the world,
  3. nations with lower wage costs, like the United States,
    are rapidly increasing their trade deficits with Japan in high-tech goods,
it is surely obvious that
the Japanese economy is one of the strongest in the world,
particularly when judged by
the yardsticks that matter to Japanese policy makers.

Japan’s very different economy should be judged by Japanese objectives,
not Western ones.
And here we get to the crucial point: whereas

the American economy,
faithful to the dictates of laissez-faire economics,
is generally run to boost
the short-term welfare of the American consumer,

the Japanese economy is run to boost
Japan’s long-term ability to project economic power abroad.

Measured by this latter criterion,
the 1990s have been years of spectacular progress for the Japanese economy.
Remember that every dollar of current account surplus a nation receives
adds an extra dollar to its foreign assets.
Japan in the 1990s
has been growing its net foreign assets faster than any nation
since the United States in the golden years of expansionism in the 1950s.
The result, entirely overlooked by the Western press, is that
Japan more than tripled its net overseas assets
in just the first seven years of the 1990s.

Before looking in detail at postindustrialism in the following chapters,
let’s sum up the story so far.
The argument of this book revolves around many points, but one is paramount:
all conventional wisdom to the contrary,

modern manufacturing industries are difficult to enter—
thus, those nations that achieve early leadership in them
are remarkably well insulated against
future challenges from lower-wage foreign competition.
Modern manufacturing industries require large amounts
of both capital and proprietary production know-how—
resources that are generally difficult for low-wage countries to acquire.

By contrast, postindustrial services are relatively easy to enter.
They typically require neither large amounts of capital
nor much proprietary know-how.
In fact, most of the necessary know-how can be acquired from
public or semipublic sources.

In sum, this book turns upside down
the standard presentation of postindustrialism
as a more economically desirable activity than manufacturing.

[End of Chapter 1]

Part II
Postindustrialism’s Drawbacks

Chapter 2
A Hard Look at Computer Software

[This chapter is omitted from this document.]

Chapter 3
A Cuckoo in the Economy’s Nest

As we noted in chapter 1,
the financial services industry ranks second only to computer software
in the extent to which it is extolled by postindustrialists.
And true enough, at first sight,
the postindustrialists’ enthusiasm for financial services
seems to make sense.
After all, pay levels in financial services
are generally well above average.
Moreover, many kinds of financial services
have shown extraordinarily rapid growth in recent decades,
not least in the two leading postindustrial economies,
the United States and the United Kingdom.

But on closer examination,
such apparent strengths turn out to be distinctly double-edged.
Take the industry’s high salaries and bonuses.
These are simply a reflection of the fact that, like computer software,
the financial services industry
hires disproportionately from the cream of the intellectual crop.
[That’s really sugar-coating reality.
They may be smarter than the average,
but I believe they also are distinctly greedier
(see, e.g., Michael Lewis’s Liar’s Poker,
or any of a host of reporting in the 2010-12 time period).
If they were not so greedy,
I do not believe they could justify the looting they are doing
of the American economy.]

Given that many top financial professionals
clearly possess superb entrepreneurial skills,
it is not hard to imagine them enjoying similarly large rewards
running high-growth companies
in exciting new fields of advanced manufacturing.
Their attraction instead to a career in finance
deprives the manufacturing sector of vital leadership
and thus undoubtedly contributes directly to
the serious deterioration in manufacturing competitiveness
that the United States has suffered in recent decades.
In this respect, the United States
is merely following in the footsteps of the United Kingdom,
whose deindustrialization in the early part of the twentieth century
was driven in part by a similar trend:
the cream of the intellectual crop preferred
careers in finance and other high-prestige service industries
over manufacturing careers.

Now for the financial sector’s growth.
Clearly seen in terms of its increasingly significant role
in depriving the manufacturing sector of leadership,
such growth is far from the unmitigated blessing
the postindustrialists imagine.

many of the financial sector’s fastest growing activities
turn out to be utterly unproductive
and even positively destructive
from the point of view of the general public good.

[It is important to bear in mind that this was published in 1999.]
As we will now see,
much of what the financial sector has been doing in recent years
has been feathering its own nest
at the expense of the great investing public.
Growth of this sort is the economics of the cancer cell,

and in praising it,
the postindustrialists have made their biggest mistake of all.

Section 3.1
First, some faint praise

Let’s be clear at the outset:
much—perhaps most—
of what the financial services industry does even these days
is of considerable value to society.
Banks, for instance, make a vital contribution
not only in facilitating the transmission of money (via checks and bank wires)
but in providing a store of value (via savings accounts)
and in financing business expansion.
Insurance companies enable individuals and business
to minimize their risk of loss
from accidents and other instances of bad luck.
Foreign exchange dealers facilitate trade between nations.
Even the securities industry,
whose many excesses we discuss in detail later,
makes a vital and important contribution to prosperity
to the extent that it facilitates
long-term investment in stocks and other risk assets.

Yet for all the talk of
the supposedly beneficial effect of financial innovation in recent years,
the financial sector’s economically productive services
are almost all old, established ones
that had already reached a high degree of maturity more than a century ago
in both the United States and the United Kingdom.
In fact, there have been few truly useful major innovations in financial services since then.

It is chastening, therefore,
for today’s financial professionals to look back to that time.
For it is an amazing fact that
the financial sector preempted vastly less labor then
than it does now.
Even the London financial services industry got through the day
with a total of no more than 30,000 clerks, scriveners, and messenger boys—
less than half the workforce of a typical major Wall Street firm today.
Yet London was then by far the world’s largest financial center,
functioning as it did as the clearinghouse
not only for the United Kingdom’s internal finances
but for most of the world’s international transactions.
Today, by comparison, the London financial services industry
needs more than 500,000 people
to conduct a much smaller share of the world’s financial transactions.

A question arises.
Why do financial services preempt so much more labor today
than in former times?
A large part of the answer is, of course,
that fundamental demand for financial services has soared
in step not only with expanding world trade
but with increasing personal wealth, and rising populations.
Meanwhile, various minor but highly useful new services,
such as credit cards and travelers’ checks,
have also contributed to the growth.

But there is something else going on here
beyond an increase in demand for useful services—
something that is best called financialism.
The term refers to

the increasing tendency for the financial sector
to invent gratuitous work for itself
that does nothing to address society’s real needs
but simply creates lucrative jobs for financial professionals.

The financial sector can get away with this
because the people ultimately paying the bill
usually don’t know they are doing so.
The beneficiaries of big pension funds, for instance,
rarely have any knowledge of, let alone control over,
how their money is invested.
Financialism has probably always been with us,
but it has grown rapidly in recent decades,
in step with the progressive deregulation of financial markets.
In painting a euphoric picture of further fast growth in financial services,
the postindustrialists are in the main merely projecting forward
the continuing proliferation of wasteful financialism.

Section 3.2
The essence of financialism:
trading for trading’s sake

Probably the greatest factor
driving the financial sector’s growth in recent years
has been an explosion in financial trading.
It has also been probably the most undesirable; as such,
it is the very essence of corrosive financialism.

It is difficult to exaggerate the scale of the trading explosion.
In aggregate, financial trading in the United States
grew more than thirty-fold in real terms
between the early 1970s and the mid-1990s.
And in some specialist areas, the growth has been even more spectacular.
Take trading in foreign securities.
As reported by Nicholas D. Kristof of the New York Times,
such trading has grown
one hundred times faster than the American economy as a whole
in the last quarter of a century.

The major driver of all this growth has clearly been deregulation,
which, in turn, has been driven by
the widespread belief among conventional economists that
the freer a financial market is, the more “efficient” it is—
that is, the more accurate it is in valuing financial assets.
Such accuracy is important to the general health of the economy in that
it serves to ensure that capital is channeled to
those uses that are most likely to result in high economic growth.

The problem is that there is no evidence that
deregulated financial markets do in fact value assets
more accurately than regulated ones.
Rather, the reverse may be true:
the evidence is that as deregulation has proceeded,
markets have become increasingly volatile
and are therefore valuing assets more and more irrationally.

The all-time classic example [prior to 1999]
of how deregulation has served to increase market volatility
was the New York stock market’s infamous “Black Monday” plunge
of 22.6 percent on October 19, 1987.
If share prices are supposed to reflect
a rational consensus on the future prospects for corporations,
this move was utterly inexplicable.
There was no significant development in the real economy that day
that presaged serious trouble ahead for American business.
In fact, as the Yale economist Robert J. Shiller has pointed out,
the only significant economic news on Black Monday
was the news of the crash itself.
Based on a survey of nearly 1,000 investors soon after Black Monday,
Shiller concluded that the collapse was
an utterly irrational outbreak of crowd psychology
in which 40 percent of institutional investors experienced
“a contagion of fear from other investors.”
This conclusion was handsomely vindicated in the following year,
when not only did the American economy boom,
but New York stocks bounced back spectacularly
to recover all their losses and more.

The important point for our purposes here is that
the Black Monday crash—the biggest one-day fall ever—
took place in what free-market theorists considered
the most “efficient” market in financial history.
Thanks in large measure to deregulation,
countless new financial instruments
had been introduced in the previous decade
that had dramatically increased trading volume—
and thus were supposed to forestall
precisely the kind of monumental irrationality so apparent on Black Monday.

Among these financial instruments,
perhaps the most devastatingly counterproductive was so-called
portfolio insurance.
portfolio insurance is a system of program trading in which
an investment fund automatically sells more and more of its holdings
as share prices drop.
In principle, it closely resembles the “stop-loss” orders
favored by many unsophisticated small-time stock speculators.
Stop-loss orders are widely considered by intelligent investors
to be a loser’s strategy, and for good reason:
they run directly counter to
the basic logic of sensible long-term investment,
which is, of course, to buy low and sell high.
According to the Brady Report, an official inquiry into the incident,
between $60 billion and $80 billion of equities
were subject to portfolio insurance in mid-1987
and were thus poised to be dumped as the market fell.
The result was what Robert Kuttner has aptly described as
“mindless freefall.”

The tendency for increased trading to breed ever more irrational volatility
has also been notably apparent in currency markets,
where trading volume has been soaring at
a compound rate of 20 percent annually in recent years.
The irrationality has been particularly apparent
in the case of the tempestuous relationship between
the Japanese yen and the American dollar.
By the standards of conventional economics,
the yen-dollar market should be one of the world’s most efficient
and, by extension, one of the most stable.
After all, the fundamental determinant of exchange rates
is each nation’s relative competitiveness in tradable goods.
Given that divergences between different nations’ levels of competitiveness
change only very slowly over the years,
the yen and the dollar should probably move
within a band of no more than a few percentage points against one another
in any one year.

In practice, however,
the yen-dollar exchange rate has become ever more irrationally volatile
since the mid-1980s.
In that time the yen has doubled in dollar terms on two separate occasions—
first in the mid-1980s, and again in the first half of the 1990s.
Then, in the second half of the 1990s, it was the dollar’s turn to soar:
between the spring of 1995 and the summer of 1998
it jumped more than 80 percent against the yen.
To cap it all, the market then immediately reversed itself,
with the yen soaring more than 30 percent in less than two months,
one of the fastest recoveries in currency market history.

There might have been a modicum of method in all the madness
if each currency had risen or fallen
as its home economy’s fortunes waxed or waned.
But if anything, the pattern of the last fifteen years
has demonstrated the opposite principle.
Several times when the American economy has done badly,
the dollar has soared on currency markets—
most notably in 1980, 1982, 1990, and 1991.
Similarly, in several years when the Japanese economy has done badly,
the yen has soared—
most notably in 1986, but also between 1992 and 1995.
Conversely in 1996,
a year when Japan recorded the best growth of any major nation,
the yen lost more than 9 percent of its value.


It is hard to see any purpose
in all this financial churning—
other than, of course,
to create lots of jobs for currency traders.

