"Deindustrialization" is an emotion-filled word for Crusaders against free trade. They describe deindustrialization like it's a kind of cancerous growth spreading throughout the U.S. economy, like the treacherous and poisonous spread of communist subversion, or like a sinister plot by aliens conspiring against the American way of life. This alarmism was portrayed a few years ago in a motion picture, "They Live!" which depicted an alien race covertly taking over the U.S. economy and gutting American industry, enriching themselves while impoverishing mainstream Americans.

Yes, a lot of factories have left the country. But there's no need to get hysterical. They're not really that far away, they're still producing the same products as before, even more, and better products. Manufacturing is alive and well. It will stay around at least until the Second Coming and probably long past it. So what's causing all this fright? What is this boogieman that is scaring so many American patriots and giving them nightmares?

Now for one thing, free trade is not the only cause of deindustrialization, just as it is not the only cause (if it is a cause at all) of declining wages for some workers (the less competitive ones). In fact, economist Paul R. Krugman argues that the trade deficit in manufacturing plays only a small role in the deindustrialization process: " . . . If trade in manufactured goods had been balanced from 1970 to 1990, . . . most of the deindustrialization would still have taken place. Between 1970 and 1990 manufacturing declined from 25.0 to 18.4 percent of GDP; with balanced trade, the decline would have been from 24.9 to 19.2, about 86 percent as large." (Scientific American, April 1994, p. 46)

Krugman says the main reason for the "decline" in manufacturing is a shift in consumer spending away from manufactured goods. And one major reason for this lower spending on products is simply the cheaper prices of them. "Between 1970 and 1990 the price of goods relative to services fell 22.9 percent," though the quantity of goods purchased relative to services remained constant. This price savings was due to higher productivity in manufacturing.

There's something almost comical about this. Free-trade bashers like Pat Buchanan and Ross Perot are sounding the alarm that America's industrial base is being eroded by a vicious "decline" in manufacturing, and yet, what lies at the heart of this so-called decline? Higher productivity, more efficiency, lower cost, and lower prices to consumers. That's a decline? What're they talking about? That's a triumph! Now, if only the rest of the economy would do the same!

So then, what's all this fuss about? On page 3, Batra declares: "Manufacturing, not trade, is the main source of prosperity." What does he mean? What "manufacturing" is he talking about? He doesn't mean production of manufactured goods for consumers, because then he should endorse free trade, since this causes more production of manufactured goods, not less (i.e., as long as there is consumer demand for them). High tariffs, as Batra proposes, throw up barriers to manufacturing by penalizing imports, and the purpose of this is to force manufacturers to produce their products in the U.S., where labor costs (and other costs) are generally higher.

Will this result in more manufacturing? No, this means higher cost, which results in less manufacturing, not more. The result of this will be less manufacturing overall, but some increase of manufacturing within the U.S.. The result will be less manufacturing, not only by foreign companies, but also U.S. companies, which will relocate a few (but not all) of their factories back to the U.S. and will reduce total production because of the new costs and/or tariffs.

So, what does Batra mean when he declares that "manufacturing" is the main source of prosperity? Apparently he means manufacturing jobs in the U.S., or factories in the U.S., even though accompanied by a net drop in manufacturing generally. Only the U.S. jobs and factories are a source of prosperity. While the foreign factories--what are they? a source of impoverishment?

Batra seems to have a 2-part dogma here: 1) more manufacturing (in the U.S.), and less of anything else, always means more prosperity; the more we divert energy and labor and resources away from all other sectors of the economy and into manufacturing, the more well-being there will be for all Americans; and 2) it's not the manufactured products per se which bring the well-being, but the jobs in those factories, independent of whatever may be produced (or even if nothing at all is produced).

Part 2 of the dogma is obviously not stated directly by Batra, but consider: if it's the products of manufacturing which have the real value, then what difference does it make where they came from? What difference does it make whether they came from Toledo, Tijuana, Tegucigalpa, or Timbuktu? Products are products, and the lower-cost production will surely provide more of them to us than the higher-cost production.

