Reconstructing America

One of the gravest events in our history is the inner emigration taking place in the United States. During the last decade, Chicago lost 12 percent of its population, Baltimore 14 percent, Cleveland 24 percent, and St. Louis 28 percent. The proportion of taxpayers moving out was undoubtedly greater. During this period, Houston gained 24 percent, San Diego 25 percent, Phoenix 33 percent. A recent study by the Industrial Conference Board measured regional standards of living by examining cost-of-living and household income in eighteen metropolitan areas. By those measurements, residents of northeastern metropolitan areas had living standards 25 to 33 percent below those of their southern and western counterparts.

During the same period, some of the most important American industries have been failing badly. In 1979, US Steel lost almost one-half billion dollars. In 1980, the Ford Motor Company, Chrysler, and General Motors each have lost between $1.5 and $2 billion, International Harvester almost $500 million, and Firestone $100 million.

It is no coincidence that the cities under the greatest strain are tied to the industries in the most severe difficulty, particularly in the region extending today from Baltimore to St. Louis. Existing trends are likely to exacerbate rather than attenuate this situation with the result that another decade like the last one will divide the country into “have” and “have-not” regions with unpredictable but probably highly unpleasant consequences. As taxpayers leave older urban centers, the remaining tax base collapses inward, requiring higher taxes for a population that is unable to pay them and fewer services to people in increasing need of them. In these trends are the makings of social strife.

At the same time, our traditionally powerful industries, the industrial locomotives that drove this country for the last century, are in the throes of a similar self-eviscerating cycle. Harshly affected by foreign competition, unable to raise vast amounts of capital needed to modernize, they live from hand to mouth, not investing in the future in order to survive today. They are also affected by a deep structural shift not only in regional prosperity but, as Emma Rothschild recently pointed out in these pages,* in the basic nature of American work as well—the shift away from productive industry and toward consumer and retail services, notably “eating and drinking places” (including fast-food restaurants), and health and business services. As Ms. Rothschild wrote, these three industries together

accounted for more than 40 percent of the new private jobs created between 1973 and the summer of 1980. In that period their employment increased almost three times as fast as total private employment, and sixteen times as fast as employment in the goods-producing or industrial sector of the economy.

…The increase in employment in eating and drinking places since 1973 is greater than total employment in the automobile and steel industries combined. Total employment in the three industries is greater than total employment in an entire range of basic productive industries: construction, all machinery, all electric and electronic equipment, motor vehicles, aircraft, ship building, all chemicals and products, and all scientific and other instruments.

Allocating blame for all these trends is easy—there is enough for everyone. Government regulation has been costly and ill-advised, and so have government policies, particularly with respect to energy, including the cowardly avoidance of taxing gasoline at much higher rates. Weak managements and short-sighted unions have collaborated in the creation of inefficient organizations whose costs are high and productivity low. Research and development, on which industrial productivity heavily depends, have been inadequate in the US both in quality and quantity. We have produced an educational system that ignores the crafts and a culture that idealizes rock stars.

The fact that practically everyone is to blame does not mean, however, that we should throw up our hands. It means rather that sacrifice can and should be shared by many to reverse the trend. The United States, today, in its basic productive industries, needs a second Industrial Revolution. The currently fashionable notion of backing the winners instead of the losers is as facile as it is shallow. The losers today are automotive, steel, glass, rubber, and other basic industries. That this nation can continue to function while writing off such industries to foreign competition strikes me as nonsense. Nor does it seem to me workable in the long run for a larger and larger proportion of our population to be diverted to such jobs as serving food and processing business paper while the industries that manufacture products for sale at home and abroad fall into a state of decline.

We cannot become a nation of short-order cooks and saleswomen, Xerox machine operators and messenger boys. These jobs are a weak basis for the economy; with ‘their short hours and low pay, they are easily eliminated in prolonged downturns of the economy. To let other countries make things while we concentrate on services is debilitating both in its substance and in its symbolism. The argument that we are substituting brains for brawn is specious; brains without sinews are not good enough.

When our basic industries fail, moreover, the shareholders and the workers who are laid off are not the only ones to suffer. Nothing is more inflationary than unemployment when it is coupled with trade adjustment payments, on top of benefits, on top of welfare. What we have to do is to turn the losers into winners, restructure our basic industries to make them competitive, and use whatever US government resources are necessary to do the job.