The consequences are doubly negative for society at large:
not only are such traders’ talents wasted on a useless activity,
but the volatility created by the trading explosion
generates dangerously misleading signals
for business executive trying to plan ahead.
In the early 1980s, when the dollar was wildly overvalued,
American business executives made major decisions to move production offshore—
only to find that with the subsequent fall in the dollar
these decisions looked distinctly questionable.
Perhaps the most farcical example was
a decision by IBM in the early 1980s
to initiate a major expansion of its production operations in Japan
to take advantage of the then-low exchange rate for the yen.
In pursuit of that strategy,
IBM moved hundreds of key American and European executives into Tokyo in 1984 and 1985.
Most of these executives had families
who had to be transplanted to Japan at vast expense
in terms of moving costs, real estate commissions,
and initial charges for joining exclusive Tokyo clubs.
Yet no sooner had the expenses been incurred
than the yen suddenly rocketed on foreign exchange markets,
thereby pulling the rug out from under the entire plan.
Within three years the yen had doubled—
and an embarrassed IBM was forced to sound an ignominious retreat,
in the process incurring additional large expenses
extricating the bemused families from Tokyo!

If the irrational volatility of financial markets
were the only evidence we had to indict the trading explosion,
our case would be damning enough.
But there is much more.
Take, for instance, the contribution of
the ever growing army of well-paid analysts and other “experts”
whose views drive so much trading these days.
When Wall Street analysts turn positive on a stock,
institutional investors rush to buy.
Then a few months later, when the analysts inevitable turn cool,
the institutions dump the stock by the million.


For Wall Street securities firms,
this is a wonderfully profitable merry-go-round—
which is, of course, the whole point.
But for society at large,
the vast amount of intellectual energy expended on all this churning
is almost entirely wasted.

For the fact is that
Wall Street securities analysts are notoriously unreliable.
In a study in 1997,
David Dreman and Eric Lukin found that
Wall Street analysts’ forecasts of corporate earnings were “written in sand.”
In the first seven months of the 1990s,
a typical analyst’s forecast of corporate earnings
was off by a shocking 48.7 percent—
an even worse performance than was revealed in
similar surveys carried out in the 1970s and 1980s.
Writing in Forbes magazine,
Dreman issued this resounding condemnation:
“The inaccuracy of these forecasts shows how dangerous it is
to buy or hold stocks on the basis of what analysts predict for earnings.
In a dynamic, competitive worldwide economy
there are just too many unknowables for such pretended precision.”

So much for the securities industry’s efforts to predict corporate earnings.
Some of its other efforts to provide investment advice
are even less intellectually respectable.
Take, for instance, the activities of Wall Street “chartists.”
These are analysts who ignore corporate fundamentals such as earnings trends and instead try to predict future stock price movements based merely on studying a stock’s past trading patterns.
[I presume these are what are also called “quants”.]
Yet for all the millions of man-hours the chartists expend on analyzing stock charts,
it is a well-known fact, proven in careful academic studies,
that chart-reading simply does not work.
[From the viewpoint of 2012,
I am not sure how valid Fingleton’s condemnation of the “chartists” looks.
The “chartists” sound a lot like the “quants”,
who certainly had some singular successes, along with some outstanding failures.
I really don’t know what the balance was
(although on mortgage failures some basic fundamentals surely were overlooked).]

The ultimate indictment of the chartists has come from the economist Burton Malkiel,
who in a famous study many years ago
asked students to construct bogus stock charts based on flipping coins.
He then presented these charts to several chartists.
Sure enough, the chartists professed to read into the random zigzags
significant patterns that they believed would help them make money
on future price movements of the “stocks” concerned.

Given advisers like these, it is clear that most fund managers
are adrift in a sea of make-believe and self-delusion.
And the proof is in the pudding.
All the evidence is that fund managers in aggregate
consistently fail to match the performance of the market averages.
In fact, the shocking truth is that American portfolio managers,
aided as they are by an army of advisers,
a globe-girdling network of computers,
and a cornucopia of new financial instruments,
are likely to underperform
the random choices of a chimpanzee throwing darts at the stock pages.

A detailed analysis by John C. Bogle,
chairman of the Vanguard group of mutual funds,
has shown that in the ten years to 1995
the annual return on diversified funds
lagged the index by full 1.8 percent a year.
Yet to produce this disappointing result,
the mutual fund industry had employed
a veritable army of highly paid portfolio managers
in identifying and buying stocks
believed to enjoy better-than-average prospects.
As a result, the funds incurred expenses totaling about
1.7 percent of total assets each year.
[The “management fees”, etc.]

The conclusion is that portfolio managers are engaged in
what is at best a zero-sum game;
to the extent that they incur any significant expenses,
it becomes a negative-sum game.
Not surprisingly, therefore, most first-rate independent advisers
tell savers to steer clear of the standard heavily advertised mutual funds
and invest instead in so-called index funds,
whose portfolios mirror the makeup of a relevant market index
and therefore guarantee a performance close to that of the index.
As index funds require virtually no ongoing trading or stock-picking,
they can therefore promise to keep expenses to
as little as 0.2 percent of total assets under management.

Of course, this is not to deny that
some investors can beat the market.
But all experience shows that such people are rare,
and not unnaturally
they prefer to apply their talents to managing their own money—
or at least to managing investment vehicles in which
they themselves are major investors.
In essence, the typical run-of-the-mill investment manager who runs mutual funds and other widely marketed investment vehicles
is wasting his time.
[That seems a little harsh.]
One is reminded of the old adage,
“Those who can, do; those who can’t, teach.”
[Or the question:
“If you’re so smart, why aren’t you rich?”.]

In the matter of picking winning stocks,
those who can, make profits for themselves;
those who can’t, lose money for other people.

Perhaps the ultimate irony is that
some of the world’s most successful investors
are outspokenly scornful of
both the recent explosion in financial trading
and the deregulation that has spawned it.
Take, for instance, the speculator-turned-philanthropist George Soros.
Having built a fortune of several billion dollars
by taking advantage of the irrationality of other investors,
he can probably claim to understand better than almost anyone
how inefficiently today’s deregulated markets value financial assests.
In recent years he has become a vociferous advocate
of a move back to greater regulation of financial markets
as a way to
“stop the market destroying the economy.”

Perhaps even more devastating for the postindustrialists
is the testimony of Warren Buffett, the Omaha-based stock investor
who is ranked by Forbes as second only to Microsoft founder Bill Gates
among the world’s richest individuals.
Buffett never tires of mocking the proliferation of new financial services.
His message is that those Wall Street gurus and advisors
who come up with new techniques for evaluating shares and other financial assets
are—not to put too fine a point on it—
snake oil salesmen.

As for new financial instruments [cf. ¶ 3.2.6],
he flatly rejects Wall Street’s self-serving view
that these do the work of Adam Smith’s “invisible hand.”
Rather, in Buffett’s view, such instruments are
“an invisible foot kicking society in the shins.”
He sees traded stock options as gimmicks
that do nothing to create real wealth
but merely ensnare financial professionals
in playing futile zero-sum games with one another.

[That does not seem entirely accurate.
Each time such a game is played,
the house, that is, the financial professionals,
takes a cut or commission from the amount invested.
Thus the combined sum of the buyer and seller of the transaction
monotonically decreases,
with the balance sticking to
the hands of those who carried out the transaction.
In other words, Wall Street gets a sure win;
non-Wall Street America loses by an equal amount.]

He has been particularly scornful of portfolio insurance,
labeling it an “Alice-in-Wonderland practice,”
and he has been perhaps the single most successful voice
in blaming it for the Black Monday crash of 1987.

The ultimate tragedy is that
all the money to keep this charade on the road comes from millions of ordinary American savers [and investors].
They pay high fees for the management of their pension [both private and public] and mutual fund assets, and less visibly, they pay the stockbrokers’ commissions and other costs incurred in the ever quickening pace of financial trading.

A key to understanding why this charade continues unchecked is marketing.
Mutual funds and other investment products are sold, not bought.
The more an investment company spends on marketing,
the more business it can expect to garner.
Various techniques have been honed over the years
to take advantage of savers’ emotions—
and particularly their gullibility and greed.
The time-honored method of catching unsophisticated savers, for instance,
is persistent foot-in-the-door salesmanship.
At a higher level, the formula that works is more subtle:
mahogany-paneled offices, Persian rugs, British hunting prints,
and an army of well-tailored sales executives
drawn mainly from the upper ranks of society.
But either way, what wins business is the right marketing strategy, not the best investment record.
This is abundantly apparent in, for instance, the fact that, as recorded by the investment columnist James K. Glassman
[who, by the by,
wrote the (rather negative) review of this book for the New York Times Book Review]
those fund management houses that charge the highest fees
actually produce by far the worst investment performance.
The simple truth is that such houses don’t have to perform well
so long as they can continue to charge
the hefty fees that fund their vast ongoing marketing efforts.

The end result of all this excessive marketing and trading is that
the American investment management business is costing the United States
probably at least $50 billion a year more than it should.
This represents enormous waste by any standards.
Yet in large part because the workings of the modern financial services industry
have been so enthusiastically endorsed by the postindustrialists,
it has never been subject to any serious reality checking.

[So Fingleton wrote in 1999.]

Section 3.3
American financial exports:
myth versus reality

[This section is omitted from this document.]

Section 3.4
A question of ethics:
finance as rotten apple

If the expansion of financial services in recent years resulted merely in
the frittering away of the talents of many top Americans
on a negative-sum game,
it would be bad enough.
But another lamentable dimension to the financial services explosion
cries out for attention:
the deterioration it has fostered in the nation’s ethical standards.

As turbo-charged new investment vehicles such as derivatives have proliferated,
illicit opportunities for financial criminals
to enrich themselves at the expense of the general public
have increased dramatically.
Perhaps even more important,
the risk of detection is decreasing all the time.
It has become vastly more difficult to police financial markets
in these days of radical deregulation
in which miscreants have ready access to the secrecy of foreign bank accounts
and can dress up their finagling in a dense thicket of complexity.
[The example of Madoff is certainly ultra-relevant here.]

At issue here are not the cruder forms of financial crime,
such as selling worthless penny stocks
to elderly widows and other vulnerable members of society.
Today, as in the past,
heartless villainy of this sort is practiced by only a tiny minority.
At issue instead are much more subtle practices
that are likely to prove tempting to
a much broader range of financial professionals,
most of whom would never stoop to
the bare-faced blackguardism of the penny-stock promoters.

One such practice is insider trading,
which, if the Securities and Exchange Commission’s caseload is any guide,
has grown dramatically in recent years.
As reported by Paul A. Gigot of the Wall Street Journal,
the SEC at the end of 1997 was investigating more than twice as many cases
as it had been a decade earlier.
given that financial scams are now more difficult to detect than ever before,
the SEC’s caseload is probably no more than the tip of the iceberg.
[See, e.g., the
Raj Rajaratnam/Galleon Group, Anil Kumar, and Rajat Gupta insider trading cases.]

One of the fastest-growing financial crimes
is a maneuver known as “front-running,”
which involves buying a stock ahead of a major buying program
by a big fund management house.
A few days later,
after the buying program has sent the stock price soaring,
the front runner
can hope to cash out at a handsome and almost risk-free profit.
Another form of insider trading that has probably burgeoned in recent years
is illicit buying by influential stock analysts for their own accounts
before they issue a bullish view on a stock.
[This can be viewed as a form of insider-trading.]

Other financial crimes can be a lot more subtle.
Take, for instance, a technique known as selective allocation.
The key to this is that
many portfolio managers act for several different portfolios
in their stock-purchasing activities.
They often allocate their purchases to their various portfolios
only at the end of each day—
by which time many trades may already be showing significant profits
while others will be showing losses.
By selectively allocating the profitable trades to some portfolios
and loss-making ones to others,
they can greatly favor some beneficiaries at the expense of the rest.

