Buchanan has it right

Edward Luttwak on the merits of protectionism

Pat Buchanan’s season of success was brief, but respectable opinion in America and beyond is still shell-shocked by the appeal of his heretical economic ideas (protectionism to lift wages!). For nowadays there is only one economic orthodoxy, taught and proclaimed by almost all academic economists, happily celebrated by Wall Street and corporate chiefs, and fully accepted by Democrats, by Republicans and by most European political parties.

Contra Buchanan’s pessimism, the ruling orthodoxy holds that the present workings of the US economy are a huge success, propelled above all by the phenomenal breakthroughs of the ‘New Titans’ of the information age: the legendary twins Microsoft and Intel, and their lesser emulators – Apple, Novell, Cisco, Oracle, Bay Net, Sun Microsystems, Sybase, Adobe Systems, Amgen, Cirrus, Informix, Intuit, Cordis, Am.Online, Autodesk, MBC Soft, Picturetel, Peoplesoft and more.

Most of them did not even exist twenty years ago. Today, the combined value of their shares, albeit fluctuating, greatly exceeds that of the unfashionable old-style giants of manufacturing: General Motors, Ford, Dupont and Kodak. In the course of rising from very little to their present heights, the New Titans have made several billionaires and hundreds of millionaires among early investors, while very substantially increasing the wealth of an even larger number of shareholders and pension-plan members. That makes for a great deal of optimism.

It turns out that every principle of the ruling orthodoxy is defended by citing the success of the New Titans. Free trade, or more precisely the continuing US effort to ‘globalise’ the world economy by negotiating away trade, investment and licensing barriers of all kinds, is justified above all by citing the success of American high-technology exports in general and of software in particular. By contrast, the net loss of 1.4 million jobs (according to the very lowest estimate of free-trade enthusiasts) caused by the chronic excess of US imports over exports is held to be of small account, because these are said to be little more than dead-end jobs, in declining industries.

Deregulation, most recently of telecommunications, is similarly justified by the wonderful opportunities it opens up for the New Titans, as well as for the new-style ‘lean and mean’ telephone and cable television companies that promise to open up the electronic highway, starting with Internet for all. In the process, the existing regional telephone companies, ‘the Baby Bells’, will be swept away unless they become drastically more efficient. At present they are still monopolies regulated by local boards, and as such are sufficiently protected from competition to be steady, well-paying employers and generous supporters of all manner of community activities – to please the local-worthy regulators of course. But the ruling orthodoxy sees no merit in anything that impedes efficiency, implicitly taking it for granted that society exists to serve the economy, and not the other way around.

True, the Secretary of Labour Robert Reich and other members of the Clinton Administration have rather suddenly taken to criticising the mass firings on the part of major corporations in general and of AT & T in particular (40,000 initially budgeted for, later reduced to 18,000). But at the same time, the Clinton Administration enthusiastically advocated the Telecommunications Deregulation and Competition Act of 1995, which allows regional telephone companies, long-distance carriers (AT & T, MCI, Sprint and more) and cable television companies alike to offer local, long-distance television and other data over wires without restriction. It will take some time for the long-distance carriers to run wires into homes and offices, but the networks of the cable-television companies are already in place, and can immediately carry telephone traffic as well. The regional telephone companies will therefore have to do exactly what AT & T is doing – that is, fire tens of thousands of employees to become more automated and more efficient. It is a classic case of false consciousness: the Clinton Administration is deploring with much sentimental verbiage the very consequences it is striving to bring about.

Above all, the success of the New Titans is regularly invoked to argue that no real harm is being inflicted by corporate ‘downsizing’ – the drastic reduction in the number of administrative and clerical employees, mainly because of software-driven automation. The latter, it is pointed out, generates its own employment: the software has to be written, customised applications prepared, computers and their ancillaries manufactured and maintained. According to the ruling orthodoxy, readily echoed by all and sundry in America and beyond (including one letter-writing LRB reader), downsizing simply means that some Americans are being forced to move to better jobs – GM may fire you but Microsoft will hire you, and Microsoft jobs are better.

