DEINDUSTRIALIZATION
Agglomerations run out of steam, and the industry/sector profit cycle proved very real. How to fix a broken agglomeration, excuse me, cluster (which is more than an agglomeration), will remain one of life’s ED/CD mysteries. Below we give the beast its name: deindustrialization and introduce the reader to the Great Reindustrialization Debate—the breeding ground for much of the strategies, tools, and programs employed by ED/CD in our Contemporary Era. Call it deindustrialization or reindustrialization, it dealt with the intersection of the industry/sector profit life cycle, innovation/disruption, the third global competitive hierarchy—and the people and places left behind, and those that marched ahead. Managing creative destruction became, with few recognizing it, the prime goal of ED/CD—replacing growth or at least coexisting with it.
Like a Sledgehammer: Bluestone and Harrison
“Deindustrialization” is associated with Bluestone and Harrison’s (B&H) The Deindustrialization of America (1982). They defined deindustrialization as plant closedowns, disinvestment, mobile capital and runaway plants. B&H’s deindustrialization lay squarely within our Progressive–Communitarian tradition, playing off a 1980 special issue of Business Week. That issue rang out like an alarm bell in the night, warning:
The U.S. economy must undergo a fundamental change if it is to retain a measure of economic viability let alone leadership in the remaining 20 years of this century. The goal must be nothing less than the reindustrialization of America … to rebuild America’s productive capacity is the only real alternative to the precipitous loss of competitiveness of the last 15 years, of which this year’s wave of plant closings across the continent is only the most vivid manifestation. (June 30, p. 58)
Deindustrialization was happening precisely as Joseph Schumpeter (1942) had predicted—only he called it “creative destruction.” As described by B&H, Schumpeter asserted:
capitalist economies can only evolve to higher levels of prosperity through a “process of Creative Destruction” … a healthy economy requires perpetual reincarnation. The old industrial order, like a forest with its cycle of decay and renewal, must undergo constant transformation to provide the material sustenance for fresh enterprise. If this fails to occur, the economy and the entire society surrounding it will stagnate and eventually crumble … Disinvestment, and lots of it, provides the only engine for reinvestment somewhere else. (Bluestone and Harrison, 1982, p. 9)
Disinvestment—and reinvestment—in falling and rising sectors and industries is how capitalism grows. Capital disinvestment/reinvestment is a conscious decision, a corporate strategy to maximize profits.
The visible manifestation of capital disinvestment is a closed facility and/or a runaway plant. Community jobs are lost, accompanied by tax base reductions and workers on the streets. Creative destruction has geographic consequences which were not acceptable to B&H. In their view, the national productive capacity was crippled by conscious corporate decisions that chose short-term profits and shareholder returns in preference to reinvestment in existing productive facilities, their workers and the community. Instead, corporations relocated investment into unproductive and unnecessary mergers, foreign investment and profit-making financial speculation that “shuttered factories, displaced workers” creating “ghost towns” (Bluestone and Harrison, 1982, p. 6) Disinvestment causes deindustrialization. This is the “runaway shop.” The root of B&H’s disinvestment lay in the “fundamental struggle between capital and community”—the “capital mobility option” (1982, p. 19). Capital mobility severs the bond between workers, community, unions, the firm and corporate management.
B&H advocated a Progressivist, if not socialist, definition of deindustrialization that fell within the CD approach—it was people and community centered, and anticorporate. Worker and community are left “holding the bag,” forced to deal with the pathologies, despair and wrecked families. Disinvestment and runaway plants violated the social contract, breaking promises made to the community by the firm when it first located. Disinvestment and closed plants are corporate strategies to “discipline labor” and generate regional war from which tax subsidies could be exacted for new facilities. In place of Schumpeterian disinvestment B&H advocate a place-based ED that is concerned with the effects corporations have on people and communities.
B&H urged upgrading business retention. The special vulnerability of branch facilities, the realities of global competition and capital mobility necessitated a watchful eye and aggressive role by economic developers. B&H urged developing a constant relationship with corporate decision-makers and an “early warning system” be devised to anticipate problems. They called for worker lay-off pre-notification early warning system, and advocated enhanced workforce training focused on dislocated workers and skills retraining. Advocacy of worker ownership— employee stock ownership plan (ESOP)—as an alternative to plant closing brought visibility to a new concept.