As Steven D. Kaye has documented in U.S. News & World Report,
favoritism in allocating winning trades
can pay dividends for fund managers in many circumstances.
In one blatant case uncovered by the SEC a few years ago,
Kemper Financial Services (a firm now renamed Zurich Kemper Investments)
allocated winning trades to an in-house account,
while allocating less profitable trades to two Kemper mutual funds
that managed money on behalf of the ordinary investing public.

In a less blatant version of the technique,
fund management houses may allocate winning trades
to portfolios run for large corporations and other sophisticated clients.
Such clients are generally much more demanding than small investors
in expecting good performance
and are much faster to vote with their feet when the performance is subpar.
Thus, a fund management house has a strong interest
in keeping such clients happy,
even if this means penalizing the mutual funds and other portfolios
run for the benefit of small investors.
Many variations are possible.
In one example of alleged impropriety reported by the SEC,
a California-based money manager was accused of
allocating profitable trades to certain accounts
that paid high management fees based on performance,
while allocating less profitable trades to other accounts
that paid no special reward for good performance.

The development of increasingly complex derivatives in recent years
has been a particular boon to financial criminals.
In a typical pattern,
securities firms deliberately concoct instruments that are so complex
that most institutional investors cannot fully understand them.

Moreover, the market in any particular type of instrument
is typically extremely thin,
and thus process can be readily manipulated by the securities industry.
Devastating accounts of Wall Street’s profits from the derivatives game
have been written by, among others,
the former Salomon Brothers executive Michael Lewis [Liar’s Poker]
and the former Morgan Stanley executive Frank Partnoy.
Partnoy in particular has been coruscating
in his criticisms of the securities industry’s practices.
After alleging [on page 28] in his [1997] book
F.I.A.S.C.O.: Blood in the Water on Wall Street
that Wall Street makes huge profits by “trickery and deceit,”
he adds for good measure:
“Everyone I knew who had been an investment banker for a few years, including me, was an asshole.”
Referring to his time as a derivatives salesman, Partnoy commented:
“The way you earned money on derivatives was by trying to blow up your client.”

Of course,
the securities industry has never been famous for its high ethical standards.
But the problem today is not only that
the scale of the finagling is larger than before,
but that thanks in no small measure to the postindustrialists,
the industry enjoys much more prestige than formerly
[As an example of how the media serves Wall Street as shills conning the rubes,
consider how the Zionist and politically correct editorial page of the Washington Post
has consistently used the phrase “wizards of Wall Street”
to describe people who have grossly misrepresented
the predictive powers of higher mathematics.
No doubt the Graham/Weymouth family has profited from their shilling for Wall Street.]

its ethical standards have thus been contagious.
Prominent Americans in other walks of life
see how money is made in a highly regarded industry
and reckon that similarly opportunistic, if not illegal, tactics are acceptable
in their own less exalted fields.

The contagious effect of Wall Street’s low ethical standards
is particularly apparent in, for instance,
the increasingly manipulative way that industrial executives
now use executive stock options to line their own pockets—
often by engaging in short-term financial maneuvering
that they know is damaging to their companies’ long-term prospects.
As early as 1989 the MIT Commission on Industrial Productivity reported that
there was “no shortage” of executive incentive plans
geared to a company’s profit performance over just one year
or even a mere six months.
As the commission pointed out,
a chief executive whose compensation is geared to such short-term measures
is likely to take an even more shortsighted view than the stock market.
[By the way, Fingleton seems to omit
describing the role of the leveraged buyout firms,
now sometimes renamed “private equity” firms,
in substituting short term financial gain for long term corporate progress,
using such methods as slashing or eliminating corporate R&D activities.]

The worst part of it is that
short-term executive incentive programs tend to encourage
outright gambling by corporate executives
in their frantic efforts to manipulate their companies’ profits.
Such gambling is in fact a no-lose proposition for the executives themselves.
On the one hand, if a gamble pays off,
they can obviously cash out quickly at huge profits.
Less obviously but even more controversially, if the gamble fails,
they always have another chance to play the game.
[The comparison to the actions of America’s banks,
also to the compensation methods of hedge-fund managers
(who get a 20 percent share of fund gains,
but do not participate in fund losses!),
is obvious.]

And this time,
because the stock price has undoubtedly fallen in the meantime
thanks to the previous year’s losing gamble,
executives can reset the buying price for their options at a much lower level,
thus putting themselves in line to benefit hugely from
even the most modest recovery in their companies’ profits.

All in all,
it is clear that the financial services industry
has played the role of pied piper
in leading American society toward a general lowering of standards
in the last thirty years

[that would be 1970-1999].
The consequences are hard to measure
but are clearly significant for economic efficiency,
not to mention for the general spiritual health of the nation.
[How often do you hear a member of the MSM talking about spiritual health,
other than serving the demands of political correctness?]

Yet as we have seen,
the apotheosis of American finance in recent years
is based on an utterly wrongheaded reading
of the role that finance should play in an economy.
Forgetting that services should serve people,
the financial services industry has come to regard itself as
somehow superior to society—
an attitude that the postindustrialists
have clearly done nothing to discourage.

Our conclusion, therefore, is that finance is an essential service
without which the economy could not function.
But it should not be raised on a pedestal above the rest of the economy.
Still less should it be considered
a driving force of the economy’s future prosperity.

Stripped of rhetoric,
most of the new financial activities the postindustrialists extol
feed parasitically on the rest of the economy.
What we have is not a goose that lays golden eggs
but a different feathered vertebrate entirely:
a cuckoo in the economy’s nest.

Chapter 4
From Cyberspace to Tinseltown

[This chapter is omitted from this document.]

Part III
Manufacturing’s Advantages

Chapter 5
A Showcase of Manufacturing Strength

[This chapter is omitted from this document.]

Chapter 6
Golden Oldies:
Ships, Textiles, Steel

[This chapter is omitted from this document.]

Chapter 7
The Future:
An Expanding Universe

[This chapter is omitted from this document.]

Part IV
Toward a Manufacturing Renaissance

Chapter 8
Time to Take the Blinders Off

If America’s drift into postindustrialism continues unchecked,
we can safely predict
a drastic deterioration in the American economy’s performance
in the decades ahead.
In particular,
the outlook is for continuing subpar growth in personal incomes.
And the worst affected are likely to be poorer Americans.
Given that, on the author John E. Schwarz’s figures,
the proportion of Americans who are poor
has risen from 17 percent to 25 percent since 1971,
postindustrialism clearly presages a further worsening of
the single most conspicuous economic problem
the United States has suffered in recent decades.
Even for middle-class Americans the income outlook is for, at best,
lackluster growth—
certainly much lower growth than
what middle-class Americans had become used to up to the mid-1970s.

Postindustrialism also bodes ill for America’s foreign trade position
and, by extension, for its continued ability to project economic power abroad.
Although many feel-good commentators
try to gloss over the significance of trade
(America’s imports, they say, just don’t matter very much because
they account for “just” 12 percent of gross domestic product),
trade is actually crucially important.
Trade, after all,
is a nation’s fundamental economic connection with the outside world,
and, among other things, this means that
in the long run it is the most important determinant of
a nation’s ranking in the world income league.
Thus, nations that fail to produce enough of the right sort of exports
inexorably sink down the league table.

Anyone who is unconvinced on this point
need merely look at other nations that in the past
have failed to rectify persistent trade deficits.
The fate of Argentina is perhaps the ultimate warning
of what could be in store.
Like the United States today,
Argentina in the early part of the twenty century
ranked among the world’s richest nations in per capita income.
But thanks in large part to persistent neglect of its chronic trade deficits,
it dropped steadily in the world income league table over the years
to the point where it recently ranked lower than
such developing countries as Thailand, Syria, and Lithuania.
If the United States continues to neglect its own trade problems,
the moment of truth is likely to come in the form of a major dollar crisis.
In the event of another dollar crisis
similar in scale to the crisis it suffered in the early 1990s,
the American economy could be displaced almost overnight by Japan
as the world’s largest economy.
At this stage, about the only thing that is supporting the dollar is
a dogged determination by top Washington officials
to maintain a high exchange rate
through the end of President Bill Clinton’s term of office.
For now,
America’s main foreign trade partners seem to be cooperating in this objective,
but this does not alter the fundamental position that
continued current account deficits
will sooner or later precipitate a major dollar devaluation.
the longer the devaluation is postponed,
the more devastating it will be.

Clearly, therefore, the need for drastic policy changes is now urgent.
before the United States can implement realistic measures
to recover its lost manufacturing leadership,
it must first understand the full extent of its problems.
Unfortunately, a whole host of factors have hitherto hidden from Americans
the full seriousness of their predicament.
We have mentioned one of these factors already—free-market ideology,
hich, as we noted in chapter 1,
powerfully but spuriously supports
the postindustrialists’ confidence in the information economy
as a superior source of future wealth.
Many other factors are also at work,
and we will consider them in this chapter.

Section 8.1
“A frenzy of religious intensity”:
the press and postindustrialism

One of the key reasons the American people
are so complacent about America’s drift into deindustrialization is that
they have been badly blindsided by the American press.

Although the American press can generally claim
a proud record of objectivity and reliability
in its coverage of most types of news,
it is far from a neutral observer in the postindustrial debate.
Not only are press commentators
among the most extreme enthusiasts of postindustrialism but,
to the extent that they canvass other opinions and insights
on how the world economy works,
they tend to gravitate to like-minded sources in think tanks and academic life.

Perhaps we shouldn’t be too surprised by the press’s partisanship.
After all,
given that the press is a founder member of the information society,
its own vested interests are clearly at stake in the postindustrial debate.
Even though reporters rarely if ever
consciously take this into account in their coverage,
the fact remains that
they display a marked unconscious bias in favor of postindustrialism.

In any case, at a personal level press reporters have their own reasons
to feel good about the information revolution.
They have, for instance, benefited disproportionately from
the emergence of ubiquitous and user-friendly word-processing
in recent years.
Certainly few reporters who remember
the multiple retypings and messy handwritten changes of predigital journalism
would want to turn the clock back.

Another factor that favorably influences
journalists’ attitudes to the information economy
is the Internet.
Although, as we have seen, the Internet is generally still too shallow
to be of much value for serious business research
[That may have been true in 1999, but I doubt it is still true in 2010.],
it is a godsend for reporters and editors in, for instance,
checking routine facts.
At the click of a mouse, a reporter can turn up anything
from a government official’s middle initial
to a screen actor’s marital record.
For reporters who remember the old days
when they had to pore over faded clippings in a dusty news library,
conjuring up such information effortlessly out of the ether seems like magic.
We need hardly be surprised, therefore, that,
as the syndicated columnist Richard Harwood has noted,
the press’s hyping of the Internet has been indefatigable.

Essentially, as Kurt Andersen pointed out recently in the New Yorker,
journalists, in common with financial professionals,
have become profoundly computer-dependent.
He adds:
“What journalists and financial professionals haven’t understood ...
is that almost no one else finds computers and the Internet quite so essential.
[Well, I think that at least may have changed in the years since 1999.]
As a result of this improbable accident of history, ...
[information] technology now sits at the center of
a speculative frenzy of religious intensity.”

[Fingleton was in part reacting to and warning against
the stock-market excesses of the dot-com bubble.]

Even some of the world’s most influential media organizations
have clearly succumbed to this frenzy.
The Wall Street Journal and The Economist magazine
are notable cases in point.
Each betrays a consistently uncritical enthusiasm for postindustrialism
that clearly owes much to a doctrinally driven tendency to endorse
almost any new trend that emerges in America’s free-market economy.
Unfortunately, where doctrinal issues are at stake,
neither The Economist nor the Wall Street Journal
(at least in its editorial pages)
can be relied on to report contrary evidence accurately, let alone fairly.
The Economist’s attempts to understand the issues
are further distorted by the disadvantage of its British base.
Although the British economy
has been in relative decline since the mid-nineteenth century,
this does not stop The Economist
from presenting the United Kingdom as still
the world economy’s ultimate trend-setter.
Thus, just as the United Kingdom long ago
began exiting manufacturing for such postindustrial services as finance,
The Economist argues that
the United States should be following the Mother Country’s “lead.”

