Manufacturing, Germany, Freedom

Yoshie Furuhashi furuhashi.1 at osu.edu
Sun Aug 11 07:59:33 PDT 2002


At 11:48 AM +0100 8/11/02, James Heartfield wrote:
>The WEEK
>ending 11 August 2002
>
>
>MANUFACTURING POLICY
>
>'Quite inadvertently we let the impression build up that we were
>interested in something called the "new economy" and we weren't
>interested in traditional manufacturing', Patricia Hewitt.
>
>Industry Minister Hewitt's qualified mea culpa over the government's
>indifference begs the question, how such an impression arose, and
>how New Labour's policy can be described as 'inadvertent'. In fact
>DTI advisor Charles Leadbeater coined the phrase 'knowledge economy'
>to describe the government's indifference to manufacturing,
>insisting that we are all in the 'thin air' business these days. But
>a few months ago, Leadbeater was mocking the idea that we can all
>'live on thin air', even though this was the central thesis of his
>own best-selling book of the policy, called 'Living on Thin Air'.
>
>What the government could do to reverse industrial decline is less
>clear in the discussion. For years the government pooh-poohed
>anxiety about the country's manufacturing base on the grounds that
>its earnings were overshadowed by those of the City of London.
>Between 1989 and 1998, manufacturing fell from 24 per cent to 19.5
>per cent of gross value added, while financial services grew from
>18.5 to nearly 24 per cent in the same period. According to brokers
>David Murray and Andrew Smithers
>
>'History shows that both banking and hedge funds are extremely risky
>businesses. They flourish during periods of rising markets, but are
>subject to bankruptcy when conditions reverse. Since 1980 world bond
>and equity markets have experienced one of the longest and strongest
>rises in history.' (Britain: The World's Largest Hedge Fund, Report
>No. 141 14th January, 2000).
>
>If that trend were reversed it would represent real problems for the
>British economy

***** The American Empire at the Millennium's End by James K. Galbraith

In a spirit of millennial gloom and long-term thinking, brood with me on the Great American Trade Deficit. Figure 1 shows the long-term decline from the early 60s until today: How bad is it? Pretty bad, but not yet catastrophic. For a proper millennial perspective, Figure 2 shows data from Werner Schlote's 1952 study, British Overseas Trade. They are for each year from 1697 to 1933. Great Britain ran trade deficits -- at least as measured in constant prices -- almost continuously for over two centuries. But a trend decline set in after 1850 -- at the height of the Empire -- culminating in serious problems with World War I. After that, British manufactures essentially collapsed. The ratio of real exports to imports is barely above 40 percent by the end of the series.

The reasons for the British decline and fall were already known to John Maynard Keynes in the 1920s, and he spelled them out in his famous essay, "The Economic Consequences of Mr. Churchill," following on to his even more famous book, "The Economic Consequences of the Peace." Versailles had inflicted a Carthaginian peace on defeated Germany and Austria, imposing vast reparations obligations while depriving those countries of the industrial means of making payment. As a result, European economic recovery was stalemated, and industrial markets for British machinery were not re-established.

Winston Churchill was then Chancellor of the Exchequer, and in 1926 he returned Britain to the gold standard. Churchill was a Tory Chancellor, and he responded to the interests of the City. London was then the financial capital of the world. Banks generally favored a strong pound; this alongside the Imperial Fleet was thought to assure the strength and stability of the Empire. But unfortunately, poor nations cannot finance rich ones indefinitely. And when they stop doing so, which they did beginning with the Creditanstalt crisis in 1930 and quickly spreading to Latin America as commodity export prices collapsed, the world centered on British financial hegemony fell apart.

Do I see a parallel here? Of course I do. The United States emerged as the world's dominant power following the second World War. We waged, and won, a exhausting struggle of military competition - mercifully without pushing matters to the ultimate war - against the Soviet Union. Victory came in the 1980s. But the cost of winning it was a sharp erosion of our competitiveness in many mundane markets, especially for automobiles and heavy machinery. And afterward we were, in fact, exhausted. Deeply in debt, politically leaderless under Bush and Clinton, we did not take the difficult, expensive, far-reaching and generous steps that could have placed our former adversaries (and their former satellites) on the path of strong and sustained growth, including growth of demand for our exports.

Today, like Britain in the 1920s, we too are under the spell of financiers, whose faith is in the God-almighty dollar, in the strength and power of our markets, in our capacity not to produce and trade but to deal and speculate. And so with high real interest rates and the strong dollar we too have suffered a vast increase in our terms of trade - getting rich at the expense of others. Since 1997 the situation has been aggravated by the collapse of our Asian trading partners, who cannot any longer purchase our goods.

Can we stay rich, this way, for a while? Sure. But as for the millennium to come... Sad to say, the empire model does not work in the long run. Just look at those British numbers.

This column is a short version of testimony delivered on December 10, 1999 to the United States Trade Deficit Review Commission.

[figures omitted, <http://utip.gov.utexas.edu/web/JGarchive/1999/empire.pdf>] ***** -- Yoshie

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