B&H’s Deindustrialization was far from the first salvo in a debate, mostly within economics, that had raged for over a decade previous—and would continue for more than a decade after. B&H captured the Policy World, but not the Privatist and corporate worlds—nor, it seems, did it capture most economists. Most of the latter embraced the third global competitive hierarchy, until it became the “third rail” in post-2016 America. It wasn’t “deindustrialization” that became the paradigm of Mainstream ED, it was the “reindustrialization.” Whatever one chose, deindustrialization and reindustrialization became the equivalent of Dickens’s “Ghost of Christmas Future.”
Great Reindustrialization Debate: Platform for Twenty-First-Century ED Strategy
Deindustrialization was only one of many strategies/definitions floating about in the ED Policy World. During the seventies most solutions advocated a strategy to “reindustrialize” America. B&H were part of that reindustrialization debate—indeed their Part IV discussed the “Great Reindustrialization Debate,” stating that their contribution to it was “Reindustrialization with a Human Face.” For our purposes this history identifies five related but quite different strands of thought engaged in the seventies’ Great Reindustrialization Debate:
- The oldest, harkening back to the 1930s originated within the American manufacturing itself (Shewhart, Deming, Drucker).
- The second, deeply buried in the bowels of economic theory, focused on oligopoly and asserted that innovation was a coequal driver of economic growth along with supply, demand and investment (Lucas, Solow, Romer, Krugman).
- A third evolved classic Keynesian economics into Neo/Post-Keynesian Liberal Economics focused on growing/declining industry sectors, comparative advantage, productivity, strategic planning and global competitiveness: Thurow, Rubin, Rohatyn, Krugman again, Markusen (1986), Michael Porter, and the Business Week special issue of 1980).
- The fourth strand, originating with Hayek, stressed supply-side (savings and investment) was adopted by the newly elected Reagan administration (Gilder, Laffer, Butler).
- Finally, our CD advocates (B&H) who “named the disease”: deindustrialization caused by disinvestment and mobile capital, inherent features of a capitalism that built and threw away communities and workers in their quest for profit (B&H, Reich, Harvey, Birch and later Markusen).
The unifying threads that ran implicitly or explicitly through all five were Joseph Schumpeter’s 1942 “creative destruction” and knowledge-based innovation.
From these strands came much of the twenty-first-century contemporary ED strategies which are commonplace at the time of writing. Porter (clusters/corporate strategy), Solow-Lucas—Romer innovation/knowledge-based economics, Gilder’s supply-side, limited government capitalism, B&H (deindustrialization) neo-liberalism, and Birch (small business) are the most well known. In retrospect, the Neo-Keynesian strand—stressing comparative advantage/free trade, sector-driven economic growth— arguably exerted the most impact and become the cornerstone of twenty-first-century global competitive hierarchy.
Schumpeter and Deindustrialization
Deindustrialization repudiated (but did not deny) creative destruction. In its repudiation, B&H deindustrialization reflected core assumptions of American community development. In so doing it formulated an alternative to other strands listed above, which accepted or were congruent with creative destruction. These latter strategists worked within the comparative advantage/free trade global hierarchy, while those who followed the road blazed by B&H are likely to decry Neo-Liberalism that created inequalities/ abuses such as the “two city/luxury city” ED, and drifted to a “protectionist” position advocated by many American unions. Schumpeter’s creative destruction has evolved into a fault line of American ED/CD.
B&H’s deindustrialization alternative is more apparent if we contrast it with Lester Thurow’s Zero-Sum Society. Thurow argued that disinvestment in declining sectors and reinvestment in growing sectors is normal and a required feature of a healthy capitalist economy. That is what he means by zero-sum. For Thurow America had to disinvest in declining “sunset” sectors if it was to compete effectively internationally:
To have labor and capital to move into new areas we must … withdraw labor and capital from old, low-productivity areas. But … disinvestment is what our economy does worst. Instead of adopting public policies to speed up the process of disinvestment, we act to slow it down with protection and subsidies for the inefficient. (Thurow, 1981, p. 77)
Classical economic models stress the need to shift from sunset to sunrise sectors as creative destruction moves into new industries and locations. There is no “runaway shop” in this approach to ED which is compatible with comparative advantage.