If the post industrial mania were limited to doctrinally driven publications
like The Economist and the Wall Street Journal,
it would be bad enough.
But unfortunately, the mania has now also gripped
other publications less noted for their doctrinal biases.
Take Fortune magazine.
Here is an institution that up to 1993
was so convinced of the pivotal importance of manufacturing
that it refused to include anything but manufacturing companies
in its famous Fortune 500 roll call.
In recent years, however,
Fortune has swung so violently to the opposite extreme
that it often seems to be an uncritical booster of all things postindustrial.
Fortune’s enthusiasm for postindustrialism
is notably apparent, for instance,
in a portentous list of “cool companies”
it has been publishing annually since 1993.
“Cool” in this case is intended to mean technologically exciting,
and the unmistakable subtext of Fortune’s cool company list is that
manufacturing is no longer cool.
The 1997 list was typical of the genre in that
not a single manufacturer was considered worth of inclusion.
All fifteen companies that did make the list
not only were postindustrial operations
but were almost laughably insignificant.
One of them, a sort of electronic clippings service called ideaMarket,
employed just eighteen people,
and most of the others were not much larger.
In aggregate, all fifteen companies employed a total of a mere 2,781—
in other words,
little more than the number of people IBM hired in a good month
in its days of manufacturing leadership
(when its contribution to America’s job base made it a truly cool company).

[The import of Fingleton’s reporting here is
the role the media played, by their relentless and uncritical cheerleading,
to driving the market capitalization of those dot-com com companies
to absurdly unjustifiable levels.]

If the press’s role were limited merely to
lionizing obscure, untried cyberspace startups,
things would be bad enough.
But the press has done
its readers’ understanding of the issues an even greater disservice in
its constant hyping of the American economy’s performance
in the deindustrializing 1990s.

By the latter half of the decade,
many press commentators had become so convinced that
the United States had undergone a full-scale economic renaissance
that they were talking as if American corporations had
“the world at their feet.”

At first sight,
the euphoria might seem to have been well justified given
corporate America’s health profits and Wall Street’s soaring stock prices.
But there was another side to the story
that clearly raised large questions about
whether the United States really had “the world at its feet.”
The point was, of course, that
the U.S. current account deficits
were more or less spiraling out of control.


to the extent that America’s manufactured imports
were coming largely from
such ultra-high-wage nations as Germany and Japan,
it was hard to see how “healthy and competitive”
the American economy truly was.

After all, the sense of American economic decline
that had been so much discussed in previous decades
was driven more than anything by
the perennially deteriorating trade position.
But to press commentators, the trade problems were merely a “quibble.”
Some quibble.
In the first seven years of the 1990s,
America’s current account deficits totaled $726G,
up 79 percent on the first seven years of the 1980s—
and this despite a massive devaluation of the dollar
that supposedly had wrought
a dramatic turnaround in American competitiveness
that would soon dispose of the deficits for good.

To the extent that commentators have focused at all on the U.S. trade problem,
they have tended to see it somehow as
evidence of America’s fundamental economic superiority. [!!!]
Their argument is that
the deficits stem from the fact that
a booming United States has been sucking in imports
from the “stagnant” economies of Europe and East Asia.

Just one of the many obvious problems with this argument, however, is that
more than one-quarter of America’s imports are coming from
nations were wages are actually higher than those of the United States.
This begs a historic question:
Why isn’t the United States capable of making such goods for itself?
Few press commentators have asked the question.
Even fewer have answered it.
The sad reality is that
after the rundown of so many once great American manufacturing industries
in the 1980s and 1990s,
the United States simply does not have the capacity anymore
to meet its consumers’ needs from its own manufacturing resources.

The press’s role in obscuring the extent to which
American manufacturers are failing to hack it in world markets
is compounded by
its portrayal of manufacturing as a consistently dull activity
worthy only of self-evident second-raters.

This explains why, as noted in Made in America,
a study published by the Massachusetts Institute of Technology in 1989,
manufacturing departments in corporate America
have come to be regarded as dead ends—
places “where you go and stay until you die.”
This contrasts sharply with the position of manufacturing in Japan,
where, as the MIT study reported,
“production has far greater stature [than in the United States]
and attracts some of the most qualified and competent
technical and management professionals.”

The American press’s tendency to belittle manufacturing
naturally colors its attitude to the world’s great manufacturing economies.
This is notably apparent in the case of Germany,
whose economic arrangements are constantly being slighted by
ill-informed American press commentators.
An article in Fortune in 1997 illustrates the pattern.
The magazine reported that
manufacturing accounts for 30 percent of jobs in Germany
versus just 16 percent in the United States.
Fortune commented that
this was “a sure sign” that German manufacturers were “seriously overstaffed.”
But were they?
For anyone who had eyes to see,
the real reason for Germany’s large manufacturing workforce was obvious:
Given that Germany exports nearly two-thirds of its manufactured output,
it clearly has a good excuse for employing a large manufacturing labor force.
Moreover, trade also helps explain
why the United States has such a small manufacturing labor force—
because, of course, the United States these days [late 1990s] relies on imports
for nearly one-third of all its consumption of manufactured goods.
One thing is certain:
With German wages running well above American levels as of the late 1990s,
Germany’s manufacturers did not become dominant players in export markets
by being “overstaffed.”

Press commentators also tend to be absurdly disparaging about
the manufacturing economies of East Asia.
In particular,
they tend to be patronizing about Japan’s key high-tech industries.
A notable case in point is computers,
a field in which Japan is consistently portrayed as an also-ran.
The only evidence adduced for this assertion is that
the Japanese do little exporting of desktop computers.
But this hardly means the Japanese are absent from the world computer market:
far from it.
The fact is that, as we have seen,
the Japanese are absolutely dominant in other areas of the computer industry—
areas that are invariably much more sophisticated than the desktop business.
The most important such area is components,
particularly the most miniaturized components.
A classic example of such components is the tiny laser diodes
that, as we pointed out in chapter 5,
play such an important enabling role in the Information Age.
Japan’s leadership in miniaturization is easy to overlook,
but the point is that, since the industry’s earliest days,
the key technological challenge in computers has always been
to get ever greater performance out of ever smaller components.
This is by no means an insignificant challenge.
To make things smaller requires not only
ever higher standards of purity in materials and accuracy in machining
but constant innovation in addressing problems like overheating
(which is a key concern in, for instance,
tiny friction-bearing parts of the sort used in CD-ROMs).
In essence, the superpowerful notebook computers
made by such Japanese giants as Toshiba, Fujitsu, and Hitachi
are the pinnacle of the computer industry’s fifty-year quest
to pack ever more performance into ever smaller packages.

The press’s uncomprehending attitude
to Japan’s extraordinary success in computer miniaturization
is part of a fashion for the business press
to dismiss many highly sophisticated manufactured products
as “commodities.”

The term is much used in reference to, for instance,
advanced electronic components that are made to industry-standard designs.
Typical of such components are liquid-crystal displays.
The key to success in such a product is
supreme manufacturing efficiency and consistently high quality.
Companies that fail to meet these tests have nowhere to hide.
The result is that the field of contenders
in such undifferentiated, “commodity” products
has thinned rapidly to a highly exclusive group of
massively capitalized, relentlessly hard-driven Japanese companies
like Toshiba, Hitachi, NEC, Sony, and Sharp.
These are the Wimbledon finalists of manufacturing—
companies whose production technology is so far advanced that,
even though they pay higher wages than their American counterparts,
they are little troubled by American competition.
In other words, they are a charmed circle.
Yet when the press refers to such companies’ products as “commodities,”
the implication is the diametric opposite—
that the fields concerned are wide open to competition from low-wage countries.
commodities is a weasel word that hides from the American reading public
how far ahead Japanese manufacturing companies truly are.

Of course,
if Japanese manufacturers are doing so much better than
their American counterparts,
this prompts an obvious question:
why has the Japanese economy been doing so badly in recent years?
Why indeed.
It is time to find out
what really happened to the Japanese economy in the 1990s.

Section 8.2
The enigma of Japanese economies:
it’s the surpluses, stupid!

One of the biggest factors encouraging Americans
to view postindustrialism complacently in recent years
has been the conviction that
the United States now stands gloriously unchallenged
as the world’s sole economic superpower.
It is all such a contrast with the 1980s,
when the United States was widely perceived as losing ground inexorably
to an ever burgeoning Japan.
To the postindustrialists, therefore, the logic would appear to be watertight: because in the 1990s a postindustrial United States
has “turned the tables” on Japan’s “machine age” economy,
there could hardly be a clearer demonstration of
the superiority of postindustrialism.

There is only one problem with this:
the United States has not turned the tables on Japan.
Far from it.
In the ways that matter most to policy makers on both sides of the Pacific,
Japan has continued to gain on the United States in the 1990s
and has done so precisely because
it has stayed the course in manufacturing.

But how can all this be reconciled with
the American press’s picture of Japan
as the worst-performing major economy of the 1990s?
It cannot, of course.
In reality
Western observers suffer major comprehension problems
in covering Japan’s highly counterintuitive economy—
problems that in recent years have consistently concealed
the Japanese economy’s enormous underlying strengths.

We’ll look at these comprehension problems in a minute [¶8.2.18 and ff.],
but first let’s be clear:
not everything has been coming up roses for the Japanese economy recently.
No economy fires on all cylinders all the time,
and certainly the Japanese economy
has had its share of problems in the 1990s.
The most obvious of these has, of course,
been the Tokyo stock market crash.
This began early in 1990 and was accompanied by an even-bigger—
if less publicized—
slump in the Tokyo real estate market.
The resulting knock-on effects have included
the impoverishment of much of Japan’s erstwhile free-spending speculator class,
not to mention the traumatic weakening of
Japan’s big banks and securities companies.

All this has led respected American economic commentators
to portray Japan as suffering
one of the worst slumps in world economic history.
Thus, by early 1999 Floyd Norris of the New York Times, for instance,
was writing:
“The histories of Japan in the 1990s and the United States in the 1930s
argue that bursting bubbles devastate economies.”

[How apposite!]

In reality, however, the idea that
Japan has been suffering a slump, let alone a 1930s-style Great Depression,
is absurd.
Of course, in some ways Japan’s performance in the 1990s
bears a passing resemblance to that of the United States in the 1930s.
But this resemblance is strictly limited to the financial sector,
which is just one relatively small part of a huge economy.
And even in the financial sector, the resemblance is hardly total:
for one thing, whereas about half of all American banks collapsed in the 1930s,
in Japan in the 1990s just one significant bank, Hokkaido Takushoku,
has gone out of business.
The truth is that,
thanks to exceptionally robust firewalls built into the Japanese economy,
the problems have been tightly contained within the financial sector
and most of the rest of the economy has come out of the 1990s
largely or totally unscathed.
Thus, whether judged by employment levels, exports, savings rates,
or a host of other crucial measures of economic health,
the contrast with Depression-era America could hardly be more startling.

Perhaps the most surprising case in point is living standards.
With the exception of a tiny minority of bankrupt speculators,
most Japanese citizens have been enjoying unprecedented affluence
in recent years.
Nearly 2.2 million more Japanese households now own a car, for instance,
than in the 1980s.
And in the case of those who already owned a car a decade ago,
most now own a much more powerful and comfortable model.
Japan’s executive class, for instance, has migrated en masse
to such toney limousines as the Toyota Celsior
(or Lexus, as it is known in the West)
that are a world apart from the antiquated Toyota Century
that was standard issue for the corporate elite just a decade ago.
Meanwhile, countless major road construction projects
have improved driving conditions throughout Japan.
Examples include such latter-day civil engineering miracles as
the Tokyo Bay undersea road tunnel and the Akashi suspension bridge,
both of which have set new world records for length.

