The paint is peeling on the exterior wall of the United Steelworkers Hall in Southgate, Michigan, a symbolic reminder of the dangerous times faced by America’s 700,000 steelworkers. Workforce downsizing; the emergence of mini-mills to complement the old integrated, hot- and cold-roll production process; and price deflation and multilateral trade agreements like NAITA have combined to make the steelworkers’ world a very different place from what it was a generation ago. Generally ignored by the mainstream news media, the radical changes that have occurred within the U.S. steel industry are readily apparent in cities like Weirton, West Virginia; Gary, Indiana; and Southgate, located at the center of downriver Detroit, which at one time was perhaps the most heavily industrialized region in the United States. (This was derisively termed the “Rust Belt” by media elites who have never known a day of hard labor.) The uncertain economic future faced by American steelworkers is a grim reminder of the revolutionary nature of the global economy and a foreshadowing of the even more radical changes already under way in the automobile industry.
For two generations in the early to mid-20th century, the steel industry was the backbone of America’s industrial might, employing millions of workers. The twin titans of steel and auto, symbolized in the 1940’s by Detroit, the Arsenal of Democracy, were crucial to the triumph of the Allies in World War II. Steel produced the materials necessary for armaments, while auto built motorized vehicles powered by the internal combustion engine, one of the greatest mass-produced precision instruments of the 20th century. Even today, memories of World War II are strong among bluecollar seniors Downriver, many of whom fought in the war or worked in the Arsenal of Democracy. In Wyandotte, adjacent to Southgate, there was for many years a mural, painted on a garage by its owner, depicting the horrors of the Japanese sneak attack on Pearl Harbor. Today, the mural would be interpreted as a slap in the face by non-native globalists who would sooner forget.
Surveying Downriver from atop the Rouge River bridge, it is difficult to forget the area’s former industrial might. Near the north end stands the Ford Motor Company’s Rouge complex, the brainchild of Henry Ford and for decades one of the largest industrial complexes in the world. Nearby, along the Detroit River south of the city, is a nearly 15-mile stretch of integrated steel mills from Zug Island to Gibraltar, near Lake Erie’s shore. Several of the mills were operated after World War 11 by Donald B. McLouth, a local businessman whose vision extended beyond his stock options. Trenton, my hometown and a Downriver community, included a McLouth mill and one of the finest parks and recreation systems in metropolitan Detroit. At the urging of men like McLouth, the suburb was laid out in the 1950’s with plenty of green space for the sons and daughters of auto and steelworkers to play, as they should, and not work in sweatshops, as they might if they lived in another part of the global economy. In the summer, we would play baseball in leagues sponsored by McLouth, wearing T-shirts emblazoned “McLouth Steel,” in parks named after the businessman with a vision. Come evening, the glow from McLouth Steel’s Trenton plant would fascinate us, lighting up Downriver in what we used to call the Orange Sky at Midnight. To the media elite, the picture painted here appears more that of a company town; to a globalist, evidence of non-productivity (idle hands make idle minds). But to those of us living in it, this was a semi-idyllic world where a high-school graduate could land a blue-collar job that paid well enough to support a family, buy a modest, 1,500-square-foot brick home and even a cottage “up north,” and generally enjoy a middle-class American life. This world no longer exists, although U.S. steel production has increased, according to a recent Wall Street journal report. The labor-intensive production process used by McLouth Steel and other integrated mills gave way to newer. more efficient systems that rely on fewer, more highly skilled workers. Mini-mills emerged as a niche in the steel market. Men like McLouth passed from the scene, and by the recession of the late 1970’s—more of a depression Downriver—steel companies and their workers were suffering horribly. Operating in a capital-intensive environment and dependent on long-term financing, they were beset by the huge debt loads and rising interest rates that accompanied the decade’s inflation, itself the result of massive growth in the U.S. money supply to pay for government wars on domestic poverty and Southeast Asian communists. Ironically, the tax dollars of bluecollar steelworkers were used to build up the U.S. military and keep Japan demilitarized and non-nuclear; this was, in effect, a cross-subsidy that allowed the Japanese to spend a far higher percentage of their Gross Domestic Product on capital investment than on defense. By the time inflation subsided in the early 1980’s, the deindustrialization of the domestic steel industry was well under way. In that decade, Michigan attempted to rescue McLouth through a taxpayer-subsidized employee stock ownership plan (ESOP), which makes it possible for workers to become shareholder-owners of the company that employs them. The theory behind ESOPs is that productivity improves and labor-management relations get better when workers become owners. Of course, this issue was not as significant when Mr. McLouth led McLouth Steel. According to New Steel magazine, however, ESOPs have not helped labor-management relations at Weirton Steel, and, in McLouth’s case, they ultimately failed.