B&H simply do not accept disinvestment. Disinvestment for them is the principal cause of deindustrialization.
The essential problem with the U.S. economy can be traced to the way capital—in the forms of financial resources and of real plant and equipment—has been diverted from productive investment in our basic national industries into unproductive speculation, mergers and acquisitions, and foreign investment. Left behind are shuttered factories, displaced workers, and a newly emerging group of ghost towns. (Bluestone and Harrison, 1982, p. 6)
Corporate leadership chose short-term profits and shareholder returns in preference to investment in existing productive facilities, their workers and communities Do sunrise sectors make up for the losses elsewhere and make the whole process worthwhile? No!
Boomtowns like Houston, Texas that have doubled in population since 1960 have had their highways, water, sewer, and school systems stretched to the limit, as capital has rushed in to take advantage of the “good business climate.” The lopsided development that goes along with such frenzied capital investment, almost invariably leaves its mark: abject poverty counterpoised to extravagant wealth, a despoiled environment and crime rates that eclipse even those in the deindustrialized regions from which capital is fleeing … the creative destruction process has become synonymous with our conception of the “throwaway” culture … the pace of capital mobility has become so fast that people and communities are carelessly discarded to make room for new ones. (Bluestone and Harrison, 1982, pp. 11–12)
This is the nature of B&H’s disinvestment. It bears little resemblance to that of Schumpeter. The “root” of B&H’s disinvestment lies in the “fundamental struggle between capital and community” (1982, p. 19). It is what we now call “the mobility of capital.”
It is at this point that we truly see the implications of B&H and their clear break from mainstream liberal-classical economics. There is in B&H a core belief disinvestment severs the bond between workers, the community, unions and firms and its corporate management. To avoid disinvestment B&H’s treatment of sunrise industries injects a strong government involvement, in their words: “public–private partnership.” “Partial public ownership of subsidized private corporations is a minimum requirement” and “planning agreements” with clawbacks if public goals are not achieved. This, to us, exposes best (1) B&H communitarian roots and (2) the clear, unambiguous rejection of comparative advantage.
Deindustrialization: A Retrospective View
A more sober view of B&H has since emerged which takes into account decades of coping with deindustrialization. First, we didn’t actually deindustrialize—if by that we mean suffer a severe loss of manufacturing employment.1 Citing BLS data, 14.9 million worked in manufacturing in 1960, increasing to 17.3 million by 1970 and 18.6 million by 1980. In 1990 manufacturing employment was still at 17.9 million, falling to 17.2 million in 2000. The collapse occurred during the 2007–09 Great Recession, when manufacturing employment dropped to 11.6 million (Kutscher, 1993).
While not challenging the reality of plant closedowns, runaway plants, manufacturing unemployment or even disinvestment, we had not, as a nation, thrown millions of manufacturing workers on the streets when B&H wrote their book (Cowie and Heathcott, 2003, p. 25). What did happen was manufacturing’s share of the total workforce declined significantly after 1980 (an 11 percent decline between 1980 and 1990 alone). Non-manufacturing sectors (i.e. service, office and FIRE sectors) left manufacturing in the dust. Manufacturing declined because the service sector skyrocketed. More precisely, manufacturing stagnated after 1980, and facilities that could not compete globally downsized and some eventually closed down. As suggested, after Bretton Woods expired, comparative advantage hierarchy acquired a definitely nasty edge augmented by a recessionary and inflationary US economy. More precisely, what was occurring during this debate was that we were witnessing the effects of shifting sectors (to the service economy) and new gazelles.
Second, B&H’s concept of “plant closedown and runaway plant” was painted too broadly. For example their opening Chapter 2 sentence portrays the Chance–Vought Division of United Aircraft that moved from Connecticut to Dallas as a “runaway plant” and “capital flight” (Bluestone and Harrison, 1982, pp. 25–6)—despite our earlier description of that movement as not only ordered, but financed by the Department of Defense as a key part of their industrial decentralization policy. There is no denying that a lot of plants moved, downsized and closed in the period previous to 1982. We have in past chapters spent a good deal of time in that description, but a simple “body count” of jobs lost and companies relocated over an extended period of time can be quite large, imparting a false sense of simplicity to what was a very complex, uneven and multifaceted series of phenomena.