But to Batra, all the products in the world have no value unless they're produced in the U.S. So his dogma is that it is only factory jobs for Americans that produce prosperity, but not any other manufacturing. The products themselves? Hell, you could dump them in a river. It's not the products, but the American jobs per se that he claims will bring prosperity.

For decades the leaders of the Soviet Union operated on this same scatterbrained economic fallacy. They cluttered up the country with thousands of factories. They didn't care about producing a competitive product for the marketplace--they just wanted to guarantee a good secure factory "job" for every Soviet citizen who wanted one. And they became so addicted to these virtual makework and babysitting centers, that they're now going through a miserable ordeal trying to scrap the whole mess and launch a market-based production system to replace it.

And part 2 of Batra's "main source of prosperity" dogma, his insistence that manufacturing is the key to prosperity and should displace other sectors--where does this lead? He says: "When freer trade promotes manufacturing, it raises . . . the general standard of living; but when it fosters services at the expense of manufacturing, productivity growth as well as real earnings decline." (p. 3)

This is mush. If true, it means all other sectors ideally should keep declining without limit, while manufacturing should keep increasing without limit, because this will increase productivity and real earnings. And when the economy is finally a 100% manufacturing economy, with no services or anything other than manufacturing, we will finally have the highest possible standard of living. Nirvana at last!

In fact, 100% of all time and energy and resources (except that required for eating and sleeping) should be devoted to manufacturing, by Batra's logic. And don't waste any time using the manufactured goods. No! That will only reduce our "standard of living." Dump them in the ocean and manufacture still more goods.

What's so special about manufacturing?

Does free trade somehow make us worse off? Does it decimate the earnings of wage-earners and thus ravage our standard of living? Is the only solution to deny consumers access to foreign imports (or punish them with high tariffs)?

The burden of proof is on the protectionists to prove the harm done by free trade and the benefit caused by high tariffs. Part of this proof must be an analytic argument, not just an empirical argument from history, but an argument of logic showing how it is bad for our country if consumers are allowed to buy foreign imports without penalty--how they must be deterred from such behavior by punitive taxes or tariffs which will force them to choose U.S.-made products instead.

Ravi Batra gives a lengthy argument on pp. 54-70 in an effort to provide this analysis and establish the causal link between free trade and a lower living standard. Again he gives special status to manufacturing, as though manufacturing is the fundamental cornerstone, or the heart of the economy, around which all else somehow revolves, like the planets orbiting around the sun. He reiterates his earlier data showing that 80% of the workforce has experienced a decline in real earnings since 1973.

There is an omission in Batra's analysis. In his preoccupation with factory workers, he forgets the rest of the workforce, explaining only how factory workers are adversely affected by free trade. On. pp. 70-72 he explains that most service employees have suffered income loss in recent years while a minority of them (the more competitive?) have prospered greatly.

But where is his analytic argument to show that lower real earnings by hamburger-flippers at MacDonald's are a result of free trade? Does this omission tell us something? Is it an admission that no causal link exists between these wage declines and free trade? that there is something else going on which hurts wage-earners? something other than trade?

For our purpose here, let's just blame it all on free trade. Let's assume that indeed 80% of wage-earners have suffered a decline in real earnings, and it's all due to free trade. What happened is that millions of manufacturing workers were laid off first, because of the new competiton from cheap foreign labor, and these laid-off factory workers then invaded the service industry jobs and have driven down the wages (in real terms) in that sector by creating a glut of job-seekers there. So indirectly the service employees also were hit by free trade.

Batra doesn't give this explanation, but it's consistent with everything he says, so let's assume this is the causal link between free trade and the lost income to all the non-manufacturing workforce, which is now well over 80% of the workforce and in the early '70's was around 75%.