Buchanan is of course in the wrong party to advance the interests of America’s lower-paid employees and unpaid ex-employees. He is also contaminated by extreme-right associations and past utterances which have been judged to be anti-semitic not merely by the Anti-Defamation League but by the right-wing guru himself, Bill Buckley, founder of the National Review. As Churchill told one of Hitler’s minions by way of advice to pass on to his master, anti-semitism is ‘a good starter but a bad sticker’ – Buchanan’s fate at the hands of the media shows how sound that advice was.

Buchanan’s exuberant delight in offending as many people as possible does not, however, mean that his political economy is off the wall. It is enough to look at the employment rolls of the New Titans, as opposed to their share values, to see that his pessimism is right and the ruling orthodoxy all wrong. Microsoft and Intel, so huge in Wall Street (they are worth much more than GM, still the world’s largest manufacturing enterprise), had a combined total of 48,100 employees at the last count, as opposed to 325,300 employed by Ford, more than half of them in the United States. In fact all the New Titans listed above have a combined grand total of some 128,000 employees, less than half the number employed by Ford alone worldwide, one third fewer than those employed by Ford in the United States.

Of course there are many other New Titans outside the computer and software industry who have also risen from nothing, including such diverse companies as Southwest Airlines, Nike shoes, Charles Schwab the mega-broker, Genetech and other bio-techs, computer hardware manufacturers such as Seagate, Compaq and more. Still, all of them together do not employ as many Americans as Ford alone, let alone General Motors (721,000 at the last count, half in the United States).

The consequences of these simple numbers are enormous. What would happen to the United States if Bill Gates and Al Gore’s vision of an all high-tech economy were to be realised? The Dow-Jones Index would no doubt reach 10,000, or perhaps 20,000, making more billionaires and more thousands of millionaires. In the meantime, with the replacement of GM, Ford, Kodak (132,600 employees), Dupont (125,000) and all other old-style, slow-growing, medium-tech manufacturers by New Titans, the total number of well-paid jobs in the US economy would decline to a fraction of present levels.

With companies like GM and Kodak, that equation could not equate, because entities that sell mass-consumption goods mostly in the domestic market cannot prosper if the mass of their prospective consumers is unemployed or re-employed in poorly-paid service jobs. But the New Titans sell their products worldwide and can afford to ignore the basic axiom of Fordism – as in a daily wage of $5 in 1914 (the Wall Street Journal called it an ‘economic crime’) to assemble a model T ($360) which its assemblers had to be able to buy, which they did in huge numbers. No more, for the New Titans can and do prosper by supplying the world’s élites and near-élites, the buyers of PCs, software, airline tickets etc. With globalisation, mass-production no longer implies domestic mass-consumption: just ask the Mexicans who assemble Ford’s cars in Hermosillo for $100-$150 per week and for whom owning a car is not 72 days away but only a distant dream.

It follows that the happy-equilibrium interpretation of downsizing (and much else) is totally wrong: if GM fires you, Microsoft will not hire you. 1. You are not trained and Microsoft has no use for uneducated blue-collar slobs spoilt by too much pay for yesteryear’s brainless assembly-line jobs. 2. If you are trained, Microsoft will not hire you either – mailing out pre-packaged software developed by a few bright souls is just not that labour-intensive.

Information technology, in other words, is not a job-creator but a job ‘sink’, as physicists would put it: while it destroys clerical and, increasingly, administrative jobs by the million, it provides relatively few jobs of its own – and those mainly in the United States. Elsewhere, in unfortunate lands with weak software industries, it merely destroys jobs.

There is moreover clear evidence that what goes for Microsoft goes for high-technology industry in general. It is above all engineers that such industry needs, and yet between 1968 and 1995 the median annual salary, including fringe benefits, of engineers with ten years’ experience declined 13 per cent in constant dollars to $52,900. Evidently there is an over-supply of engineers, which means that the New Titans who do not employ uneducated slobs do not employ many engineers either. So much for the current nostrum of a high-tech education for all: to turn out more engineers would merely add to their over-supply.

