About two years ago, I wrote a “Letter From Rockford” entitled “A Month in the Life of the Industrial Midwest” (April 2001), in which I used excerpts from news reports to illustrate the rather dramatic economic changes that were taking place in the Rockford area—plant closings, layoffs, declining wages. At the time, I had no way of knowing, but the very month after the one that I had chosen to highlight—March 2001—has since been acknowledged by the federal government as the first month of the current recession, which may explain the number of phone calls, letters, and e-mails I received from readers across the country who said that, after reading the column, they had begun to notice similar news stories in their local media. The hard times, it seemed, were not confined to Rockford or even to the Rust Belt.
Now, two years, a midterm election, a bear market, and a September 11th later, there are precious few signs that it is morn-ing again in America. In fact, looking at the overall state of the economy, the most remarkable thing, perhaps, is how much discretionary spending continues to go on. Very few chain restaurants have folded during this recession (locally owned restaurants, of course, are another story, but that’s true in every economic climate), and the traffic continues to stream past my living-room window every Saturday and Sunday, as consumers (the only proper name for them) in their new, zero-percent-financed Japanese cars seek to fill the hole at the center of their existence with the latest piece of plastic forged from Middle Eastern oil by wage slaves in a Chinese factory.
The zero-percent financing provides the key to the puzzle, and the federal government has noted an incredible spike in household debt, as Americans have financed their continued consumption through credit cards, auto and home-equity loans, and advances on their 401(k)s. This cannot continue indefinitely, however: Some reports indicate that average household debt may have doubled since 2000 (average household credit-card debt alone reached $8,500 by mid-2002), and the rate of personal bankruptcy has risen to unprecedented heights. At some point, even dual-income families, who have to shop because they cannot afford not to, will have to curtail their spending. And then Rockford’s East State Street corridor of chain restaurants and big-box stores will begin to resemble a supersized version of her struggling downtown.
Now Main Street’s whitewashed windows and vacant stores
Seems like there ain’t nobody wants to come down here no more . . .
Nowhere is the underlying softness in the economy more obvious than in the the small-business manufacturing sector. Several of the stories I highlighted in the earlier column concerned the closing of small factories, often the result of larger corporations (particularly in the auto industry) moving jobs to Mexico or China (and, increasingly, Eastern Europe). While the auto industry isn’t necessarily setting out to replace the small factories’ products with foreign-made parts (by, for instance, reversing the decades-long trend toward outsourcing when the Big Three move their factories overseas), NAFTA and?GATT have still made it harder for small American manufacturers to compete. Tariffs may have been reduced or eliminated, but other costs—particularly transportation—have increased. The pressure then mounts on the small manufacturer to move his own operation south of the border or overseas, so that he can eliminate these additional costs or offset them through cheaper labor. If he refuses to do so, he may find, as one Rockford-area manufacturer recently did, that he has no option but to sell to someone who will.
They’re closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain’t coming back
To your hometown . . .
Recently, I spent part of two days visiting the factories of Rockford Acromatic Products, a locally owned manufacturer of after-market auto parts. Founded by Dean Olson, Sr., in 1949, Rockford Acromatic (also known as Rockford Constant Velocity) is now run by his sons, Dean (a longtime Chronicles supporter) and Jim Olson. The company has two factories, both “across the railroad tracks”—one on Beacon Street in Loves Park and the other on 11th Street in Rockford. The 11th Street plant also functions as a storage and shipping facility.
With the decline of the domestic steel industry over the last 20 years, Rockford Acromatic has become heavily dependent on foreign steel. Like (I suspect) many Chronicles readers, I initially cheered when President Bush announced that he was placing a tariff on certain steel imports. Now, after touring Rockford Acromatic and discussing the effects of the tariff with Dean Olson, I’m not so sure.
The problem is not that either tariffs or free trade are bad per se but that they always need to be viewed in historical context. Back during the battles over NAFTA and GATT of the early 1990’s, when Chronicles was opposing such trade agreements because they had the potential to undermine national security and to gut the American economy, many libertarians joined forces with us, albeit for different reasons. As one prominent paleo-libertarian never tired of saying, we don’t need thousands of pages of regulations to declare that there will be free trade among the United States, Canada, and Mexico; all we need is the simple statement that “There will be free trade among the United States, Canada, and Mexico.” That view, to put it charitably, is naive. “Free trade” is an abstract concept that has never existed in reality and never will. Once we recognize that condition, we can also understand that every businessman will try to structure trade in such a way that it will benefit him and his business. That’s human nature. As Dean Olson says, “I don’t know anyone who doesn’t believe in free trade; it’s just that it hasn’t been applied equally.” And it never will be.