(In reality this theory is weak because the service workers should benefit from the lower prices of the cheap foreign imports and so should benefit from free trade.)

So, assuming this general decline in real income of most wage-earners, is it really a bad thing? Why, why of course it's bad, especially if the service jobs are hit too, even 80% of the labor force, God forbid! How could that not be a bad thing?

But Batra himself tells us, unwittingly, how it might really be a good thing. It comes through in the analogy he draws between this decline in factory-worker income and a similar decline historically in farm income. He compares industry to agriculture and notes how technological change has ended up hurting most farmers even though it benefits consumers. The same thing is now happening to industry--he calls it "agrification" of industry. And yet Batra seems to recognize that what happened in agriculture was a net benefit for the economy. On p. 170 he says that despite the declining incomes of farmers, "the nation as a whole benefits," and "Competition among farmers may hurt agriculture, but society is better off . . ."

So let's assume Batra would not undo all the farm technology but would keep it in spite of the injury suffered by thousands (even millions) of farmers and farm workers who had to abandon the farm. Presumably this is the price of progress.

But then why not say the same about manufacturing workers? or even about the 80% of the workforce hurt by free trade? Are they not also victims of progress? What's the difference? ". . . farm troubles have stemmed from inelastic demand, whereas industry's headaches have come from free trade." Okay, let's say that's true. Still, the competition in farming was good for consumers and so was justified. Now why isn't the same true for the new competition in industry due to free trade? Why isn't that good for "the nation as a whole" just as technology and competition in farming was good for the country?

"Farm problems are natural; industrial problems are man-made." No, that's not true--farm problems also are man-made, caused by humans competing and by new technology invented by humans. And what difference would it make even if the farm problems were "natural" and the industrial problems were "man-made"? Whatever caused it, isn't what happened to agriculture really good for consumers and for the country, and isn't what is happening to industry also good for the same reason--benefit to consumers outweighs cost to farmers/workers?

". . . the basic analysis of the two sectors [industry and agriculture] is exactly the same." So why shouldn't they be judged the same? Why isn't that which is good in the case of agriculture also good in the case of industry?

He says the "phenomenon of tumbling relative industrial prices . . . induces a relocation of productive resources from manufacturing into services . . ." It must be so--Krugman said the same thing earlier. But to Batra this cost savings in industry is a bad thing, because it redirects resources from the manufacturing sector into services, and that is automatically bad because of his doctrine on p. 3: "Manufacturing, not trade, is the main source of prosperity."

And yet, when farmers suffered from competition, was there not a resulting "relocation of productive resources" from agriculture to other sectors? Yet, "the nation as a whole benefits. . . . society is better off," Batra says, despite the relocation of resources. Why is a "relocation" of resources bad for society when it happens to manufacturing, but not when it happens to agriculture?

And furthermore, by Batra's twisted logic, all resources should be relocated to manufacturing, and all labor too, 100% of the economy; even Batra himself should be a factory worker, and so should Chuck Harder and Pat Buchanan and all the other free-trade bashers.

Batra continues giving the similarities between the fate of industry and the fate of agriculture. And then, here and there, he insists there is some fundamental difference. In both, he says, real wages dropped because of falling prices and rises in productivity. "But in agriculture the earnings drop resulted from inelastic demand, whereas in industry the culprit was free trade." Okay already! Free trade caused it. The question now is not who or what is the culprit.

The question is: If what happened to agriculture was a net benefit for the economy, despite the harm to farmers, then why isn't the "agrification" of industry also a net benefit to the economy despite the harm to those workers whose wages went down (however much of the labor force)? Nevermind the culprit.

The same analysis applies to both: "What bedeviled farming in the past is now besetting U.S. industry, and for the same reason, namely, the excessive decline in the relative price." ". . . the American economy is now suffering from the same crisis as agriculture."