It is true that jobs in retailing, health services and small businesses of the dog-washing-in-your-own-home variety keep increasing in the United States, so much so that the official unemployment rate has been falling in spite of all the downsizing. The number of these jobs will no doubt continue to increase, but it is small consolation. As everyone knows, the average earnings of ‘non-supervisory employees’ – 77.5 million out of 114 million employed Americans, from Bill Clinton to part-time maids – have been declining for years (from $8.40 per hour in 1978 to $7.41 in 1994 in constant 1982 dollars) precisely because so many Americans now work in poorly-paid service jobs.

The secret of the American economy’s much-envied ability to create jobs is no mystery: it is easy enough to employ people when they are so cheap to hire, so easy to fire. It is not just the likes of Wal-Mart (434,000 employees), K-Mart (358,000), Sears (403,000) and McDonald’s (177,000) that pay very little as compared to General Motors or Dupont, but banks, too, are lousy employers. Early complaints during the Reagan years that US workers were losing well-paid industrial jobs, then being forced into minimum-wage (‘hamburger-flipping’) service work, were silenced by the rapid increase in white-collar positions in banking, insurance, financial services and real estate offices. It was assumed that those employees at least would be well paid. That turns out to be wrong. The average earnings of the mass of ordinary, ‘non-supervisory’ employees in the financial sector as a whole – some five million in 1995 – are below $8 per hour, only slightly more than in 1970 ($7.64) in constant dollars, and much less than GM pays its assembly-line workers.

What has happened to rank-and-file wages in the booming financial sector, breeding-ground par excellence of millionaires, billionaires and zillionaires, exemplifies the paradox of an increasingly rich economy in which more and more Americans are less and less prosperous. That is one of the results (there are many others) of ‘turbo-charged capitalism’, itself the combined effect of rapid technological change, the retreat of state controls and globalisation. By accelerating structural change in the economy, turbo-charged capitalism rewards agility as much as competence, penalising ordinary working stiffs who cannot smartly jump to something better when their jobs are eliminated or downgraded by technically-induced organisational change, imports or deregulation. When all must run fast if only to stay in place, a few will run much faster than that and do very well indeed; but most will fall behind.

The ruling orthodoxy has a master-remedy: faster economic growth for ever and ever. But it no longer persuades. In the first place, another bit of the orthodoxy calls for monetary stringency and high interest rates to slow growth as soon as it accelerates, in order to prevent inflation. Moreover, the US economy has grown a great deal since 1978, but the earnings of seven out of ten Americans have declined.

Very, very slowly, thanks to the fitful success of oddball candidates like Perot and Buchanan, the impossible is coming to pass: in a nation where market-worship is the true national religion, where the prime victims of turbo-charged capitalism are even more anti-government than its leading beneficiaries, it is beginning to be sensed, however vaguely, that there are no remedies, other than political remedies, for increased and increasing income and wealth inequality. We have not yet had a one-time only (for immediate redistribution) wealth-tax candidate in the United States, even though the top 2 per cent of all households have been the beneficiaries of more than 100 per cent of all the country’s economic growth during the past quarter of a century (‘give me your vote and I’ll give you $40,000’), but we have had Buchanan. Having started out with abortion songs to lure the Right-to-Life troops into his service (they have activists in every county of every state), family and children talk (he has none), gay-bashing etc, Buchanan’s campaign came to stand for what is in effect state intervention against turbo-charged capitalism, to his own surprise no doubt.

Nor can it be said that Buchanan’s remedies, however unwise, were wholly without substance, as his infuriated critics kept saying. As against a Microsoft America, whose Gross National Product would be huge but whose well-paid employees would be very few, Buchanan’s protectionist America would have a somewhat smaller Gross National Product but a far more prosperous base of clerical and industrial employees, the ‘middle class’ of contemporary American discourse – actually a conspicuously moneyless lot between underclass and over-class, not a bourgeoisie with means, between proletariat and upper class.

