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Friday, April 25, 2008

Yougstown, Free Trade, and Moral Hazards

Youngstown, Ohio is ground zero in the debate over free trade. It is among the hardest hit by the obliteration of manufacturing jobs and the folks in Youngstown are hurting. When people hurt, they always look for someone or something to blame. Their pain, and the pain of folks like them all over Ohio and Pennsylvania, were exploited by both Sherrod Brown as well Bob Casey Jr. in 2006. Their suffering was laid at the feet nearly entirely of free trade and by extension those that supported it. (in this case both their opponents who were painted as villain for supporting acts that cost these folks their jobs)

In my opinion, the real reason these jobs have moved away has much more to do with a complicated set of economic conditions. It was a combination of forces including an evolving economy that evolved away from manufacturing, to better productivity which meant less labor was necessary, to state and national tax structures that made these areas less competitive. The two Democrats didn't see reality as easy to exploit as such things as NAFTA, CAFTA, and all the free trade agreements that were upcoming. Youngstown's income levels is among the nation's poorest at 24k yearly according to the last census, and it relies heavily on the exact jobs that Brown claimed were lost due mostly to free trade. The folks in Youngstown bought it and Brown was elected, and the same could be said for many similar towns in Pennsylvania which elected Casey.

They used terms like "job outsourcing" and implied that foreigners were taking jobs that were rightly theirs. While this rhetoric was a political goldmine, it also ignored some substantive truths. Economically, what job outsourcing means is that companies found a way to do things better somewhere else. If Casey and Brown were to succeed in their quest they would artificially hold onto jobs that should rightfully, through market forces, go somewhere else.

Furthermore, they ignored the most important reality. Youngstown, and other places like it, relied far too much on manufacturing for their income. Just like an investment portfolio needs to be diversified, a city must diversify its employment opportunities or it will be destroyed everytime economies evolve. In fact, that is exactly what happened to Youngstown previously,

Between the 1920s and 1960s, the city was known as an important industrial hub that featured the massive furnaces and foundries of such companies as Republic Steel and U.S. Steel. At the same time, Youngstown never became economically diversified, as did larger industrial cities such as Chicago, Pittsburgh, Akron, or Cleveland.[42] Hence, when economic changes forced the closure of plants throughout the 1970s, the city was left with few substantial economic alternatives. The 1969 corporate merger between the Youngstown Sheet and Tube Company and the New Orleans-based Lykes Corporation proved to be a turning point in the demise of the local steel industry.[49] The merger and subsequent takeover of Youngstown Sheet and Tube burdened the community's primary steel producer with hundreds of thousands of dollars in debt.[49] Further, the deal placed control of the company outside of the Mahoning Valley.[49] The September 19, 1977, announcement of the closure of a large portion of Youngstown Sheet and Tube, an event still remembered by many Youngstowners as "Black Monday", is widely regarded as the death knell of
the old area steel industry. This was followed by the withdrawal of U.S. Steel in 1979 and 1980, and the bankruptcy of Republic Steel in the mid-1980s.[50] Attempts to revive the local steel industry proved unsuccessful. Shortly after the closure of most of Youngstown Sheet and Tube's area operations, local religious leaders, steelworkers, and activists such as Staughton Lynd participated in a grassroots effort to purchase and refurbish one of the company's abandoned plants in neighboring Campbell, Ohio.[51] This project met with failure in April 1979.[51] In the wake of the steel plant shutdowns, the community lost an estimated 40,000 manufacturing jobs, 400 satellite businesses, $414 million in personal income, and from 33 to 75 percent of the school tax revenues.[52] The Youngstown area has yet to fully recover from the loss of jobs in the steel sector.[53]

By having an economy nearly totally dependent on steel, the economy was depressed when our economy evolved away from steel. It is likely that Silicon Valley and Youngstown won't be mentioned in the same breath often but on one point they have similarities. For nearly a decade in the 1990's Silicon Valley was the place to be in the entire United States. That's because Silicon Valley was ground zero for all things internet. It was the twentieth century equivalent of the gold rush. Every entrepeneur was rushing to Silicon Valley to add a .com to their company, go IPO, and then call themselves a multi millionaire. Once the internet busted so did the entire economy of Silicon Valley. Yet, politicians didn't rush to Silicon Valley to propose ways to artificially keep jobs there. Everyone understood that these entrepeneurs took risks and this was the result of those risks. The same can be said of a city that relies to heavily on any one industry. Detroit is facing a similar problem because its economy is so dependent on automotives. You aren't likely to hear New Yorkers complain about "job outsourcing" though because its economic job market is plenty diversified. In fact, Youngstown showed that it learned from its previous mistakes. It is taking steps, however tiny, to diversify its own job market...

Youngstown's downtown, which once underscored the community's economic difficulties, is a site of new business growth. The Youngstown Business Incubator, located in the heart of the downtown, houses several start-up technology companies, which have received office space, furnishings, and access to utilities.[58] Some companies supported by the incubator have earned recognition, and a few are starting to outgrow their current space. In an effort to keep such companies downtown, the incubator secured approval to demolish a row of vacant buildings
nearby to clear space for expansion. The project will be funded by a $2 million federal grant awarded in 2006.[58] Meanwhile, the downtown has retained its traditional role as the community's financial center. Several banks, including JP Morgan Chase, National City, Huntington, and First National Bank have offices in the city; and the Youngstown-based Home Savings & Loan is headquartered there.

Youngstown has taken the lesson of the steel bust to heart and now its making headway into diversifying the economy. That won't happen if our government artificially forces manufacturing jobs to stay domestic even though there are better outlets elsewhere. That is known as a moral hazard. The sort of town that Yougstown is was first introduced to me by the movie All the Right Moves. While there is no doubt that towns where everyone works at the steel mill are in many ways part of Americana, they are also an example of exactly what not to do in localized economies. Basic investment ideals say you don't put your entire investment portfolio into one stock. Yet, localized economies that put their entire employment portfolio into one industry or one plant are not only celebrated, but politicians line up to protect their flawed structure.

They are rewarding the exact behavior that should be punished. In order for local economies to survive long term they most evolve, adapt, and diversify. If your entire economy is dependent on steel, it will be destroyed sooner or later. As soon as steel stops being vital. That is exactly the sort of economic behavior that free trade punishes. Yet, protectionists want limit free trade and reward economies that don't diversify. Politicians bemoan the loss of manufacturing and promise to bring it back. They should be bemoaning the local officials that sat by while their economies became entirely too dependent on manufacturing and did nothing. It is not courageous or wise to proclaim that you will force jobs to stay local even though free trade could give companies better opportunities elsewhere. What is courageous is exactly what John McCain said in Youngstown recently

The biggest problem is not free trade, but our inability to adjust to a new world economy. I can't look you in the eye and tell you that I believe those jobs are coming back... [but] protectionism and isolationism have never worked in American history."

John McCain is absolutely right. Free trade is not the villain. Free trade exposed the weaknesses and deficiencies that caused these problems. Unfortunately, there are opportunistic politicians everywhere that will tell people what they want to hear not what they need to hear. On the issue of free trade, the rhetoric is downright dangerous, as is any rhetoric that leads to a moral hazard.

1 comment:

Jim Cossler said...

Thanks for the mention. Perhaps, a better update on what is happening at the Youngstown Business Incubator.

The current expansion project for YBI that is just finishing includes $6million in new construction and $3million in building renovation giving us a three building interconnected campus.

The recognition of our portfolio companies includes Inc. magazine naming Turning Technologies last year as the fastest growing software company in the country.

Yep, all happening in a little old Youngstown, Ohio.