The U.S. steel industry learned from the recessionary inflation of the late 1970’s, a supposed impossibility. Many steel firms reduced their debt loads and improved their financials. They changed their capital-labor allocation, increasing productivity. But even more powerful economic forces were emerging. As freemarket economics suggests it would, deindustrialization sent capital investment abroad, into steel mills in emerging-market nations where wages are a fraction of what they are here and where returns on equity are higher. NAFTA accelerated this process of Factor Price Equalization (FPE), one of the most important, if overlooked, aspects of the global economy. FPE rests on the idea that supply and demand eventually equalize production factors such as capital and labor between nations by combining them into one market. Wage rates for steelworkers in capital-intensive nations like the United States are bid down by the market, while rates for those in labor-intensive nations in emerging economies are bid up over time. One does not have to be a Keynesian or a Marxist to believe in FPE; the concept is accepted among free-market economists, including members of the Austrian School.
The United Steelworkers of America (USWA) are focusing on legal, not economic arguments, in challenging NAFTA. In July 1998, the union and the Made in the USA Foundation filed suit in U.S. District Court in Birmingham, Alabama, challenging NAFTA’s constitutionality on the grounds that it was not adopted in conformity with Article II, Section 2 of the U.S. Constitution. The Founders declared that the executive has the power to make treaties, provided two-thirds of the senators present concur. NAFTA passed in the Senate by a 61 to 35 vote, thus falling short of the two-thirds requirement. The U.S. government’s response has been to argue that NAFTA is “a non-justiciable political question.” Furthermore, the government maintains, the steelworkers, among them veterans of World War II, Korea, Vietnam, and other conflicts, “lack standing” to sue. According to the U.S. Department of Labor, more than 215,000 U.S. workers have lost their jobs due to NAFTA, including thousands at McLouth Steel when it finally went under several years ago. The Orange Sky at Midnight is no more.
Today, the steelworkers hanging on Downriver at Great Lakes Steel (owned by National Steel of Mishawaka, Indiana) or other firms in the area face another economic phenomenon once considered highly unlikely: deflation. Macroeconomic events in remote outposts of the global economy, such as Thailand (summer 1997) and Russia (August 1998), have contributed to falling prices in commodity-based industries like steel. This development is good for consumers, but it forces firms to increase productivity even more to stay ahead of falling prices. In the post-World War II era, large firms such as U.S. Steel or General Motors routinely passed on price increases to consumers and wage increases to workers; they were operating in an inflationary price structure. Today, these same firms are forced to increase productivity or downsize in response to deflation. The U.S. high-tech sector, to a great extent, has been operating in a deflationary pricing structure for most of this generation. Moore’s Law, at the center of Silicon Valley’s product cycles, holds that productivity doubles nearly every 18 months due to technological advances. First steel and now auto are being dragged into a deflationary price structure, although productivity gains like those in the high-tech sector are unrealistic. Unskilled, nonproductive jobs will continue to be eliminated in areas like Downriver.
Many economists are still trying to make sense of these developments. Consider a recent publication of the Federal Reserve Bank of Chicago, which notes:
Several manufacturing industries in the Midwest faced great challenges during 1998 . . . Foreign steel producers sharply increased their exports, doubling the U.S. market share held by foreign steel from 20 to 40 percent. This steel “dumping” caused severe cutbacks and layoffs among domestic steel producers and pushed several small firms into bankruptcy.
Elsewhere, the report observes:
In southern Illinois, at least six firms in the steel industry laid off a significant number of workers in the third and fourth quarters of 1998. With a continuing build-up of demand for labor in other parts of the state, the laid-off workers must decide whether it is worth moving or commuting great distances in order to obtain employment.
Unfortunately, the workers and their families do not have “the option of deciding” whether to eat. “It is not yet clear,” the Chicago Fed Letter notes, “how this dynamic will play out.” Other facts cited in the report give some indication:
The problems facing the steel industry affect Indiana more than any other state in the region, since Indiana produces roughly 25 percent of all the steel produced in the U.S. The state has been struggling to maintain its relative economic position over the past 20 years.
As has Michigan, where a government economist ignores steel but observes:
Manufacturing employment has been losing its share of total employment in the state over the years. In 1969, manufacturing jobs represented a third of all workers, in 1977 it had fallen to 28 percent, and in 1997 it reached 19 percent.
At one point in recent history, steel was equated with the U.S. manufacturing base. Not so anymore, as the process of globalization continues to unfold. In a 1998 speech at Notre Dame, USWA President George Becker said:
Even National Steel, which is headquartered a few miles from here in Mishawaka, isn’t so national. For some time, the majority owner of National Steel has been Nippon Steel, a Japanese steel firm.
As the U.S. manufacturing base continues to decline, middle-class jobs and a way of life disappear for low-skill workers. On a recent trip Downriver, I ran into a classmate from junior high. A highschool graduate, now nearly 40 years old, he operates a cash register at a convenience store.
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