If imports were reduced by Buchanan’s high tariffs – as I have said, as of now, the United States is a net importer of manufactured goods – all Americans would suffer some loss as consumers, because they would be forced to buy more expensive and/or inferior US-made goods instead of being able to pick and choose from the world’s most competitive output. American manufacturing employees both industrial and clerical would also be penalised as shoppers, but they would gain greatly overall because the production of those more expensive and/or inferior US goods behind tariff walls would do wonders for their wages by increasing the demand for their labour. Of course US exports would also be reduced, because even if other countries did not retaliate by raising trade barriers, their own ability to buy US goods and services would decline. That would offset some of the gain for US manufacturing employees, but not that much given the present trade imbalance. By contrast, more prosperous Americans would lose at both ends: first, because they consume imports disproportionately, and second, because they now have the lion’s share of the benefits of globalisation (partly, as Buchanan kept saying, because they own and manage entities that now produce abroad).

Buchanan’s proposal to stop immigration was greatly ridiculed, but it would certainly have raised the incomes of the poorest Americans. Ironically, the urban black underclass, a group most unlikely to vote for Buchanan, would have gained the most. If the hard-working Mexican and Central American immigrants, both legal and illegal, who now work as gardeners, maids, cleaners and manual labourers, were kept out, those jobs would once again be available for the least skilled Americans. Poorly paid and with worse fringe-benefits, those are nevertheless the only jobs that many Americans are qualified for. As of now, these particular Americans are simply unemployed, or else employed in the bottom rungs of the crime industry, at very great cost to the United States, which is suffering the consequences of a permanent intifada by unemployed and unemployable black youths.

When the Great Depression of the Thirties ravaged the lives of people in all parts of the world sufficiently developed to partake of the international economy, almost all bankers and academic economists were in perfect agreement that the only possible remedy was to reduce government expenditure. We now know that the exact opposite was the case, that much could have been done by simply printing money to finance any and all government spending (with accompanying import licensing, to prevent the exhaustion of foreign exchange reserves). At the time, however, respectable politicians could only agree with respectable professional opinion, leaving it to a few radical-fringe politicians to challenge the professional wisdom (Mosley in Britain, unsuccessfully; Hitler in Germany too successfully). In the absence of a new political economy of redistribution if not re-regulation able to confront today’s turbo-charged capitalism, and specifically its impoverishment of the 80 per cent of working stiffs, the United States may yet end up with Buchananism, with or without Buchanan as its protagonist.

So far, mainstream Democrats and Republicans, like the established political parties of Western Europe, have completely failed to respond to the acute sense of personal economic insecurity that afflicts so many of their electors. Instead they promise more growth thanks to the magic of a yet more dynamic economy. While centre and centre-right parties in most countries now contradict themselves by preaching both unchanging ‘family values’ and dynamic economic change, centre-left and leftist parties offer both more assistentialism and dynamic economic change. But what most people in the United States as in Europe want is not the possibility of better jobs or higher incomes thanks to economic growth (they very rightly suspect that their earnings will not increase) but rather security for the jobs and incomes they already have – which are threatened as much by the structural changes caused by growth as by a lack of economic growth.

The one thing that the majority certainly does not want is more assistentialism: people who are employed and who are earning, earning perhaps very well, but who fear for their economic future, have no use for political parties that want to tax away more of their uncertain incomes in order to assist those who do not work, and to feed the huge, inefficient bureaucracies that stand between them and the assisted.

A vast segment of the political spectrum is thus left vacant by the centre right contradiction, on the one hand, and by leftist assistentialism, on the other. In American politics, that was the space briefly occupied during the 1992 election year by the caprices of Ross Perot, who burdened his central message of personal economic security with all sorts of strange preoccupations. And that is the space that was briefly dominated by Buchanan.

Actually, for all his exasperated Americanism, there was nothing specifically American about Buchanan’s message. Just as turbo-charged capitalism is a global phenomenon, so is the reaction it has evoked: the neo-Communist electoral victories in Hungary, Poland and Russia, the French riots and strikes, the winning ‘no’ vote in Italy’s retail liberalisation referendum, even Carl Bildt’s defeat in Sweden’s last general election – all derive from the same causes as Buchananism.