Part of the problem with this current tariff is that it applies only to premium grades of steel, and then only to the steel in raw form—thus exempting from its effects large manufacturers who use standard grades of steel and foreign companies who import final products to the United States. To take just one example: Under the Bush administration’s 40-percent tariff, a certain after-market part would now cost Rockford Acromatic $25 to $28 to produce, but the company can import it from China for $14 to $18. The Chinese have the advantage not only because of lower labor costs but because no tariff is placed on the Chinese product based on its steel content (it is almost entirely made of steel). So Rockford Acromatic now imports the parts, places them in their own boxes, and sells them on the domestic market.
Similar dynamics have dramatically changed the way Rockford Acromatic does business. Today, half of what the company sells is imported, packaged, and resold. At first glance, this seems to be simply “the market in action, compensating for disparate wage and materials costs in an increasingly integrated global economy.” What gets lost in such an analysis, however, are the human costs of such “adjustments.” Today, Rockford Acromatic employs about 60 people; at its height—when it made most of the products it sold—it employed 680. Two hundred and sixty of those jobs were here in Rockford; the rest, in Chicago, were tied to the aerospace industry, which has gone through similar changes. Even more discouraging: Most of the remaining 60 jobs are now low tech and low pay—approximately six to eight dollars per hour. Many of the employees are women; some speak very little English. They pack parts—for instance, a universal joint imported from China, boxed in Rockford, and exported to Canada. While Rockford Acromatic continues to make u-joints, it’s hard to argue that it is more “efficient” to pay highly skilled machine operators $15 to $20 per hour than to hire more low-skilled packers. As Mr. Olson notes, applicants can no longer be reasonably sure that they can raise a family on their wages or remain at Rockford Acromatic for the rest of their working lives.
There are, however, some signs of hope for Olson’s company. The 11th Street plant was built to store inexpensive rubber parts imported from China. Because the parts are so light, shipping was prohibitive on all but the largest orders, so the Olsons found it economically feasible to build a storage facility to house a million of the rubber parts so that they could import in mass quantities. Then, several years ago, they discovered an even better solution: They developed a proprietary process to produce the parts from a thermoplastic elastomer right there in the 11th Street facility. It is, as Mr. Olson says, an example of comparative advantage. But it’s very different from Ricardo’s classic example of England producing cloth while Portugal produced wine. For one thing, because shipping costs are still prohibitively high, Rockford Acromatic only has a comparative advantage in the domestic market; the company ships very few of the parts overseas, where the market is still dominated by Chinese parts. Still, that this limited comparative advantage has allowed Rockford Acromatic to continue to employ local people.
Others have not been so lucky, including those Rockfordians whose livelihoods were dependent, directly or indirectly, on the 200 jobs that have been lost locally over the years at Rockford Acromatic. The loss of every one of those jobs had a ripple effect in the local economy, which is something that individualist economists never quite grasp and economic statistics never adequately summarize. The Rockford Area Association of Realtors has trumpeted a recent increase in area home sales, but, behind each of those sales, there is a story, only part of which was hinted at when sales plummeted once again in January.
Last night me and Kate we laid in bed
talking about getting out.
Packing up our bags maybe heading south . . .
Seven years ago, when we bought our house, my wife and I never toured a home that was empty. Today, looking for a larger home, we’ve noticed that an increasing number of houses lie vacant, awaiting sale. The cleaning lady at Rockford Acromatic’s 11th Street plant has been kept busy by local banks, who hire her to clean up houses that have been abandoned by people who can no longer make their mortgage payments. In a number of cases, she told Dean Olson, the homeowners have simply walked away from the house, leaving all of their possessions, including their cars.
I think of this story this morning, as I (over my wife’s protests) load two school desks in my van from a trash pile in front of a house around the corner from ours. The homeschooling family had placed them at the curb fully loaded—schoolbooks, pencils, projects, and all. There was no “For Sale” sign, and I never noticed a moving van. No real-estate sales figures or unemployment statistics could ever adequately explain what caused them to leave in such a rush—or convey the despair they must have felt when they had to leave behind such a precious part of their children’s lives.
I’m thirty-five we got a boy of our own now
Last night I sat him up behind the wheel and said son take a good look around
This is your hometown . . .