The Japanese people’s increasing affluence in the 1990s
is also apparent in
the range and quality of their household electronic gadgetry.
Fully 33 percent of Japanese households
now boast at least one video camera, for instance,
up from just 16 percent in 1990.
And household ownership of personal computers has grown even faster.
There have been big increases also in the ownership
of everything from home fax machines and mobile telephones
to rooftop satellite dishes and digital versatile disk players.

On vacation, too, the Japanese people have never had it so good.
Fully 13M Japanese citizens vacationed abroad in 1996
(the last year for which figures were available at press time).
That represented an increase of a phenomenal 70 percent on 1989.
In a notably backhanded compliment to their spending power,
the Japanese have in many cases now displaced Americans as
the prime targets of the world tourist industry’s various tricks
for fleecing affluent foreigners.
Hotels in favorite Japanese vacationing spots
everywhere from Cairns in Australia to Mount Whistler in Canada, for instance,
now routinely charge special “Japan rates”
that are as much as 50 percent higher than
rates quoted to other tourists, including Americans.

Even in housing, a category in which as recently as the 1980s
Japan notoriously lagged behind other advanced nations,
Japanese citizens have been catching up fast:
whether they are buying or renting,
they now receive as much as 50 percent more space for their money
as a decade ago.
As a result, although jerry-build homes from the postwar reconstruction era
continue to mar Japan’s inner-city vistas,
Japan has drawn broadly level with nations like France and the United Kingdom
in overall housing standards.

Of course, none of this is to suggest that
the Japanese has achieved any kind of consumer nirvana.
Japan’s highly regulated economy
continues to suppress consumption in various ways
that clearly diminish the potential for the good life.
But the point is that
Japanese consumers saw probably as big a lifestyle improvement in the 1980s
as any other major nation—
and the ultimate symbol of that improvement, as we have already noted,
is that
Japan has now climbed to the top of the world life expectancy league table.

Underlying the improvement in living standards
has been another crucial strength
that belies Japan’s images as the “sick man” of the global economy—
its remarkably robust labor market.
In the face of unprecedented financial turmoil,
unemployment averaged less than 4 percent in the first eight years of the 1990s;
up to early 1999,
the highest it had gone at any stage in the decade was 4.4 percent. [!!]
Although this was certainly high by previous Japanese standards,
it was the ultimate rebuke to those who would suggest that
Japan has been suffering Great Depression-level problems.
Remember that the unemployment rate in the United States
reached as high as 25 percent for a time in the early 1930s.
[And neared 10 percent in 2010.]

All this helps explain
what is perhaps Japan’s most remarkable strength in the late 1990s—
its world-beating export industries.
Maintaining consistently high levels of employment through thick and thin
(and despite paying some of the world’s highest wages),
Japanese exporters have been achieving muscular increases in output
almost every year.
The result is that, as measured in dollars,
Japan’s total exports rose by a cumulative 53 percent
in the first eight years of the decade.
Adjusted for dollar inflation,
this represents real growth of more than 18 percent.
And all this was the more impressive for the fact that already a decade ago
Japan’s exports were so large that
they were considered to have unbalanced the world trading system.

Of course, it has to be admitted that compared to earlier decades
economic growth in Japan has been relatively slow in the 1990s.
Things could hardly be otherwise given that
most Japanese industries long ago competed their catch-up phase
and therefore no longer enjoy the benefit of
piggybacking on new production technologies pioneered elsewhere.
But even in the matter of economic growth,
the news has not been remotely as bad as most press commentators have implied.
Certainly the Japanese economy has had some poor years lately,
but it has also had some excellent ones,
the overall trend has been amazingly better than
readers of the American press have been led to believe.

In fact, as the Economic Policy Institute economists
John Schmitt and Lawrence Mishel have pointed out,
per capital gross domestic product actually grew faster in Japan
than in the supposedly booming United States

in the first eight years of the 1990s.
Moreover, Japan’s growth—at an average 2.1 percent a year—
looks even more impressive compared to that of most European nations.
It exceeded by nearly 50 percent the performance in the United Kingdom,
for instance—
and we need hardly add that no one has been suggesting that
the United Kingdom has been suffering a Great Depression in the 1990s.

That said,
Japan’s performance has been even better than these comparisons suggest.
For a start the foregoing figures measure gross domestic product (GDP),
whereas the most appropriate yardstick for a comparison of this sort
is gross national product (GNP):
the distinction is that GNP is a more comprehensive measure
that, unlike GDP,
takes account of debits and credits relating to cross-border investments.
As the United States has become an increasingly large net importer of capital
in recent years,
its GNP is actually now considerably less than its GDP.
By contrast, because Japan has long been a major net exporter of capital,
its GNP is considerably larger than its GDP.
How much of a difference does this make?
Unfortunately, we can’t be sure,
because both the United States and Japan switched to a GDP reporting basis
a decade ago.
But at a guess,
the distorting effect of GDP numbers makes the American economy
appear at least three percentage points larger relative to that of Japan
than it really is.

Various other adjustments are also necessary to conduct a fully fair comparison,
and most of these also favor the Japanese side.
For one thing, as the economist Dean Baker has pointed out,
U.S. national income figures have been inflated in recent years by
a significant element of double counting.
This arises from an explosion in the use of stock options
to remunerate both executives and rank-and-file employees.
Properly accounted for,
such options are a cost that should be deducted in calculating profits,
but few corporations actually do this.
The result is that American national income figures are bloated by
an increasingly large element of “funny money” in corporate profit statements.

All this helps explain an otherwise inexplicable aspect of the 1990s—
a persistent tendency for the yen to gain relative to the dollar.
[For reference, the approximate exchange rates were
1998: ¥120/$
2010: ¥80/$.

A particularly notable illustration of this pattern was in 1998,
when the yen gained a net 13 percent at a time when
the newspapers were outspokenly gloomy about
the state of the Japanese economy.
Of course, not too much should be read into any one year’s currency trend
(and 1998 was indeed, in most other respects, a bad year for Japan).
But with the yen gaining a net 24 percent between 1989 and 1998,
the long-term trend is clear—and highly troubling for the United States.
In this regard, it is worth remembering that, if other things are equal,
the strength of a nation’s currency is
the ultimate determinant of the size of its economy—
and the ultimate symbol of its economic health.
In the 1960s, President John F. Kennedy [35] felt so strongly about this that
he ranked dollar devaluation alongside nuclear war
as the two things he feared most!

Given the strength of all the evidence to the contrary,
we must wonder why the press has so consistently and outspokenly
portrayed the Japanese economy as a basket case in recent years.

In attempting to interpret Japanese economic affairs,
the main mistake the American press makes
is to see everything through
the simplistic logic of American-style laissez-faire.
The truth is that
the Japanese economic system is not based on laissez-faire
but rather is a much more complicated animal
whose inner workings require special knowledge to interpret.
In struggling to make sense of
the Japanese economy’s bewildering divergences
from American economic logic,
the American press is rather like someone
whose knowledge of board games is limited to checkers
but who nonetheless has been called upon to provide
a running commentary on a Grand Master chess match!

To be fair, it has to be noted that
the press’s comprehension problems
have been greatly exacerbated by the highly counterintuitive nature
of Japan’s international public relations strategy in recent years.
Basically the Japanese economic system’s leaders and spokesmen
speak and behave as if Japan’s economic situation
were much worse than it really is.
They evidently believe that
it is in Japan’s national interest not to appear too strong—
and certainly not to seem like a “threat”
to American influence in the world economy.
Their rationale is obvious:
so long as Japan is regarded abroad as
somehow an especially “dysfunctional” nation
whose economic victories are invariably Pyrrhic ones,
Western policy makers will continue to take
a patient and indulgent view of Japan’s controversial trade policies.
In this regard,
the Japanese learned an important lesson in the late 1980s when,
with the Tokyo stock market hitting new highs almost every day,
Western policy makers swung to the opposite extreme
and became momentarily highly alarmed at
what they saw as an all-conquering juggernaut.
This helped galvanize Western governments to demand
major reforms of Japan’s perennially controversial trade policies.

That said,
the idea that a nation would go out of its way to play down its economic strengths
seems so counterintuitive that it is hard for Westerners to credit.
Remember, though, that a strong modesty ethic pervades Japanese culture.
This makes it almost second nature
for the Japanese to cast themselves and their institutions
in a ritually negative light.
Another factor that helps sustain
the Japanese establishment’s downbeat slant on the news is that
Japanese economic leaders and institutions have little or no need
to court the admiration of anyone outside
the close circle of their immediate peers.

Perhaps the clearest indication of
the lengths to which Japanese leaders are prepared to go
to understate their economy’s true strengths
is the way they talk about the Japanese government’s budget.
All through the 1990s they have suggested that
the government has been running huge deficits—
deficits ostensibly intended to stimulate consumption,
particularly consumption of imported goods.
So successful have they been in this regard that
America’s most respected media organizations—
organizations of the caliber of the New York Times,
the Washington Post, and the Wall Street Journal
have fallen for the story.
Thus, year after year
Americans have been treated to a deluge of reports that
Japan was supposedly running huge government deficits.
In reality, as authoritative figures from the OECD demonstrate,
Japan was running huge government surpluses!
In 1995, for instance,
a year when the Wall Street Journal reported that
Japan was running a budgetary deficit of 2 percent,
the OECD found that the government achieved a budgetary surplus of 3.5 percent.
In fact, according to the OECD’s book OECD in Figures,
not only was Japan’s surplus one of the strongest of any OECD nation,
but Japan was the only major nation that had a budget surplus at all that year.
By comparison,
the United Kingdom, for instance, ran a deficit of 5.0 percent,
and America’s deficit was 2.2 percent.
Any full analysis of the Japanese economy’s performance in the 1990s
can produce dozens of other similar discrepancies
between an image of an apparently weak economy
and an underlying reality of enormous strength.

Another factor that contributes powerfully to
the American press’s comprehension problems in Japan
is the role played by securities analysts.
Many of them are, to say the least, not wholly reliable.
As the International Herald Tribune’s Hong Kong correspondent
Philip Bowring has pointed out,
many analysts quoted in the press
are clearly intent on winning business for their firms
or on gaining personal publicity for themselves
rather than enlightening the public.
This point has been echoed scathingly by the U.S. News writer and longtime Japan watcher William Holstein,
who has pointed out that many of the securities analysts the press has relied on
for its understanding of various problems in the Japanese financial system
actually had little or no knowledge of that system.
Referring to such analysts, he said:
“They build their careers by getting quoted.
Since inflammatory remarks get quoted, they say inflammatory things.
It doesn’t matter whether they’re right or wrong.
They don’t care.
Other rent-a-quote specialists aren’t even on the ground in Asia,
yet they also get quoted making the most sweeping Armageddon-like statements.”

One thing is certain: had the press checked,
it would have discovered that
most of the analysts it had been quoting so liberally over the years
have egregiously bad records in interpreting the Japanese economy.
Many of them were influential in creating the impression in the West that
the Japanese government was running budget deficits in the 1990s
when in fact it was the only major nation that was running surpluses.
Moreover, virtually none of the many prominent analysts
who lived in Tokyo in the bubble era
predicted the coming crash that began in January 1990—
or at least, they did not do so publicly.
Even in the last wild weeks of the bull market,
most analysts remained outspokenly bullish.
Strange as it now seems,
even the great [hmmm...] American credit rating agencies
continued to accord the Japanese banks ultra-high credit ratings
even as those banks’ wild lending was driving up Tokyo real estate prices
to stratospheric levels.
(This was the time when, at prevailing land values,
the Imperial Park in central Tokyo was supposed to be
worth more than the entire state of California!)
In justifying their bullishness,
American and British analysts in Tokyo repeated as a mantra that
“Japanese real estate prices never fall.”
With guides like this,
no wonder the press so often grasps the wrong end of the stick.