If a new political economy cannot emerge to tame the new force, populism in many different local forms may well come to dominate both American and European politics. In all cases, it would have to promise more personal economic security to the broad masses of office workers, shopkeepers, industrial workers and government employees now threatened by efficiency and unemployment. In some cases, it might acquire a fascist undertone by adding racist and authoritarian stances (we would only be spared the militarism of the original version because there are very few expendable youths in today’s post-industrial families).

What makes this outcome less improbable than it may seem is the likelihood that the Great Deflation will last for another decade or even more. We happen to be in the surplus-of-everything phase of the global demand/technology cycle. The result is today’s chronic, worldwide unemployment. Two decades ago we were in the opposite scarcity-of-everything (inflationary) phase of the cycle, exemplified by the very high oil, metal and grain prices of the mid-Seventies. It was then that the ‘Club of Rome’ issued its predictions of catastrophic food and energy shortages. At the time, there was already scarcity (that is why real prices were rising). With the world’s population steadily increasing, it was a matter of simple arithmetic to predict that the scarcity would increase, causing further increases in energy and raw-material prices, and also famines as more and more of the world’s poor would be priced out of the market.

But the result of the scarcity of the Seventies was not more scarcity and famine but rather a great upsurge of technological progress. Agricultural techniques, whose development was stimulated precisely by the high prices caused by current and anticipated shortages, yielded the ‘green revolution’ that multiplied the production of rice, wheat and maize. Similarly, high oil prices propelled the many-sided improvement of energy production and conservation techniques, while high metal ore prices promoted extensive substitution. Finally, the labour shortages that were causing wage-inflation in the Seventies, powerfully increased the recourse to automation and robotisation in all advanced economies.

When we look back we can now see that, in the first phase of the cycle, existing technology applied to the world’s natural resources, plus an increasing population, cause scarcity and rising prices (inflation). In the second phase, that same scarcity stimulates the development of new technologies, while prices are still rising so that the stimulus is kept up. Finally, in the third phase, the new technologies applied to the world’s natural resources result in abundance and falling prices (deflation).

During the first two phases unemployment is low, because the workforce is employed in overcoming technological limitations in the struggle against scarcity – i.e. in the attempt to extract more production with existing techniques. At that point, resource-inflation is compounded by wage-push inflation. During the third phase, however, unemployment is high, because the new techniques successfully developed to overcome scarcity yield abundance, so that there is no striving to increase output by hiring all available labour.

We are now in that third phase, in case anybody has not noticed, the phase of global, chronic unemployment. There is also a fourth phase (otherwise we would not be able to make it back to the first phase of the cycle) in which demand increases because of economic growth, rising incomes and rising demand – eventually causing the return to scarcity within the constraints of existing technologies, thus restarting the cycle. When that fourth phase of inflation and full employment will start is anybody’s guess. For now, only political remedies can overcome the consequences of third-phase abundance, deflation and unemployment: they must be political, because the economic-theory armoury is ineffectual, while the Bill Gates solution of high-tech education for all to allow high-tech employment for all simply does not work: even in the United States, homeland of the New Titans, of most of the world’s software industry, and of much of the world’s high-tech industry in general, the total number employed in computer and data-processing services (everything from writing software to PC repair), was only just over one million last year, out of 114 million employed Americans. As for the number of Americans employed in the production of electronic ‘and other electrical’ equipment – i.e. including all possible computers, accessories and ancillaries – it is actually in decline, being at present 1.6 million when it was 1.7 million in 1990. These numbers are still awaiting a response from the high-minded people who criticised Buchanan without formulating any respectable substitutes for his remedies.