This country’s goal must be twofold: First, to have a functioning economy, with stable growth and emphasis on the creation of private sector jobs; and second, to have all elements of our society, and all regions of the country, participate in that growth as fully as possible.

It is not only foreign competition that challenges our basic industries. We depend on highly unstable countries not only for our basic energy supply but also for the strength or weakness of the dollar. And the regional shifts in national wealth I have mentioned will, partly as a result of oil and gas price decontrol, threaten our social and economic stability as a nation, if allowed to continue unchecked.

From 1980 to 1990, decontrol of oil and gas prices will generate about $120 billion of revenues to the energy-producing regions of this country. This is a tax which will be paid by the consuming regions of the Northeast and the Midwest in the form of royalties and severance taxes. At the same time, a program of heavy tax cuts intended to shore up the “supply side” of the economy is bound to accelerate the trend of manufacturing businesses away from the northern part of the country. The federal budget cutbacks that will have a heavy impact in the Northeast and the Midwest will be more than made up in the Sun Belt by increases in revenues resulting from energy pricing as well as sharp increases in defense spending. With these revenues local taxes in the Sun Belt states can be reduced, services maintained, all kinds of incentives provided for industry. The drain of businesses away from the Northeast and the Midwest will obviously increase, with the inevitable deterioration of the regional tax base.

We will then be faced with a situation in which one city after another in the north of the country will be less and less able to support a larger and larger proportion of its population in need of public assistance. The industries which formerly provided employment and support will continue to decline. Many of those taxpayers who are able to leave will migrate to the Sun Belt, leaving behind a growing mass of unemployed or unemployable people unable to move or afraid to try. Not even a country as large as ours can maintain its democratic institutions half rich and half poor, especially when the economic trends will make it very apparent that for the “have nots” things will get worse and not better.

There has been much talk recently about “re-industrialization” and “industrial policy.” The former (“lemon socialism” to its detractors) is described as the government bailing out the large and inefficient. The latter is a policy by which the government would deliberately “pick the winners” and provide for their accelerated development. Except for additional tax benefits for research and development, however, attempts by government to “pick the winners” are for the most part futile. No government agency is capable of doing so, and in fact, the winners do very nicely without being selected for special government help. Such efficient users of new technology as IBM, Hewlett-Packard, Tektronix, Intel have been spectacular successes in the 1950s, 1960s, and 1970s. There is no need for the government to try to identify their counterparts for the 1980s and 1990s; they will emerge by themselves.

It is also counterproductive for government to bail out large, inefficient, or noncompetitive organizations if the only result is to have them limp along, neither dead nor alive, a menace to their healthier competitors and to themselves. A case in point is the so-called rescue of Chrysler, which is nevertheless doomed to failure, at a heavy cost to the taxpayer, because the remedy was inappropriate to the disease.

What is needed, first, is an industrial policy committed to restructuring basic US industries, to enable them to take their place as healthy competitors in the world markets; and, second, a regional policy whose aim will be to maintain the US as a country in which all geographical areas (and thereby all classes and races) share the burdens as well as the benefits this country has to offer.

The United States must be considered not only as a country but as a continent, and if we are to find remedies we must look at half of that continent as a new hybrid: a highly industrialized but nevertheless underdeveloped country that risks becoming poorer, unproductive, ridden with slums. Italy with its Mezzogiorno, France with its southern provinces have attempted to develop the rural areas that lie outside their industrial heartland. We, on the other hand, must maintain both our own crumbling industrial heartland, possibly on a smaller scale, and the urban centers tied to it. It is in the national interest to do so and therefore it is also in the interest of the faster growing regions.

We need a viable steel industry for our security, not only in the narrow sense that steel is indispensable for weapons but in the larger sense that the US would be fundamentally weakened if it depended on foreign countries for so crucial a resource. We need a viable auto industry because one out of every eight jobs in this country still depends on it. We need to revive our basic productive industries generally because we need an economy with an effective balance of both manufacturing and services. Our world-wide competitive position requires this from the point of view of both domestic employment and of the balance of payments. We must reduce our requirements for imports and increase as much as we can our industrial self-sufficiency and our ability to export in a decade that will see greater and greater trends to protectionism as one country after another attempts to solve the payments problems posed by oil imports.

