Contents | January/February 2003

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From the archives:

"The Roaring Nineties" (October 2002)
Joseph Sitglitz was deeply involved in many of the economic-policy debates of the past ten years. What did this experience tell him? That much of what we think we know about the prosperity of the 1990s is wrong. Here is a revised history of the decade, by the winner of the 2001 Nobel Prize in Economics.

"The New Old Economy: Oil, Computers, and the Earth" (January 2001)
"Knowledge, not petroleum, is becoming the critical resource in the oil business," the author writes in this firsthand account of how technology is stretching the bounds of finitude. By Jonathan Rauch

"America's Forgotten Majority" (June 2000)
Forget the "soccer mom." The new white working class is the key to twenty-first-century politics, but neither party has found a way to mobilize it effectively. By Joel Rogers and Ruy Teixeira

"Beyond the Information Revolution" (October 1999)
The author uses history to gauge the significance of e-commerce—"a totally unexpected development"—and to throw light on the future of "the knowledge worker," his own coinage. By Peter Drucker

"Building Wealth" (June 1999)
The new rules for individuals, companies, and nations. By Lester Thurow

"The Computer and the Economy" (December 1997)
Will information technology ever produce the productivity gains that were predicted? By Alan S. Blinder and Richard E. Quandt

"The Age of Social Transformation" (November 1994)
A survey of the epoch that began early in this century in which knowledge, not labor or raw material or capital, is the key resource. By Peter Drucker

"The Morning After" (October 1987)
America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand. By Peter G. Peterson

The Atlantic Monthly | January/February 2003
[Jobs & Productivity]

One-Dimensional Growth

Since 1998 the United States has lost 11 percent of its manufacturing jobs—and the much vaunted productivity gains of the digital revolution seem to have disappeared. We need an industrial policy that produces real growth
by David Friedman
ven before the collapse of the stock market and the recession of 2001 dispelled the illusion that we had escaped the business cycle, there were reasons to doubt that America was truly experiencing the miraculous rebirth that some people claimed it was. Although productivity, after years of stagnation, did increase during the boom years of the past decade, even at its late-1990s peak the economy did not produce jobs any faster or for a longer period than previous expansions had. In the ten years 1993 to 2002 the U.S. economy created barely more jobs than in the previous ten years, when the working-age population was smaller. Moreover, job growth in the nineties was strikingly uneven across industries. Since 1998, in fact, America has shed 11 percent of its relatively well-paying manufacturing jobs, the second worst rate of job loss in the past fifty years.

Further reading
selected by David Friedman
When productivity climbs steadily (that is, when workers keep increasing how much they can produce per hour), consumers can buy more goods and services without triggering inflation. From 1972 to 1995 the country's productivity growth was relatively slow; every time the economy started to heat up, consumption would outstrip production, driving prices and interest rates higher and sending the economy reeling. Around 1995, however, productivity growth suddenly appeared to accelerate. This raised hopes that the expansion of the nineties would somehow be different from its predecessors—that it would be longer-lasting, maybe even sustainable indefinitely.

But revised data now reveal that America's productivity growth after 1995 was only half as strong as the initial numbers showed. Even these gains may turn out to have been more superficial than they now appear. When imported products are available at very low prices, as they were from cash-strapped Asian manufacturers in the late 1990s, U.S. productivity can artificially appear high. Production-related imports, such as semiconductors and engines, accounted for 50 percent of the value of American manufactured goods in 2000, up from 24 percent in 1987. U.S. productivity skyrocketed, as domestic assemblers relied on bargain-basement parts from abroad to generate high-value finished goods for the U.S. market with less and less labor—which means that apparent domestic-output gains may owe more to foreign producers' ingenuity than to our own. A slight statistical adjustment in import values, or a fall in the value of the dollar, would erase almost all of the reported productivity gains.

et we were seduced by the fantasy that a handful of Wall Street whiz kids and their computer-savvy counterparts had somehow reinvented the economy—a fantasy that seemed to justify America's growing reluctance to foster traditional industrial development. As early as 1969, for example, New York City adopted a plan that explicitly called for the systematic displacement of the city's "low wage" industrial base by a subsidized "modern" office economy. (The city provided tax breaks and development assist-ance to businesses in the office economy while it zoned and regulated many businesses in the industrial economy out of existence.) Over the next three decades this policy stripped 600,000 well-paying manufacturing jobs from what was once America's largest and most diverse production center, replacing them with a small number of professional positions at one extreme and many more low-paying service jobs at the other.