For the time being we have only central-bankism. In some narrow but important ways, Americans who voted for Bush, Perot or Clinton in 1992, and then for Newt Gingrich in 1994, are actually governed by Alan Greenspan, Chairman of the Federal Reserve, just as Germans are governed by the Bundesbank, Japanese by the Nihon Ginko and so on. Two generations ago, their predecessors compounded the third-phase natural deflation of the late Twenties by demanding drastic cuts in government spending, or even budget surpluses, and duly brought about the Great Depression that was ended only by war’s deficit finance. Today we are, once again, in a third-phase deflationary phase of abundance and unemployment; far from having to employ the largest possible workforce to overcome technical limitations, most trades can produce more and more goods and services with fewer and fewer employees. But the central banks keep pursuing their eternal master-goal of fighting off high inflation by means of high interest rates and lending restrictions, entirely disregarding the circumstances we are now in.

It must be fully recognised that the power of the central bankers is so great because it is so broadly based. First, they are sustained by almost all respectable professional opinion, as they were in the Thirties. It is therefore foolish to criticise Greenspan or any of his foreign counterparts personally. They do not decide anything of their own volition. They merely exemplify, apply and enunciate a consensual doctrine as unchallengeable within its own premises as the Immaculate Conception. In the second place, central bankism attracts both right-wing and conventional left-wing political support, not to speak of the centre, whose opinions coincide with the centre of gravity of respectable professional opinion.

To bond-holders, especially the truly rich (as opposed to poor people with money, even much money, who speculate), the fight against inflation, or better still, the achievement of deflation, is self-evidently the only blessed cause. But central bankism would be politically weak if it did not also attract the support of the passive Left everywhere – the Left that is much concerned with the welfare of ordinary working stiffs but unwilling to risk any innovative action on their behalf. For that Left, the mainstream Left everywhere nowadays, the only truth is the central bankers’ mantra that inflation is the cruellest tax. Which it is, on its own: when prices start rising, real estate goes up as do all long-lived assets, and they go up more than proportionately, anticipating as they do future inflation. Hence those who already have assets become richer, while those who don’t must pay much more if they need to acquire, for example, a dwelling to dwell in. Inflation is disorienting, creating fast-buck opportunities for fast people even as working stiffs on fixed salaries and wages fall behind. That same disorientation causes inefficient distortions in the economy, most visible when there is hyper-inflation (when people run to spend instead of working) but always present in proportion.

As against these truths, there is a greater truth. Full employment causes inflation, as everyone knows. By the same token, however, so long as spending is sustained, money-fuelled demand for everything causes full employment, as it did after 1939 with war’s deficit finance. (Stagflation – inflation plus unemployment – only comes about when investment falls because would-be investors do not invest, out of fear of a forthcoming strangulation of demand – to stop inflation of course.)

Anyone who believes that the humiliation, self-doubt, impotent sense of futility and material impoverishment that unemployment has brought to one out of 15 (US, UK) or one out of ten (France, Germany) fellow citizens are worse than some loss of real GNP to distortions, and worse than inflation’s inconveniences and irritations for all, should oppose central bankerism during this third-phase deflation. As for the inequities of inflation, wealth or ‘excess earnings’, taxes can certainly offset the cruellest tax, as they did during the Second World War. Would the GNP suffer? Of course. But in the United States, and not only there, the GNP can afford to suffer, having grown mightily while eight out of ten citizens have failed to share in its growth.

Turbo-charged capitalism is not caused by deflation; its accelerated societally disruptive structural changes in jobs, firms, industries and localities have been brought about by the releasing effect of government deregulation and privatisation, globalisation and unusually rapid technological progress. Turbo-charged capitalism merely happens to coincide with the present third-phase deflation. To undo its causes would involve much more interference with the economy and world commerce, and much more inefficiency than to replace central bankism with full employment, while tolerating the resulting inflation and relying on a wealth tax to negate its inequities. Nowadays, the economic thinking of Democrats or Republicans, Tories or Labour is interchangeable for most purposes; they are all different labels for central bankism when it comes to money and employment policies. That suits the Right very well; only inflation plus a wealth tax could suit an active Left not content to emulate the Right, but for the lachrymosity of its background music.