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Lou Dobbs is Wrong About Industry

By Edward Gresser

From his perch as an anchor on CNN, Lou Dobbs gives voice to a neo-populist movement broad enough to unite newly elected left-liberal Sens. Sherrod Brown (D-Ohio) and Bernie Sanders (I-Vt.) with long-shot Republican presidential candidate Rep. Duncan Hunter (R-Calif.). A demagogue to some but an oracle to others, Dobbs taps a powerful sense of fear, dislocation and narrowing horizons as he warns of "the dismantling of America's manufacturing base" at the hands of China and a "war on the middle class."

Dobbs' success -- and the public's alarm -- are easy to understand. American factories shed 3 million of their 17 million workers between 2001 and 2003, and have hired none back since. The Internet is bringing similar, though less easily quantified, changes to many service industries. It is natural to worry about the nation's industrial future and the security of one's own job.

But Dobbs and his coalition are wrong to believe America is de-industrializing. And the policy solutions they propose would make the problems that do exist even harder to solve.

In fact, American industry is remarkably healthy and strong. Measured by production, share of the U.S. and world economies, or investment and export trends, American factories are doing very well. Consider five basic trends:

Production: In real dollars, American manufacturers produced $1.53 trillion worth of goods in 2005 -- up from $900 billion in 1992, a 70 percent increase.

Share of the economy: The most recent data show that manufacturing accounts for 13.5 percent of the U.S. economy in real dollars -- up from 12.9 percent in 1992.

Share of world manufacturing: World Bank and U.N. reports find that the United States accounted for 21.1 percent of the world's manufacturing output in 2003, only slightly less than the 21.4 percent of 1993.

Insourcing and outsourcing: More factory investment comes into the United States than goes abroad. Since 2005, Americans have invested $78 billion in foreign manufacturing ventures. In that same period, America received $100 billion in manufacturing investment from abroad.

Exports: American factory exports jumped by $60 billion in 2005, and soared by $100 billion in 2006. The latter figure is an all-time record in dollar terms, and represents the fastest pace of export growth in a quarter-century.

Far from being dismantled, therefore, American manufacturing is doing very well. But while Dobbs is wrong to suggest the United States is losing its manufacturing base, so is The Wall Street Journal 's editorial board when it cites growth and productivity data as proof that nothing is amiss. American workers and the families they support have reason to worry, and grounds for dissatisfaction with the responses of those who should help them.

Factories are succeeding in large part because they have found an old solution to low-wage competition: cost-cutting through technology. Albert Einstein saw the same phenomenon at work when he visited the United States in the 1920s. At that time, Warren Harding's Republican Party was consumed with anxieties about trade and low-wage foreign competition. Einstein observed: "Once the machine is sufficiently developed, it becomes cheaper in the end than the cheapest labor."

Eighty years later, American factories are proving him correct again. Confronting a surge in Chinese competition, American factories are replacing people with machines more quickly than ever before. The 3 million workers laid off during the recession of 2001 and 2002 do not represent lost production, but heavy investment in robots and computers. American factories accordingly produce more goods with fewer people.

During the next decade, the Bureau of Labor Statistics predicts, U.S. factory employment will fall by another 700,000 workers. America is not losing jobs overall; private-sector employment is rising again, and unemployment rates remain 2 percentage points lower today than they were in the 1980s. But transitions are always traumatic, and this one is particularly painful because the Internet is simultaneously reordering many service industries.

The United States is not alone in all this, of course. But the changes may be uniquely painful here, because of America's very weak social safety net. In Europe or Japan, a layoff means unemployment. Here, it can be a family catastrophe that couples joblessness with lost health insurance, an evaporating pension, and threats to college tuition and house payments. Even with low unemployment, high growth, and healthy factories, a reasonable American worker can easily decide the risk is too much to bear.

Yet the facts clearly show that pessimism about America's industrial future is mistaken. Moreover, the favored populist remedy -- erecting new trade barriers -- would do considerably more harm than good. That is not only the judgment of economic theorists, but the dismal, real-world experience of industries where tariffs remain high: Manufacturers of clothes, shoes, textiles, luggage, watches, and costume jewelry have lost jobs faster than unprotected industries. Tariffs or similar measures intended to shelter U.S. factories would raise the cost of the metals, computer chips, and other inputs that manufacturers need to buy; depress the purchasing power of their American customers; and deprive them of overseas markets just as America's housing boom fades and the need to export is greatest.

Instead, the country needs a two-part progressive agenda -- one that aims not to hold onto the past, but to make the future easier to reach.

New social contract. The first part of the agenda must be a program to improve national competitiveness, blending fiscal reform with skill development, infrastructure, and trade policy. The government should restore fiscal discipline; American trade negotiators should launch a more ambitious program of opening foreign markets to American exports; and Congress should bolster support for scientific research, while ensuring that visa policies allow American universities and businesses to tap the world's best young scientific talent.

The second and larger challenge is to meet worker anxiety with a new social contract that eases the stress of transition.

America's current domestic arrangements date to the years after World War II when workers expected long careers with single companies. In those years, unions bargained with managers on behalf of large groups of unskilled employees, while government health and pension programs filled the gaps by providing for the poor and the aged. As businesses pull back from their roles as providers of health insurance and pensions, and as the traditional union concept of bargaining over the wages and benefits of long-term workers loses relevance, that combination is self-evidently out of date.

A new social contract should be conceived broadly to include a reshaped labor movement, as well as new roles for government. Unions and government should join business in designing guarantees of health insurance and portable pensions, as workers shift from one job to the next. They should offer support for retraining and placement during periods of unemployment, and provide insurance for mortgage and tuition payments during periods of economic stress. With transitions made easier and their risk lessened, workers could look ahead with more confidence. The open-market policies that speed growth, keep unemployment low, and underpin international political stability would therefore have stronger support.

Most of this program will have to wait for a progressive president. But a good start, as Congress takes up its renewal of Trade Adjustment Assistance this year, would be to make TAA's health subsidy and job training available to all dislocated workers. The price tag for this would not be enormous: approximately $4 billion a year. That would be an affordable down payment on the larger reforms a new Democratic president might oversee.

The larger effort lies further ahead, but its outline is clear. The country needs to be offered a fresh progressive vision that explains why Dobbs and the populists are wrong to say America is losing factories and industry -- a vision that looks ahead to the 2020s rather than back to the 1970s. This reinvigorated progressivism must not regard public anxiety as a form of ungrateful complaining, but instead design policies and support new social and labor institutions to address it. That is the way to provide a new social contract to replace the one that served its function well in the past but is no longer sufficient; and it would give America's 21st-century workers and middle class confidence that their future is as bright as the nation's.

Edward Gresser is director of the Project on Trade and Global Markets at the Progressive Policy Institute.

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