This "crisis" in agriculture and now in industry, this decline in the relative price which "bedeviled" both sectors, was it not good for America? Batra never says it shouldn't have happened in agriculture. The new technologies, the mechanization, higher yields--all good because it meant lower prices for consumers. Progress. So, why not the same for industry? Why isn't that also progress? Why isn't "agrification" a good thing to happen to any sector of the economy?

Batra throws around the same rhetoric we hear from Pat Buchanan and Ross Perot: ". . . millions of factory jobs have evaporated into thin air . . ." ". . . industrial heartlands have turned into wastelands . . ." And he returns to his dogma that more manufacturing is always good: "Manufacturing jobs have been replaced by service jobs, and therein lies the tragedy of free trade."

What tragedy? Was new farming technology a "tragedy"? No? Then why is free trade? Farming jobs were also replaced, yet Batra doesn't call that a "tragedy." ". . . both the Great Depression and trade liberalization shattered the American dream by disrupting the price mechanism" (i.e., by lowering prices to consumers.) And what did new farm technology do to the American dream when it also disrupted the price mechanism?

The calamity of the Depression was overcome "thanks to the Second World War." But the "calamity of laissez-faire can be overcome only by putting an end to free trade." And what about the calamity of farm technology which did the same thing to agriculture that free trade is doing to industry? Why doesn't Batra say something about "putting an end" to that calamity? Or if it's too late to save agriculture, does Batra mean to say that if steps could have been taken 200 years ago to stop technology dead in its tracks, it would have been right to stop it, nip it in the bud, in order to save agriculture from the terrible fate of falling agriculture prices?

Batra argues as though falling prices are bad for the economy, because they mean lower wages to wage-earners. And he puts the "blame" for these falling prices squarely on free trade, which arrogantly made available to U.S. consumers the benefits of increased foreign productivity. "In fact, the greater the rise in foreign productivity in industrial goods, the larger the fall in the industrial relative price." So is a rise in foreign productivity a curse for America? There is no other way to interpret Batra.

He seems to lament the "enormous productivity growth" in Germany and Japan, which has precipitated "a sharp worldwide fall in the industrial price. This, and only this, has caused American earnings to drop so steeply despite rising U.S. productivity." (p. 69)

In a closed economy instead of free trade, "U.S. earnings and living standards would have continued to grow even if Japanese productivity had grown a thousand times faster than U.S. productivity." And thus, "America's economic decline" was caused by opening U.S. markets to this foreign competition, and if the foreign productivity had been a thousand times greater, "America's economic decline" would have been worse!

Keep in mind: this is the case against free trade; it is on the basis of this kind of logic that Pat Buchanan and others want to deny freedom to U.S. consumers to spend their money on foreign imports. The logic is: some foreign companies, especially German and Japanese, are more productive than U.S. companies, and U.S. wage-earners are hurt if American consumers are permitted to buy the superior German and Japanese products, because the U.S. wage-earners need the U.S. market in which to sell their own inferior over-priced products; and if the foreign products were even better still, they would pose an even greater threat.

So the U.S. standard of living is inversely proportional to the efficiency/productivity of foreign producers--any gain by them in technology can only reduce the U.S. standard of living, and so we should wish nothing but ill toward all foreign enterprise, since their gain is necessarily our loss. Or at least we must be certain to cut Americans off from any foreign producers who are more efficient or more advanced in technology.

You see, these more efficient and more advanced are a threat to Americans, while conversely, the less efficient foreign producers are less of a threat, and so it would be okay to allow the inferior foreign products into the U.S. market. So, by this logic, America should open its market only to the inefficient and over-priced imports, which are no threat, but make certain to keep out the superior foreign products.

This is the kind of thinking upon which the case against free trade is based. Progress by foreign producers means decline for America. And that "Washington bunch" sold out our wage-earners to this foreign aggression! No wonder Pat Buchanan cried out for them to grab their pitchforks! When they say they want their country back, what they mean is they want their consumers back, their turf, their property.