Greater industrial productivity coupled with exports of grain and coal should be the basis for our strategy to offset payments for oil in the 1980s. Moreover, industry has to provide greater employment opportunities for residents of the inner cities. Nothing will do more to erode the confidence of our allies, and consequently our defense positions throughout the world, than the demonstration that we have a nonfunctioning economy with an industrial base in disarray. We need functioning northeastern and midwestern cities because the economic and social costs of their failure will be intolerable.

To redevelop the parts of the US that are failing, a Reconstruction Finance Corporation should be created for the 1980s.

Would this simply be a renewal of the New Deal? In fact the original RFC was created by Herbert Hoover in 1918, and under Franklin Roosevelt it was run by the Texas businessman Jesse Jones. The RFC of the 1930s saved numerous banks, some cities, and many businesses, and prevented much larger dislocations from taking place. It financed synthetic rubber development during World War II and new aluminum capacity during the Korean War. It made money for the taxpayer.

The RFC, of course, will be said to interfere with the free market system. But at present the price of our energy is not freely set; nor is the price of our food, or the price at which we borrow money. Free markets are clearly desirable, but we do not in fact live in a free market economy and never will; we live in a mixed economy in which prices and capital are, and will be, subject to government influence.

The RFC should provide the kind of capital our older industries sorely lack: equity capital. In exchange for providing capital to industries that have a sound case for it, and the job security that would come with it, the relevant unions would be asked to make their contributions in the form of wage concessions and changes in work rules that would increase productivity. The lenders, the banks and insurance companies, could be asked to convert some loans to preferred stock and to join with the RFC in committing additional capital. Special classes of securities could be created that would each have appropriate credit ratings and would meet the standards of the “prudent man rule,” which would make them eligible for purchase by union pension systems. The RFC, like any other large equity investor, should have the right to insist on management changes and changes in the board of directors if it deems them appropriate. It should not become a permanent investor but should act as a revolving fund which can be used to help a given company (or industry) when necessary, and whose holdings can, and should, be sold in the marketplace when it has done its job.

At present, problems like those of Chrysler and New York City can only be dealt with by emergency maneuvers that must take place in front of congressional committees. In the case of New York City, the Municipal Assistance Corporation was able to play a role similar to the one the RFC could play. After its creation as an independent agency by the state legislature, MAC was able to extract concessions from banks and unions, from the city and the state. It was then able to put together a financing package, including federal credit assistance, and to impose fundamental reforms which permitted the city to achieve a truly balanced budget in 1980, five years after near bankruptcy.

The case of Chrysler is an example of how not to proceed. Providing government-guaranteed loans at close to 20 percent interest to a company which has too much debt and no net worth can buy some time, but nothing else. Companies like Chrysler in recent years, and possibly larger ones in the period just ahead, need permanent equity capital in the form of new common stock. Only very large injections of such capital can help make a company’s survival credible and impel other participants to make the major efforts and sacrifices that have to be made if they are to be put back in shape. Only an RFC that is publicly accountable but is run outside of politics, like MAC in New York State, could provide such capital as well as negotiate the often stringent concessions that have to come with it. That is beyond the capacity of a congressional committee.

Only now, after over a year of wrestling with the problem, is the Chrysler Loan Guarantee Board beginning to take some of the difficult steps needed to give Chrysler a chance to survive. The board is asking for a total wage freeze (including a freeze on cost-of-living allowances) from the UAW. It is also asking the banks to convert half their loans to preferred stock, and to forgive 70 percent of the balance completely; it is pushing the management to seek a foreign merger or a joint venture partner. The tragedy of this is that it is probably too late and too little. Had these actions been demanded two years ago by an RFC which could simultaneously have promised additional equity capital, it might have had a chance of success. As it was, the congressional committees demanded little and gave a lot. The Loan Guarantee Board, in the middle of a presidential campaign, looked the other way. Now reality is sinking in, but the opportunity has probably been lost. Without substantial fresh capital and a merger partner, Chrysler’s chances of survival are minimal. An RFC might have created those possibilities two years ago; it is now probably too late.

Chrysler is hardly an isolated case. A good many large industrial companies, airlines, savings and loan associations, and possibly banks could be in serious difficulties if we cannot break out of our current economic miasma of high interest rates, high inflation, and low growth and productivity. Some have great hopes for the new administration’s economic program, but there is no guarantee of quick success. Instead of improvising expensive half-measures in the heat of crisis and politics, we should have a safety net to deal with an economic emergency affecting a number of large organizations at the same time.

