Friday, December 16, 2016

A lesson from abroad for creating American jobs

The presidential election exposed deep and painful rifts in the U.S. economy.
One underlying concern is the future of U.S. jobs, millions of which have been lost in recent decades, and not just in manufacturing, where more than 5 million jobs have been shed since 2000, but also in financial services, technology, energy, publishing and other sectors. Not only has Archie Bunker lost his footing, so too have his college-educated son-in-law Meathead and subsequent generations.
Many voters affected by these trends have focused their anger on “foreigners” at home and abroad. To dismiss this anger as bigoted or misinformed, however, misses the point. What is needed now is a strategic path forward that enables U.S. workers to compete effectively in global labor markets.

To start, we need to revisit a core tenet of free trade policies like the North American Free Trade Agreement (NAFTA) and Trans-Pacific Partnership (TPP). This tenet is comparative advantage. It is the theory that each country should focus on what it’s comparatively best at producing and then trade with others doing the same. Each country gains, the theory goes, with more produced at lower prices. This of course overlooks the impact on workers if a country loses its comparative advantage in a particular industry, hence arguments for protectionism.
But it also overlooks the fact that comparative advantage isn’t static. It is often created. American dominance in technology and related areas, for example, is rooted in Cold War-era government investments in research and development and higher education. These investments coordinated efforts across government, business, academia and beyond in a way that would have been difficult if not impossible for any one company to achieve.
These investments helped launch the internet as an entire job-creating ecosystem of innovation and entrepreneurship that endures today. So what’s gone wrong since then? The internet itself has been a major disruptor. So has the rise of China as a manufacturing center, particularly since it joined the World Trade Organization (WTO) in 2001. A perfect storm of these and other factors have led to fundamental changes in the U.S. economy and in our labor markets.
Using the S&P 500 as a proxy for these changes reveals that 60 percent of companies on the list in 1996 are no longer on it today. A telling pattern that emerged was the decline of steel. Once the dominant world player and a major employer, the U.S. steel industry has been under siege for decades. More than 30 American steel companies went bankrupt between the 1990s and 2004. The industry continues to shed jobs today. U.S. Steel, for example, employed 340,000 at its peak in 1943 but is down to about 21,000 today. It now ranks 24th worldwide in steel production and is no longer listed on the S&P 500 because its market capitalization is too low. Worse, Bethlehem Steel had 167,000 workers at its peak in 1957. Today, it no longer exists. It shuttered in 2003.
To blame cheap steel from China, however, is not only facile, it’s lazy. Japan’s Nippon Steel has somehow managed to thrive, ranking 3rd worldwide, as has Korea’s Posco, which ranks 4th. There is much to be learned from both of these cases, but to start, neither Nippon nor Posco has to shoulder healthcare costs because their governments provide these. In contrast, healthcare as a cost borne by U.S. steel companies-—a legacy of post-World War II labor shortages and union pressures—has been crippling.
Shifting the burden to a national healthcare system is one step toward putting U.S. workers on equal footing with their global competitors. This can also free up corporate capital to invest in research and development, as Posco has done, effectively pivoting from low cost to high value added steel as a smart strategy for competing with China.
Amy Blitz is a lecturer at Babson College, where she teaches economics and strategy. She holds a Ph.D. from the Massachusetts Institute of Technology and has more than 15 years of strategy consulting experience.

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