Isn't the Protectionist bunch just as bad? They see consumers as their cattle going astray. They want to brand their U.S. consumers and herd them into boxcars and keep them away from the foreign producers who are like cattle rustlers trying to steal their herd.

Is it necessary to explain why Batra's analysis here is wrong? Is it necessary to explain how Americans generally benefit from technology advances, even if those advances originate outside the U.S.? For those readers who already see this clearly, just skip the following and proceed to page 2 ("What about that deindustrialization?" cont'd)

First, it should be obvious that the only Americans who can possibly be hurt by foreign technology advances are those who are involved with the outmoded technologies which are to be replaced. Producers/workers whose livelihoods are dependent upon the old technologies might be threatened. Yes, they could be hurt in the short run. But only these particular producers/workers and no one else. EVERYONE ELSE BENEFITS, immediately, in the short run as well as the long run.

But, Batra insists, suppose these ones who are dependent upon the old inferior technologies happen to be a majority of the population. Could it be that in this particular instance the change is bad for the U.S. because a majority of the workforce is adversely affected?

What does this mean? that a majority are hurt? It could not be only one or two particular technology advancements referred to here. This would have to refer to all technology advancements, in all types of businesses. No one single technology advancement could possibly threaten the livelihoods of a majority of the U.S. workforce. (Though we could consider that unlikely possibility too, and even in that case Batra's analysis would be just as wrong.)

So let's consider three new hypothetical technology advancements. Let's just call them A1, A2, and A3. And let's consider three wage-earners: Mr. Jones, Mr. Smith, and Ms. Hoosenheimer. Now, Jones is in a job which uses outmoded technology O1, and is threatened by the new technology advancement A1. And Smith works in outmoded technology O2, and is threatened by A2. While Hoosenheimer works in outmoded technology O3, and is threatened by A3.

Now, doesn't it become clear what happens? Yes, Jones is hurt by the introduction of A1, BUT, he benefits from A2 and A3, not to mention all the hundreds of other technology advancements which are permitted into a free market economy. And Smith--he is hurt only by A2, but benefits from A1 and A3. And, lastly, Hoosenheimer is hurt by A3, but benefits from A1 and A2.

So, isn't it obvious: Each worker/producer who is hurt is hurt only by the one technology (or in some cases by 2 or 3) which pertain to his or her particular field and replace the outmoded technology which s/he worked in previously. The new technology now disrupts this person's career and forces him/her to change. Bummer! BUT, during all those years when this particular worker was doing his or her job, s/he was benefiting from all the other technology advances which posed no threat to him/her because they affected workers in other fields.

So the truth is that virtually everyone benefits overall if all the technology advances are encouraged and permitted to consumers, even if those advances came from a foreign source, yes, even from those cursed Japanese and Germans!

In their hearts, even the most rabid protectionists know this is true. And Ravi Batra really should be ashamed of himself suggesting that German and Japanese technology advances are harmful to American workers.

Not only is it obvious that we gain a net benefit from the advances, no matter where they originate, but also that the introduction of these foreign technology advances creates added competition within our economy and motivates our own producers to upgrade their production system and even introduce technology advances of their own. U.S. advances in technology clearly will be spurred on by the foreign competition, and any suppression of that foreign competition, in any form, will only slow down new technologies within the U.S.

So, as always when you are stricken by the free-trade blues, there is the same one and only solution: Compete! Whining is not the solution.

End of Part 3, page 1. Go to Page 2 ("What about that deindustrialization?" cont'd)

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Free Trade Forever front page

The Sucking Sound and You Introduction

Part 1: What about those declining wages?

Part 2: What about those high tariffs in the 19th century?

Proceed to:

Part 4: What about that multiplier effect?

Part 5: Compete? Yes, but not with them foreigners!

Part 6: Lower Cost vs. Higher Income

Do you have a bitch against free trade?