In each case where a firm sought financing, the RFC staff would have to analyze its chances to survive on a realistic basis, surveying not only conditions in a particular industry but the kind of competition it faced from abroad. The RFC might find that some large firms were beyond help. It might have to insist, as a condition for capital, that the weaker parts of some industries be phased out, that labor contracts be modified, that ways be found to increase productivity. Some firms and unions may find such conditions bitter medicine to take. But it does not seem too much to suggest that, in our current bloated and inefficient economy, the austerities and productivity measures recommended by an RFC could provide a demonstration to other industries of the kinds of reforms that might work for them as well.

An RFC could, at the same time, play a major part in a regional policy. In the Northeast and the Midwest, city after city faces budgetary problems and crumbling infrastructure. The Boston transit system was recently shut down for lack of funds; the New York MTA operates a subway system so old that it poses physical dangers, and it will need $15 billion over ten, years to provide adequate service. Bridges and sewers, sanitation and mass transit, schools and firehouses have been allowed to deteriorate. The RFC could provide low-interest, long-term loans to enable municipalities to maintain their physical plants. By improving the quality of city life such investments could help to retain taxpayers while providing jobs to help the existing tax base. As in the case of industrial investments, the RFC could ask for participation by other parties; the various states could be asked to create organizations like MAC to provide local budgetary oversight: the local unions and banks could do their share. As with industry, reform and restructuring would, in many cases, have to be the quid pro quo for receiving capital on favorable terms.

How, one might ask, would such an RFC be set up, capitalized, and financed? Congress would have to create a new independent entity with powers to make investments in industries and localities where the RFC deems this in the public interest. Its board of directors could include experienced people from business, finance, and labor. An RFC could plausibly begin with capital of $5 billion and authority to issue five times its capital, or $25 billion in bonds guaranteed by the US government. Its charter should provide that it could not supply more than 50 percent of the financing for any project, the balance to come from the private sector. It could then generate total investment of up to $60 billion. The RFC need not stay in existence more than seven to ten years, after which it could be liquidated, with its assets taken over by the Treasury. Its capital should be subscribed by the Treasury, not necessarily all at once.

The RFC’s federally guaranteed bonds could be sold on the open market but a quite different arrangement seems to me preferable: that they be sold to certain of the OPEC countries with large dollar surpluses, such as Saudi Arabia, Kuwait, the United Arab Emirates. It is time to realize that OPEC is more than an insecure energy source; it is also a more and more important source of capital. At current prices, over the next five years we will pay to OPEC approximately $500 billion for petroleum, about half the present value of all companies listed on the New York Stock Exchange. Possibly a third of that amount, or $150 billion, is likely to be in excess of OPEC’s own investment requirements and will consist of short-term dollar balances, most of them belonging to the Saudis, Kuwait, and the Emirates, and subject to the whims and winds of Middle Eastern politics.

We must borrow back, on a long-term basis, as much of these funds as possible in order to strengthen the dollar and relieve the pressure on our credit markets. What can we offer in exchange? To the “moderate” oil producers like the Saudis, military protection, continued attempts to find a rational Israeli-Jordanian solution to the West Bank problem, greater efforts at US conservation and domestic production to lengthen the life of their reserves. The RFC, with its federal guarantees, would be a wholly appropriate vehicle for investment of these OPEC surpluses, and its use of them would constitute true recycling, in contrast to the present conversion of deposits into short-term paper.

Another possible source of financing would be the surplus funds to be generated by our own oil-producing regions. In Canada, the oil-producing regions have created the Heritage Fund in order to invest several billions of excess dollars in Canadian industry and other Canadian provinces. A similar arrangement could be set up here to assist the RFC in its regional policy investments. Why not have Alaska invest some of its excess oil funds in an East Coast harbor to export coal mined in West Virginia, Ohio, and Pennsylvania?

An RFC, by itself, could not make an industrial or a regional policy. Tax benefits, changes in federal formulas for welfare and medicaid, different allocation of defense and synfuel contracts, a coal-based energy plan based on the Northwest and Midwest, temporary measures to protect at least some American industries from foreign competition while they reorganize themselves more efficiently—all these will be required. Temporary protection, however, should always be coupled with needed domestic reform. If the automotive industry is granted a three-year period of restriction of foreign imports, this should be conditional on a three-year commitment to wage restraint on the part of the unions and price restraint on the part of the manufacturers. Similar bargains could be required from the steel industry and its unions, as well as from other industries. The RFC should be the central mechanism, the catalyst.