(To those who might accuse this present writer of
Monday morning quarterbacking,
he has a ready reply.
As a Tokyo-based banking writer in 1989, he argued that
the “sky-high stock market” was headed for “a disastrous accident”
that would lead to a “prolonged bear market.”
Earlier, in a seven-page article “Why the Japanese Banks Are Shaky,”
he had argued that the Tokyo real estate market
had been pumped up to “giddy heights of folly”
by hugely inflated bank lending and predicted an inexorable implosion
that would badly damage the banks’ balance sheets.
The article was one of the first
that forthrightly labeled Japan’s financial excesses of the late 1980s
a “bubble.”)

with their wildly bullish pronouncements to the press in the late 1980s,
the analysts played a crucial part in inflating the bubble.
Yet these same analysts had no compunction in turning around in the 1990s
and painting the state of the wider Japanese economy
in outlandishly dire terms.
All this helps explain some otherwise unbelievable aspects
of American reporting of Japan in the 1990s.
Even in years when the Japanese economy performed outstandingly well,
for instance,
the American press consistently presented it as troubled.
This was notably apparent in 1996,
when everyone from the Wall Street Journal
to the Christian Science Monitor
was dismissing the Japanese economy as “sluggish” or “stagnant”
or even “mired in a deep slump.”
In fact,
Japan’s growth rate that year, at 3.9 percent
was the best of any major economy and was significantly superior to
the rate of 2.8 percent recorded in the booming United States.

The press’s tendency to underestimate Japan
reached something of an all-time record in 1997,
the year of the East Asian financial crisis.
For many Americans, the most memorable moment of the crisis
was not the spectacular currency collapses in Thailand, Malaysia, and Korea,
but a piece of comparative trivia:
the demise of Japan’s Yamaichi Securities.
This made the main television news bulletins around the world
after a hysterical Yamaichi executive
tearfully appealed to other Japanese employers
to hire the firm’s laid-off employees.
Rarely has such a minor event had so much attention.
The distinctly limited significance of Yamaichi’s demise
can be gauged from the fact that
the firm employed fewer than eight thousand workers in Japan—
a drop in the ocean
in an economy of more than sixty-six million workers.
Moreover, the financial consequences of the collapse were minimal
given that both Yamaichi’s customers and its bankers came out entirely whole.
In any case, the demise of even a big securities firm
is hardly a devastating blow for a Japanese financial system in which
the securities industry has never been more than a fringe player.

One of the few commentators who saw through the absurdity of it all at the time
was William Holstein of U.S. News.
He commented:
“Here is the world’s second largest economy,
which commands $12 trillion or so in wealth,
and the media have created the impression that
the country is on the edge of breakdown.”

So how strong is the Japanese economy really?
This present writer has addressed this question before
in a book in 1995 entitled
Why Japan Is Still on Track to Overtake the United States by the Year 2000
From his vantage point in Tokyo,
he has seen little since then to undermine his confidence in his analysis.
Certainly he has been vindicated in his central point,
which was that Japan’s current account surpluses
would continue to soar in the latter half of the 1990s,
thus giving the lie to much talk in the American press in the mid-1990s
that Japan’s export industries would be disastrously hollowed out
by South Korea and other low-wage East Asian nations.
The soaring surpluses, which have stemmed in part from
a major rise in real terms in the dollar value of Japan’s exports
in the last decade
and in part from
dramatic falls in the prices of most of the commodities that Japan imports,
represent the culmination of
a century-long commitment by Japan to scientific mercantilism
as the key to national economic power.
While the jury is still out on whether,
on conventional measures of economic size,
Japan will pass the United States by 2000
(this prediction is based on the belief that
the yawning trade imbalances with the United States
will trigger another major dollar collapse),
the soaring surpluses mean that
Japan has now clearly surpassed the United States
in its external economic clout.
In this regard,
Japan’s savings performance is a crucial factor that
conventional commentators have overlooked.
Although experts like The Economist’s editor in chief, Bill Emmott,
predicted a decade ago that Japan’s savings rate would plunge in the 1990s,
the truth is that at last count Japan was producing $708G of new savings a year—
or nearly 60 percent more than America’s total of $443G.
Not only has this enabled Japanese industry
to invest nearly twice as much per worker as the United States in the 1990s,
but it has meant that Japan has now decisively surpassed the United States
as the world’s main source of capital.
In short,
Japan is now exporting more capital in real terms
than any nation since
America’s greatest days of economic leadership in the 1950s.
Overlooked by the American press,
the results are starkly apparent in IMF financial statistics,
which show that Japan’s net external assets jumped from $294G to $891G
in the first seven years of the 1990s.
By contrast,
America’s net external liabilities ballooned from $71G to $831G.

In the long run, this changing balance of financial power
will be just about the only thing that historians will remember
about U.S.-Japan economic rivalry in the 1990s—
but it was the only thing that Western observers utterly overlooked at the time.

Note that Fingleton does not even mention the subject of
Japanese deflation in the 1990s,
as shown by this 2010 graphic from the New York Times.

Section 8.3
America’s manufacturing comeback:
a myth is born

[This section is omitted.]

Section 8.4
American high-tech:
back at the leading edge?

For many Washington policy makers,
disappointments in steel and autos ultimately don’t matter very much
so long as the United States retains a decisive lead in
more advanced manufacturing industries.
So how is the United States doing in such industries?
On the face of it, very well—
and its apparent success has been crucial in quelling concerns about
the precipitate decline in
the overall size of America’s manufacturing workforce in the 1980s and 1990s.
Unfortunately, however, this success is largely illusory.
The reality is that, though American high-tech brand names
are more visible than ever in the world’s stores,
the companies that stand behind these brand names are, in manufacturing terms,
a mere shadow of their former selves.
As America’s high-tech manufacturers have “restructured” in recent years,
they have come to depend more and more on outsourcing from East Asian rivals
for their most sophisticated manufacturing processes.

A particularly significant point about corporate America’s outsourcing is that
much of it is done in ultra-high-wage Japan.
Other things equal,
when a lower-wage nation imports a product from a higher-wage one,
we can reasonably assume that the manufacturing technology concerned
is one in which the importing country is lacking.

Americans got used to the idea of such outsourcing in the 1970s and early 1980s
when Japanese wages were still low by American standards.
American corporations could justify outsourcing from Japan
on the basis that they were relying on the Japanese
merely for low-level, labor-intensive workmanship,
thereby, in theory at least,
freeing American workers to specialize in higher-level work.
These days, however,
with Japanese wages so much higher than American levels,
American corporations that import from Japan are effectively admitting
they lag behind in the technology race.

The outsourcing trend has become something of an embarrassment
at many major American manufacturing companies these days.
So much so that journalists who ask questions about such issues
either are unceremoniously rebuffed
or at best are fed a diet of highly misleading half-truths.

Of course, when a company outsources its production,
this does not necessarily imply that it is outsourcing from abroad.
[It might, say, be from another American company.]
But as a practical matter, when American manufacturers outsource,
they do so largely from East Asia.
Such supposedly strong American manufacturers
as Hewlett-Packard and Compaq
depend on East Asian rivals
not only for crucial components
but for entire manufacturing functions.

For a more complete view of
the extent to which major American high-tech corporations
have become dependent on outsourcing in recent years,
it is useful to check American corporate disclosure documents
filed with the Securities and Exchange Commission.
In making these filings, corporations are under some pressure
to acknowledge their dependence on foreign suppliers.
Among other things,
failure to do so may later expose them to expensive, class-action lawsuits
from disgruntled shareholders complaining of being blindsided by,
for instance, currency-driven cost increases.

These SEC filings often contain
surprising admissions of dependence on foreign suppliers—
albeit admissions that have consistently been overlooked by
American media commentators
toasting corporate America’s high-tech “supremacy.”
Take, for instance, this disclosure from Hewlett-Packard in 1997:
“Portions of the company’s manufacturing operations are dependent on
the ability of significant suppliers to deliver completed products,
integral subassemblies, and components
in time to meet critical distribution and manufacturing schedules.
The failure of suppliers to deliver
these products, subassemblies, and components in a timely manner
may adversely affect the company’s operating results
until alternate sourcing could be developed.”
Elsewhere Hewlett-Packard disclosed:
“For many of its products,
the company has existing alternative sources of supply,
or such sources are readily available.”
This statement sounds reassuring,
but in fact it is a lawyer’s way of putting shareholders on notice
that in the case of many other products,
the company does not have any alternate sources of supply—and thus,
Hewlett-Packard is effectively dependent on single suppliers
for what are crucial enabling components
without which it would be out of business.

Another major American high-tech manufacturer
that is surprisingly dependent on foreign suppliers is
the leading maker of semiconductor manufacturing equipment,
Applied Materials.
In SEC filings in 1996, Applied Materials disclosed:
The company’s manufacturing activities consist primarily of
assembling various commercial and proprietary components
into finished systems,
principally in the United States,
with additional operations in England, Japan, Korea, and Taiwan.
Production requires some raw materials
and a wide variety of mechanical and electrical components,
which are manufactured to the company’s specifications.
Multiple commercial sources are available for most components ....
There have been no significant delays
in receiving components from sole source suppliers;
however, the unavailability of any of these components could disrupt
scheduled deliveries to customers.

Many other examples could be cited
of how other key American high-tech manufacturers depend on foreign suppliers
for their most sophisticated components.

But surely the United States has scored some real successes
in high-tech manufacturing in the 1990s?
Yes—but far fewer than even most experts realize.
Perhaps the strongest remaining American high-tech manufacturer is Boeing.
But even Boeing is doing less well than it used to.
Quite apart from facing competition from the European Airbus consortium,
Boeing has been under considerable pressure from foreign governments to transfer jobs abroad, and it has duly done so.
As William Greider has pointed out in his book One World, Ready or Not,
30 percent of the components used in Boeing’s 777 jet are made abroad.
By comparison in the 1960s,
Boeing imported only 2 percent of its components.
Thus, Boeing, like other erstwhile world-beating American manufacturers,
is rapidly becoming a “virtual corporation”
ever more dependent on suppliers in Japan and elsewhere abroad
for its most advanced manufacturing needs.

despite all the talk of a renaissance in the American semiconductor industry,
there is actually only one truly strong America semiconductor manufacturer left: Intel.
Intel’s success says little if anything about its manufacturing prowess.
In fact, the company’s twenty-four-fold growth in the fifteen years to 1997
has been driven
not by any fundamental efficiency edge in production engineering
but rather by
the company’s near-monopolistic franchise in producing microprocessors
for the dominant “Wintel” standard in personal computers.

In any case, Intel is just one company—
and judged by the all-important criterion of jobs,
not a particularly large one.
At last count it employed sixty-seven thousand people worldwide—
little more than one-sixth of IBM’s peak workforce in the mid-1980s
before its domination of the computer industry collapsed
under pressure from the rising Wintel standard.
Moreover, Intel is not as advanced as it appears.
In fact, its Wintel chips are based on an aging technology known as CISC
(complex instruction set computing).
In the last decade, CISC has been superseded by a technology called RISC
(reduced instruction set computing).
RISC chips, which are noted for their use in such high-performance computers
as Sun Microsystems’ network servers,
are made mainly in Japan.

Intel apart,
there are few other semiconductor manufacturers left in the United States.
This may seem surprising in view of the fact that,
according to such prophets of America’s purported industrial renaissance
as Jerry Jasinowski,
the United States has now recovered strong leadership in semiconductors.
He has reported that
American semiconductor makers boosted their global market share
from 40 percent in 1988
to 44 percent in 1993,
and this supposedly
has put the United States back in the “top spot” in the industry.
After the big decline in America’s share in the first half of the 1980s,
all this seems like convincing evidence of a comeback.
But the truth is that his 44 percent figure is bogus.
It is based on highly misleading statistical procedures
that categorize most chips outsourced by American companies
from factories in East Asia and elsewhere
as “American”!
The only justification for this bizarre statistical treatment is that
most such chips are made to American designs and bear American brand names.
But that hardly means they are made in America.
Even Dataquest, an information-industry consulting firm
that is the ultimate source of data on world semiconductor production,
compiles its statistics on this basis.