What was to be done with mature firms, sectors, industries and the regions in which they concentrated was not at all evident once the problem had a name. Assuming the reader accepts in some form our profit/oligopoly life cycle, deindustrialization and/or mature profit life cycle do not come with known solutions. That is why oligopoly and mergers occur as consolidation and productivity prolongs survival. In the CED World, a sort of permanent innovation has become the magic bullet to resolve its woes. Good luck with that; agglomerations age. As they age, they exhibit a propensity to become mobile, downsize, merge, close down and run away. They need to find new meaning, competitiveness and profitability before they go not-so-gently into the night.
Deindustrialization/profit life cycle has emerged as a fundamental tension in our CED/CD. Cowie and Heathcott rightfully acknowledge the costs of closedowns to communities and, most importantly to workers; many, maybe most, will never recover. As Bluestone asserts in his Foreword, this was a very tumultuous time for our jurisdictional economic bases—and, as he would insist, for the workers and communities left behind. Such trauma tears at the political culture, crushing the identity and resilience not only of affected workers, but community, its residents and decision-makers as well. Worse, it pushes the young away into distant jurisdictions.
The profit life cycle is not restricted to American economic bases. One can see the sad story repeating itself in no less a contemporary place than coastal Dongguan in southern China. Dongguan was China’s textile sector capital, its Lowell (USA) or Birmingham (UK), during the 1990s and pre-Great Recession. Now it is losing ground to cheap labor-intensive inland Chinese cities, Vietnam, and Bangladesh. Dongguan’s manufacturing workforce is hollowing out; runaway factories and closedowns haunt the city (Chang, 2009).
The fabrication of Deborah Stone-like “stories” is real; they haunt the implementation of ED and have created a Third Ghetto where economic assimilation is next to impossible (Wilson, 1996). Disinvestment inserted a wedge between ED and CD that developed into a fault line. Stage 4/5 firms are vulnerable, and their workers depend on them for paychecks and occupational survival. Economic developers cannot escape this. Should they be helped to survive as long as they can, providing what payrolls they can—or let to go to find their way into the night? This history has uncovered no magic elixir or miracle cure. And so we have Trump.
Trump raises the issue of the Forgotten People—the casualties of the third global competitive hierarchy. These poor folk are not supposed to exist if proponents of free trade and productivity/innovation disruption are correct. Every economist of any note that stands along with free trade, comparative advantage, innovation, and productivity asserts that in the end disruption will create more jobs than it destroys. There are tons of research to back this up, but I fear statistical methodologies have created an impregnable urban myth. Frankly, I am skeptical. To repurpose a famous Keynes quote (“in the long-term we are all dead”), a displaced worker is likely to say “in the long-term my son might have a job, but I will be unemployed or working for less for the rest of my life.” One may wonder the extent the children of these Forgotten People will get the eventual “created” job in the new rising sector—is it as likely to be someone’s else child in another region entirely?
Communities full of such folk stagnate and decline. I suggest displacement caused by the third global hierarchy is characterized by a temporal lag between the job destroyed and the eventual job created, and a shift across generations and perhaps geographies/place. Lag and Shift (L&S), also characterized the unspoken of “broken cluster,” as I witnessed for two decades in Buffalo, NY. One can wonder if L&S lies at the root of our chronically declining jurisdictions, be they rural, Great Lakes, industrial Mid-West, or coal country. Skills training has not proven successful in sufficient volume, and middle-age households do not relocate easily, willingly, or well. This issue extends into productivity-affected “routine jobs,” or work based on repeated tasks. Routine jobs fell from 40.5 percent in 1979 to 31.2 percent in 2014.2 The issue of “Forgotten People,” in my opinion, received little attention other than being relegated to the workforce’s “usual suspect” programs during the Transition Era. In 2017, it is developing into a serious concern with the free trade comparative advantage paradigm.
Ron W. Coan 