Of course, none of this is likely to happen tomorrow. The current economic theology—the 1980 version of “laissez faire”—is neither Republican nor Democratic. President Carter’s Commission for a National Agenda for the 1980s, a prestigious bipartisan academic group led by William McGill, has just recommended that the government encourage the current population shift to the Sun Belt even though doing so will impose “traumatic consequences” for the major urban centers of the North. The commission argues that we must accept the decline of northeastern and mid-western cities as an inevitable effect of the working of the market.

This view will not stand up to scrutiny. No doubt there are fundamental difficulties in attempting to halt the shrinkage of metropolitan areas, but it is also true that government policies have heavily contributed to the exodus. We might remind the commission that there were fundamental difficulties in going to the moon, in winning World War II, in eliminating slavery. The commission’s recommendations epitomize the kind of advice that returned Mr. Carter to Georgia; for it was the perception of him as a president who could not cope with events that defeated him, just as it defeated Herbert Hoover fifty years ago. This country did not become powerful by a mere acceptance of the status quo.

People like the commissioners who throw up their hands at current trends and say “so be it” must be asked to confront the consequences of doing so. In a world where capital will be in shorter supply than energy, is it really a valid use of resources to have to build anew in the Sun Belt the existing school-houses, firehouses, transit systems, etc., of the North for the benefit of the new immigrants in the South, instead of maintaining and improving what we already have in place here? Is it rational to think that northern cities teeming with the unemployed and unemployable will not be permanent wards of the federal government at vast financial and social cost? Shouldn’t a commission reporting on our so-called urban problems face up directly to the fact that the future of the cities cannot be discussed separately from the acute difficulties facing the black and Hispanic minorities? Doesn’t the notion of “taking the people to the jobs” completely ignore that many of those people, in large parts of this country, are unable and unwilling to move? Is it rational, in the name of the mythical free market, to let our basic industries go down one after the other, in favor of an equally mythical “service society” in which everyone will serve everyone else and no one will be making anything?

The United States is probably the only country in the world today whose biggest problems may also provide its biggest opportunities. Becoming self-sufficient in energy, rebuilding our basic industries and our oldest cities—there is work enough here for everyone in this country as far as the eye can see. Certainly we need tax cuts and regulatory reform and a balanced budget. But alone they will not do the job. Strong presidential leadership working with business and labor will be needed to make it happen. This may mean temporary government intervention to control wages and prices, to create an RFC, to tax gasoline at higher rates, to institute some form of national youth service if not the draft, to link inner city school systems to new private employment opportunities, to dismantle farm support programs and other engines of inflation. It does not mean the end of the market system, no more than did the New Deal. On the contrary. However, it clearly does not mean laissez faire.

In New York City, we proved something could be done. In 1975, an activist governor joined with business and labor to keep the city from bank-ruptcy. We could have simply let the city go, blaming previous mayors, governors, banks, unions; there was also then more than enough blame to go around. The result would have been disaster for the city and great harm to the nation. We chose not to do so. Everyone paid a price: workers with frozen wages and fewer jobs; banks, by providing more and cheaper credit; students, by paying tuition. The riding public was charged higher fares, note-holders had to accept a temporary moratorium on repayment. But today the city, with an equally activist mayor, is thriving economically and has a balanced budget.

America cannot survive half rich, half poor, half suburb, half slum. If the country soon wakes up, it will not do so by way of laissez faire; nor will it do so by way of the old liberalism which has proven itself incapable of coping with our present problems. It will do so only by building a mixed economy, geared mostly to business enterprise, in which an active partnership between business, labor, and government strikes the kind of bargains—whether on an energy policy, regional policy, or industrial policy—that an advanced Western democracy requires to function, and that, in one form or another, have been made for years in Europe and Japan. This partnership will have to be as indigenous to our culture and traditions as those of Germans and Japanese have been to theirs, and it will have to be competitive. Much is at stake in making such a partnership work. Our ability to protect ourselves and our friends, and to deter our enemies, depends on maintaining a stable, solid economic, industrial, and social base at home. Our national security, our industrial power, the strength of our social system itself are all tied to one another and to the need for a new pattern of cooperation to emerge in the United States.

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    The New York Review, Feb. 5, 1981.