Despite these consequences, most other U.S. industrial centers followed suit. Seattle and Portland—which not so long ago were hardscrabble lumber, aircraft, and shipping communities—have mutated into elite post-industrial enclaves over the past decade. Soaring property prices have driven out the working class. Increasingly anti-industrial policies have alienated even the regions' most coveted manufacturers, such as Boeing and a once world-class cluster of metals and machinery producers. Similar one-dimensional growth has long been apparent in deindustrialized Boston, San Francisco, and other cities. The drive to transform our cities seems in part to reflect an almost aesthetic or cultural distaste for blue-collar work among our political, economic, and media leaders.

The advent of the New Economy seemed to validate this strategy, at least for a while. If investing in appealing white-collar sectors such as Internet development, software, and finance spurred reasonably robust job growth, then why not tailor domestic and international policies to favor office parks at the expense of factories? But many of the problems thought to have been vanquished by America's purported economic transformation have now returned. U.S. job growth is anemic. The 1990s expansion generated record disparities in wealth. U.S. trade deficits are at all-time highs. The economy is increasingly reliant on public-sector and consumer spending—a big reason why public deficits and private debt are ballooning.

Although it became fashionable to imagine that America could flourish as a deindustrialized society, manufacturing remains crucial for prosperity. The average production-sector job creates three times as many additional employment opportunities as the average service job. Given that more than 60 percent of U.S. workers lack college degrees, and that manufacturing disproportionately employs the non-college-educated and pays wages roughly 20 percent higher than other sectors, it is not surprising to find that as manufacturing declines, economic inequality rises.

If our goal is to create jobs, boost productivity, reduce income inequality, and ensure our international competitiveness, then America needs an industrial policy that cultivates development across a broader spectrum. An effective industrial policy would have several key elements. One would be to re-examine our policy of maintaining a strong dollar—a practice that benefits the financial-services industry and affluent American consumers but undercuts the ability of domestic manufacturers to compete with foreign producers. A second element would be to exercise a more balanced trade policy. Over the past decade the U.S. government has gone to great lengths to force other economies to open up their financial markets and to protect intellectual property for the sake of New Economy companies worried about copyright infringement or MP3 downloads. But it has turned a blind eye to the unfair trade practices in the goods-producing sectors of those economies. For instance, many American steel companies went bankrupt when the government failed to enforce its own trade laws and allowed collapsing Asian economies to flood the U.S. market with low-cost steel.

But the most important part of an effective industrial policy would be to abolish the discriminatory state and local business incentives, including land-use rules, that have over the past decade increasingly favored information-age jobs over working- and middle-class jobs. The growing political influence of New Economy corporations transformed tax, land-use, and development policies throughout much of the country. As a result it became virtually impossible for an "old economy" business, such as a factory or a shipping company, to secure permits in a timely manner in many communities. Meanwhile, broadband and fiber-optic companies received billions of dollars in tax and other subsidies, leading to the misallocation of some $3 to $4 trillion in investment capital. Today those regions that excessively favored New Economy interests are bleeding jobs and revenues, while those few that did not are experiencing sustained growth and development.

A more balanced industrial policy might temporarily lower our production numbers (from the artificially inflated to the genuine), but it would maximize the diversity of our economy, generate the widest range of employment opportunities for all our citizens, and stimulate real advances in our collective skill and creativity.

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David Friedman is a senior fellow at the New America Foundation.
Copyright © 2003 by The Atlantic Monthly Group. All rights reserved.
The Atlantic Monthly; January/February 2003; One-Dimensional Growth; Volume 291, No. 1; 109-110.