Given the prevalence of such misleading statistics,
how do we gauge the true state of American competitiveness?
Again, there is no substitute for international trade figures.
These indicate that
the United States ran a deficit of more that $3G with Japan alone
in semiconductors in 1997.
Given Japan’s higher wage levels, therefore,
it is clear that the idea that the United States
has recovered world leadership in semiconductors
is just another myth.

It has to be noted that many American executives think that
it no longer matters that the United States imports most of its semiconductors
so long as American companies do their chip design work in the United States.
From the point of view of corporations
intent on boosting their short-term profits,
this argument no doubt makes sense.
But from the point of view of the overall American national interest,
things look quite different.
The basic problem is this:
product development as practiced in the United States these days
has become a postindustrial function.
As such, it is burdened with all the usual drawbacks of postindustrialism.

For a start, it comes up short on jobs:
product development creates jobs mainly for
a narrow elite of university-educated workers—
the same sort of workers who are favored by
most other postindustrial businesses.

Moreover, in the long run outsourcing works to the disadvantage even of
American semiconductor companies’ shareholders.
The point is that by abandoning its manufacturing activities
the American semiconductor industry loses all hope of
establishing a lasting lead over foreign competitors.
After all, American designs can be easily reverse-engineered,
and as a matter of fact
America’s best chip designs are often imitated in East Asia
within weeks of their launch.
Certainly they prove a far less enduring asset for a nation than
proprietary manufacturing know-how.
Thus, companies that lead in product development must keep innovating
merely to stay in the game,
and unlike great manufacturing companies,
they never get a chance to build up
a reservoir of deep proprietary production knowledge
that can see them through bad times.

At the end of the day,
when American high-tech companies are lauded in the press as world leaders,
what is being extolled is not solid manufacturing know-how but rather
much less enduring postindustrial strengths.

Section 8.5
The last illusion:
uniquely inventive American manufacturing

We have already had much to say about
the myth of superior American creativity.
One further point needs to be added.
Even among American policy makers who understand
how hollowed out American manufacturing has already become,
the creativity myth has had a powerful tranquilizing effect.
Such policy makers reassure themselves that
a relative lack of creativity will ensure that
other nations’ manufacturers, and particularly those of Japan,
cannot independently race very far ahead of their American counterparts.
Such policy makers therefore take it for granted that
by dint of superior American creativity,
the United States can easily get back into advanced manufacturing
anytime it chooses.

But just as it is a myth that other nations
lack the necessary creativity to succeed in postindustrial services,
equally it is a myth that they cannot innovate in manufacturing.
The ability of the Japanese in particular
to pioneer new areas of advanced manufacturing
should not be underestimated.
As the British management commentator Robert Heller has pointed out,
anyone who looks closely at Japanese products immediately sees that
they display a high degree of creativity in producing design.

The idea that
the Japanese lack the ability to make independent innovations in manufacturing
is also strongly rejected by
the Clinton [42] administration adviser Ira Magaziner,
who is a noted authority on Japanese manufacturing.
Commentating on one American manufacturer’s characterization of Japan
as a nation of copyists,
Magaziner has said:
This was a common refrain in the early 1980s.
Many U.S. businessmen, policy officials, and media analysts saw
our entrepreneurial small companies as untouchable by the Japanese.
There were many pseudo-psychologists of Japan with themes about
why Japan’s collectivist culture did not allow for
the creativity and freedom necessary for invention and entrepreneurship.
These arguments have proven baseless
as Japanese companies have shown themselves quite capable of
pioneering new technologies and products.

The proof of this is already abundantly apparent in the marketplace.
The world’s electronics stores in particular are now full of
products that were developed largely or totally in Japan.
These notably include
the Walkman, the Handycam, the liquid-crystal display,
the digital camera, the home videotape recorder, the compact disk player,
the laptop computer, and the cellular phone.

In truth,
as the MIT Commission on Industrial Productivity pointed out some years ago,
the argument about superior American creativity in advanced manufacturing
is an ironic one given the historical record.
For this is not the first time that a flagging industrial power
has imagined that the allegedly superior creativity of its people
can arrest its relative decline.
In the early part of the twentieth century,
the United Kingdom and other European nations consoled themselves
with similar arguments
in the face of rising American manufacturing might.
Up to World War II,
Europe regarded itself as the fountain head of world creativity,
and it talked about
American manufacturers’ efforts to commercialize European inventions
in the same condescending tones
that many Americans now reserve for the Japanese.

Amusingly, the ultimate authority on the human psyche, Sigmund Freud,
seems to have concurred with
the Europeans’ assessment of Americans as copyists.
In an interview in 1930, Freud said:
“Americans are clever generalizers.
They are rarely creative thinkers.”
Of course, Freud was wrong, and after World War II
this became obvious as Americans,
leveraging their new advantage in abundant funding,
took the lead in many prestigious areas of science, technology, and medicine
that had previously been dominated by the Europeans.

[In fairness, it must be acknowledged that
the forced migration of Jews from Europe, fleeing the Nazis,
greatly changed the European/American balance in many intellectual disciplines,
to America’s advantage.
That said, it must also be noted that America was hardly impotent in
various areas of invention and innovation,
as a host of practical inventions were discovered by American inventors
even before the Jewish emigration.]

Creativity, like beauty, is in the eye of the beholder.
While few today would accuse Americans of lacking creativity,
the idea that there is something uniquely creative about American culture
is not a bankable proposition.
Rather, it is a dangerous illusion.

So much for the myth of superior American manufacturing creativity.
Having disposed of this last excuse for procrastination,
we emphasize that drastic action is now urgently necessary.
Let’s now proceed to a look at
what realistic policy options are open to American leaders
in their efforts decisively to reverse
the deindustrialization record of the last three decades.

Chapter 9
An Action Plan

[Note: This final chapter is not divided into sections, only paragraphs.]

What should American policy makers do to reverse the postindustrial trend?
Any effective strategy would have to be drastic.
But in the basic principles, it would be quite simple:
  • Boost the nation’s savings.
  • Channel a larger proportion of those savings into industrial investment, particularly productivity enhancing production engineering.
  • Ensure that manufacturers earn a reasonable return on their investment.
  • Upgrade worker’s skills.
  • Stem the leakage of world-beating production technologies abroad.

Setting aside for a moment the task of raising the savings rate,
many practical measures are available
to facilitate most of the rest of this agenda.
Tax incentive, for instance, can be readily devised to ensure that
as much as possible of the nation’s savings is channeled into manufacturing.
The quality of management in manufacturing industries
can be bolstered by ensuring that
the nation’s educational system
places a stronger emphasis on technical subjects.
Such a focus would help attract
more of the nation’s best brains into engineering,
and particularly production engineering.

Concomitant measures would be needed to lessen the counterattractions of
careers in finance and other postindustrial services
whose compensation levels are now disproportionately high.
[Again, this was published in 1999;
the finance industry has only inflated its compensation levels ever more astronomically in the ensuing years.]

The securities industries size, for instance, could be drastically curtailed by imposing a transaction tax of, say, 0.5 percent on stock trades.
[Which would also, of course, help with deficit reduction.]

To deliver an adequate return on manufacturing investment,
the United States would have to make sure—really sure—
that its exporters competed in world trade
on terms at least as favorable as those enjoyed by their foreign rivals.
As a first step, the United States would have to dramatically beef up
its notably half-hearted trade diplomacy.
It might also be necessary to relax antitrust rules
to ensure that the nation’s manufacturers could agree on product standards
and avoid wasteful duplication of effort
by cooperating in research and development.

All this would undoubtedly boost the profitability of manufacturing industries.

higher profits are not enough.
If U.S. competiveness is to be boosted,
profits must be plowed back into raising worker productivity,
rather than siphoned off in
large compensation packages for a wealthy elite.

Among other things, executive stock options would have to be reengineered
to force managers to focus on boosting their corporations’ long-term prospects.
Managers might be required as a general principle
to be vested for a minimum of, say, seven years
before they could cash in their stock-option gains.
Moreover, they would forfeit their options completely
in any vesting period in which they laid off American workers.
This would powerfully focus management’s attention on
providing workers with secure jobs—
a task that requires managers to think long-term
in investing both in new production facilities and
in research and development.
In a regimen in which managers were punished personally for laying off workers, companies would be much more concerned with
bolstering the quality of jobs at home;
they would have a strong incentive, for instance,
not to transfer their most advanced technologies
and their most capital-intensive manufacturing processes overseas.
The new corporate orientation toward the long term could be further bolstered by
financial regulation giving long-term investors more say in corporate affairs,
while frustrating the destabilizing activities of
short term-minded takeover artists and stock market speculators.

So far, so good.
But we are left with the fundamental problem that
the U.S. savings rate is far too low.
How can the American people be induced to save more?
Many remedies have been tried over the years,
but almost invariably they have only seemed to make the problem worse.
[Let me suggest one:
Tax consumption, not production.
Retain income taxes only on the highest wage earners, for progressitivity.]

This is not to suggest that effective methods to raise a nation’s savings rate
do not exist.
The whole history of the East Asian economic miracle demonstrates otherwise.
Even in Singapore, one of the freest societies in the East,
the savings rate was successfully boosted by a system of broad savings
instituted by Lee Kuan Yew shortly after the city-state won independence.

The problem, of course, is that the United States is not Singapore.
Any attempt to impose a Singapore-style savings program on Americans
would undoubtedly spark a political firestorm.
[Americans might want to ponder on what that says about them.]

the task of reviving U.S. manufacturing prowess
is of vital historic importance
and clearly demands exceptional measures.
By a process of elimination, only one policy option remains to be considered—
an option that has so far been regarded as second only to nuclear war
in unthinkability.
That option is tariffs.
Even the mention of the word generates a frisson of fear and loathing
among today’s policy makers.
That is understandable.
After all, many of them experienced at firsthand
the unforgettable One World optimism of the Flower Power era,
and like most decent people,
they would like to believe that
the world is ready for the close economic and political integration
that global free trade implies.
But after nearly fourteen years studying East-West relations
from a vantage point in Tokyo,
this writer has no illusions about
the practical difficulties that face Western leaders who want to
“teach the world to sing in perfect harmony.”
Certainly in the absence of major breakthroughs in trade diplomacy
in the very near future,
the tariff option must be included in any serious consideration of
how U.S. manufacturing prowess can be revived.

American manufacturers will be condemned
to a perpetually unequal struggle
in trying to compete with foreign manufacturers
that enjoy the enormous advantage of a protected home market.

Let’s be clear:
As Patrick Buchanan has extensively documented in The Great Betrayal
[published 1998],
the poor image that tariffs suffer in the current American economic debate
is largely undeserved.
Their image problems stems almost entirely from
the allegedly major part they played in causing the Great Depression.
In reality, however, they played a minor role in that disaster
and were much less significant certainly than
the general mismanagement of domestic demand
in the United States and elsewhere
in those years.
In any case,
to judge tariffs by referring to Depression-era experience with them
is hardly more appropriate than
to judge luxury liners by the unfortunate fate of the Titanic.

For any sane consideration of tariffs,
the appropriate reference point is not the Hoover [31] years
but rather the Eisenhower [34] years.
Eisenhower’s time, after all, was one of unprecedented prosperity,
not only for the United States but for most of the rest of the world.
Accompanied by supporting policies,
such as careful demand management and fair regulation of financial markets,
tariffs clearly played a major role in providing
the economic stability needed
for manufacturing industries to thrive.

The great advantage of tariffs is that

they powerfully counter the effect of
other nations’ industrial policies
in undermining the profitability of
American manufacturing industries.

Competing with one another behind a modest but adequate wall of tariffs,
American companies would be provided with
a generally appropriate level of profitability.
They would reinvest those profits in the confident knowledge that,
if they managed their businesses wisely,
they would earn a fair return in the future.
Tariffs could go a long way toward endrunning
the savings shortages and poor returns on investment
that have discouraged so many American manufacturers
from creating the world-beating production technologies
that the American worker needs to stay at
the leading edge in world productivity.

Of course, tariffs, like most economic tools,
generate minuses as well as pluses.
Certainly compared to a world of perfect free trade,
they result in a less than optimum distribution of global industrial capacity.
But for an economy as large as that of the United States
(or for a large trading bloc, such as the European Union),
the disadvantages involved in
maintaining some firewalls against the vagaries of globalization
are quite minor.
In any case,
absolute economic efficiency is by no means the only consideration here.
It hardly ever is in real life.
[As opposed to our Jew-controlled media and, of course, to the economists.]
Remember that if economic efficiency were the only concern,
most of our economic arrangements would be very different.
Families would live in commune-style accommodation, for instance,
rather than in self-contained one-family housing units.
Just as people do not consider simply crude economic efficiency
and are prepared to pay a bit extra for
their own private bathrooms, kitchens, laundry facilities, and so on,
it is reasonable for a major economy
to waive the dictates of crude economic efficiency in ensuring that
it is self-reliant in at least
the most important of its fundamental manufacturing needs.
Essentially the point here is that good fences make good neighbors.

The need to build firewalls against the worst excesses of globalization
may not enter into economists’ equations,
but it is a real enough consideration nonetheless
for anyone who has a wider concern for the human condition.
Globalization might work if all the world’s people
shared substantially the same cultural values.
In reality, however,
as anyone who has actually lived for an extended period
in, for instance, East Asia, can testify,
we are still an awfully long way from such a prospect.
Those who might think otherwise have been misled by
the much publicized Westernization
that has become apparent in many non-Western nations around the world
in recent decades.
But this Westernization is typically highly superficial.
Certainly the fact that people eat McDonald’s hamburgers and drink Coca-Cola
is no guarantee that they share an American attitude to economics or politics.
[Again, this was published in 1999, before 2001-09-11.]
Absent carefully thought-through safeguards, therefore,
any attempt to mesh diverse cultures together is likely to end in tears.
[What a shame America’s reigning opinion leaders don’t get that.]

Of course, any talk of a pulling back from globalization
is likely to appall the American financial elite.
And here we come to the nub of the problem:
So long as the current economic fashion for laissez-faire
holds sway in elite circles,
any serious attempt to map out
a detailed program to revive American manufacturing
would be a waste of words.

The fundamental question is not how to craft a workable program, therefore,
but rather how to slay the prevailing zeitgeist.

Encouragingly, the zeitgeist has already been coming under increasing attack
from many quarters around the world in recent years.
In the United States the charge against the excesses of laissez-faire
has been led by such notable thinkers as
James Fallows, Lester Thurow, William Wolman,
Clyde Prestowitz, Chalmers Johnson, Bennett Harrison, Patrick Buchanan,
George Soros, John Judis, Robert Kuttner, and Barry Bluestone.
[And Pat Choate.]
Even in the United Kingdom, that ultimate font of postindustrial choplogic,
laissez-faire is coming under increasing vigorous attack from such authors as
Will Hutton and Paul Ormerod.
That said, it has to be admitted that on both sides of the Atlantic
the dogmatists still reign supreme.
In fact, they have survived a well-deserved measure of opprobrium
in the immediate aftermath of the Reagan-Thatcher era
to come back in arguably even more potent form than ever in the late 1990s
[not to mention the early 2000s!].

In any effort to beat back the dogmatists and vested interests,
the media can and should play a pivotal role.
After all, the media profoundly shape the intellectual climate in which
politicians must compete for votes.
The editors of the world’s leading newspapers should be leading from the front
in questioning the obvious contradictions in the prevailing dogma.
[You wish!]

So far, however, they have generally shrunk from the task,
no doubt in part because they are intimidated by
the economics profession’s pretensions to scientific certainty.
But in truth they have no reason to be intimidated.
Although academic economists delight in
cloaking their work in abstruse mathematics,
the truth is that real-world policy making rarely demands anything
much more abstruse than simple arithmetic.
[Well, a little algebra and statistics wouldn’t hurt.]
The advanced mathematical tools used by the “experts” [His quotation marks!]
are useful merely in analyzing highly theoretical models that assume away
the imperfection and complexity of the real world.
By contrast, analyzing the real world generally requires little more than common sense.
As John Kenneth Galbraith has pointed out,
economists have yet to come up with any worthwhile practical insights
that cannot be explained in plain English.
Far from hiding important truths,
the economics profession’s cloak of mathematical abstruseness
merely camouflages the worthlessness of its insights
in guiding practical policy making.

Another reason the media shrink from challenging the zeitgeist is that
laissez-faire’s claims to be the one true faith
have been consistently validated by the way the Nobel Prize for economics
has been conferred over the years.
Most of the prize’s recipients have been
dyed-in-the-wool advocates of laissez-faire.
This naturally has given the impression that
there is a general consensus among the world’s intellectual leaders that
laissez-faire is the only valid form of economics.
The truth could hardly be more different.
In reality,
as Business Week’s economics editor, Michael Mandel, has pointed out,
the world of academic economics is a seething mass of controversy in which
there is virtually no consensus on anything anymore.
Thus, the laissez-faire zealots who have won the Nobel Prize
represent just one faction in a dysfunctional and demoralized profession,
and their thinking is fiercely contested by others in the profession.

The great irony is that the laissez-faire bias in the awarding of the prize
seems to represent nothing more significant than
he views of the Stockholm-based Sveriges Riksbank.
Known in English as the Bank of Sweden,
it administers the Nobel Prize in economics.
The pattern it follows in conferring the prize
faithfully reflects the tendency of the Stockholm financial elite
to seek laissez-faire solutions to Sweden’s economic problems in recent years.

One thing is certain:
The world needs no lessons in economics from present-day Stockholm.
In fact,
Sweden’s recent history has been an object lesson in how not to run an economy.
Since the 1970s [at least to the date of this book, 1999]
Swedish economic policy making
has been increasingly shaped by laissez-faire thinking,
and the result has been a consistently disappointing economic performance.
Between 1970 and 1997, Sweden’s per capita income in current dollars
rose a mere sixfold—
the poorest performance of any advanced economy with the exception of
the United States and Canada.
Its recent history contrasts starkly with the early years after World War II,
when Sweden ran one of the most avowedly interventionist economies
in the Western world.
The formula included a powerful labor movement, a government-dominated savings system, high taxes, price controls,
and a close partnership between big business and government.
The result was one of the strongest and richest post-war economies:
Sweden boosted its real output by two-thirds in just
the first fifteen years after World War II.

[One might wonder how much that has to do with the fact that
one of its largest competitors, Germany, had much of its industry destroyed in WWII.]

Disastrous though
the Swedish economy’s encounter with laissez-faire economic dogma
may have proved,
the Bank of Sweden’s baleful orthodoxy
has profoundly influenced the world’s universities,
particularly those of the United States,
which vie fiercely to win as many Nobel Prizes as possible.
The result is that college administrators increasingly select for advancement
those economics scholars whose views are most likely to please
the Bank of Sweden and its right-leaning committees.

That the Bank of Sweden’s unfortunate influence on American economic thought
has been almost completely overlooked in media discussions
speaks volumes about the seriousness—or rather, lack of seriousness—
with which the editors of the great American media organizations
take their responsibilities to cover economics.
The task for the media is clear:
They must move firmly to hold the economics profession as accountable
as they would other key players in public life.
Although American reporters delight in setting traps for politicians
and disgracing them over essentially irrelevant aspects of their private lives
[This was written shortly after the Clinton scandals.],
they have rarely done any reality checking on
the economics profession’s very public—and generally counterproductive—role
in shaping the nation’s destiny.

A first step on the road to
more reliable and searching media coverage of economics would be
for top editors to take direct responsibility for that coverage
rather than delegating it to their business sections.
They should hire an entirely new cadre of top economic writers
who are free from the institutional biases of the business sections.
Chosen from the cream of the intellectual crop,
such writers would be well versed in the principles of standard economics—
and well versed also in deflating
those ivory-tower theorists who present standard economics
as a set of sacred truths.

By contrast,
the current practice of delegating economic coverage to business reporters
is a recipe for bias and misinformation.
Business reporters are too close to their Wall Street sources,
and they almost automatically identify with the Wall Street view,
which happens to be an especially deadly formulation of the prevailing dogma.
When reporters from
the New York Times, the Washington Post, and other key media organizations
call Wall Street analysts to put the latest economic developments “in context,”
the result is often pure spin.

[I am certainly not an expert on this.
But I am not sure Fingleton has the exactly right solution here.]

Business reporters generally share the stock analysts’ kneejerk tendency
to identify exclusively with the interests of capital
and are therefore implicitly or explicitly hostile to
the much more economically significant interests of labor.
Wall Street may be forgiven for focusing tightly on
maximizing its own narrow interests,
but the press is supposed to be bound by higher ideals.
It is obligated to see the larger picture—
and in particular to recognize the obvious truth that
a nation cannot be rich if its workers are poor.
This truth gets short shrift on Wall Street,
which cares not at all
if American workers lose their edge in the productivity league tables
as America’s most valuable production technologies are transferred abroad.
The only criterion that matters on Wall Street
is whether such transfers will pay off
in boosting a corporation’s short-term profits.
But it is the press’s job to keep an eye on the longer term
and to stand up for the interests of the community as a whole.

[One might also interpolate the roles of
our elite universities and their business schools here,
and the extent to which they did or did not
place the interest of the American nation foremost in their research and educational activities.]

The press’s reliance on Wall Street for economic insights also introduces into its reportage an irrational bias against regulation.
In any discussion of the need for regulatory action
to correct the undesirable economic tendencies innate to extreme laissez-faire,
Wall Street has a huge vested interest to protect:
not to put too fine a point on it,
but the more relaxed the regulatory backdrop in finance,
the easier it is for financial professionals to feather their own nests
at the expense of the nation’s savers.
Wall Street analysts thus naturally tend to be
unsympathetic toward regulation in all its forms.
But again, it is the press’s job to see things in a wider focus,
and in particular to look out for the national interest.

[Frankly, I think the only nation whose interests
Fred Hiatt and Jackson Diehl are interested in advancing
is the Jewish one.]

The truth is that, for all the glib talk of globalism in recent years,
the peoples of the world still find group strength in their national identities.
We pay our taxes to the nation, for instance, and it is, for the most part,
from the nation that we draw our social security and other benefits.
Moreover, when it comes to helping the sick and the old,
it is entirely natural for us to think that charity begins at home.
Even in the age of globalism, the nation assuredly still counts.

The irony of the global view of economics that underpins laissez-faire
is its assumption that
other nations are prepared to abandon all national concerns
and behave as true globalists in managing their economies.
It should be obvious that this is a utopian reading of human nature.
In fact, in most parts of the world people are still very concerned about
their own nation’s relative position in the world economy.
This is true even of the United States,
where globalism has gone much further than almost anywhere else.
There is probably hardly a single American who does not yearn for
a return to the halcyon years of
the Eisenhower [34] and Kennedy [35] presidencies,
when American manufacturers paid the highest wages in the world
yet nonetheless almost effortlessly dominated world markets.
Such concern for one’s nation’s economic standing in the world
is quite natural and, within reason, a good thing;
it is really just community spirit writ large.

The final question is one of balance.
On the one hand, one’s nation should strive to cooperate
to make this planet a better place;
on the other hand, it should stand up for its own citizens’ interests
when these are at stake.
Striking the correct balance is a matter of common sense, not dogma.
It is time our media led the search for
a better way to balance these interests.

[End of book.]

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