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The ruling free-trade orthodoxy on the economy is wrong. The time has come for protectionism, argues Edward Luttwak

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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 these days there is only one economic orthodoxy, taught 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.

The ruling orthodoxy holds that the US economy is a huge success, propelled by 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 and many more. Most of them did not exist 20 years ago. Today, the combined value of their shares greatly exceeds that of the giants of old-style manufacturing: General Motors, Ford, Dupont and Kodak. In the course of rising 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 a larger number of shareholders. That is a recipe for a great deal of optimism.

Every principle of the ruling orthodoxy is defended by citing the success of the New Titans. Free trade is justified by citing the success of American hi-tech 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. In the process, the existing regional telephone companies, "the Baby Bells", will be swept away unless they become drastically more efficient. True, the Secretary of Labour, Robert Reich, and other members of the Clinton administration have suddenly taken to criticising the mass firings by big corporations in general and by 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 and long-distance television and other data over wires without restriction. 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. The Clinton administration is deploring with sentimental verbiage the consequences it is striving to bring about.

Above all, the success of the New Titans is 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. According to the ruling orthodoxy, readily echoed by all and sundry in America and beyond, downsizing 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.

Yet it is enough to look at the employment rolls of the New Titans, as opposed to their share values, to see that Buchanan's pessimism is right and the ruling orthodoxy wrong. Microsoft and Intel 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 US. In fact all the New Titans listed above have a combined grand total of 128,000 employees, less than half the number employed by Ford alone worldwide, one third fewer than those employed by Ford in the US.

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-tech companies, 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 US).

The consequences of these numbers are enormous. What would happen to the US if the vision of Bill Gates of Microsoft and vice-president Al Gore of an all hi-tech economy were to be realised? The Dow Jones Index would no doubt reach 10,000, or perhaps 20,000, making more billionaires. In the meantime, the number of well-paid jobs in the US economy would decline to a fraction of present levels.

With companies such as GM and Kodak, that equation could not work, because entities that sell mass-consumption goods mostly in the domestic market cannot prosper if most of their prospective consumers are unemployed or employed in poorly paid service jobs. But the New Titans sell their products worldwide to the elites and can afford to ignore this basic axiom.

It follows that the happy-equilibrium interpretation of downsizing is totally wrong: if GM fires you, Microsoft will not hire you. One, you are not trained and Microsoft has no use for uneducated blue-collar slobs spoilt by too much pay for yesteryear's assembly-line jobs. Two, if you are trained, Microsoft will not hire you either - mailing out pre- packaged software is just not that labour-intensive.

Information technology, in other words, is not a job-creator but a job "sink": while it destroys clerical and, increasingly, administrative jobs by the million, it provides relatively few jobs of its own - and those mainly in the US. Elsewhere, in unfortunate lands with weak software industries, it merely destroys jobs.

It is above all engineers that such industry needs, and yet between 1968 and 1995 the median annual salary of engineers with 10 years' experience declined 13 per cent in constant dollars to $52,900. Evidently there is an over-supply. So much for the current nostrum of a hi-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 US, so much so that the official unemployment rate has been falling in spite of all the downsizing. But this is small consolation. As everyone knows, the average earnings of "non-supervisory" employees - 77.5 million out of 114 million employed Americans - have been declining for years (from $8.40 per hour in 1978 to $7.41 in 1994 in constant 1982 dollars) 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: banks, too, are lousy employers. The average earnings of the mass of ordinary, "non-supervisory" employees in the financial sector - 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 workers.

That is one of the results of "turbocharged capitalism", the combined effect of rapid technological change, the retreat of state controls and globalisation. By accelerating structural change in the economy, turbocharged 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 but most will fall behind.

The ruling orthodoxy no longer persuades in part because another bit of the orthodoxy calls for monetary stringency and high interest rates to slow growth as soon as it accelerates to prevent inflation. The US economy has grown a great deal since 1978, but the earnings of seven out of 10 Americans have declined.

Very, very slowly, thanks to the fitful success of odd-ball 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 turbocharged 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 increasing income and wealth inequality.

We have not yet had a one-time-only wealth-tax candidate in the US, even though the top 2 per cent of households have been the beneficiaries of more than 100 per cent of the country's economic growth during the past quarter of a century, but we have had Buchanan. His presidential campaign came to stand for what is in effect state intervention against turbocharged capitalism, to his own surprise no doubt. 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 smaller gross national product but a far more prosperous base of clerical and industrial employees, the "middle class" of contemporary American discourse.

If imports were reduced by Buchanan's high tariffs, 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 choose from the world's most competitive output. American manufacturing employees would gain greatly because the production of those more expensive US goods behind tariff walls would do wonders for their wages by increasing 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 ability to buy US goods and services would decline.

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. Buchanan's proposal to stop immigration was greatly ridiculed, but it would 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. 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 US, which is suffering 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 agreement that the only remedy was to reduce government expenditure. We now know that the exact opposite was the case. In the absence of a new political economy of redistribution, if not re-regulation, able to confront today's turbocharged capitalism and specifically its impoverishment of 80 per cent of working middle classes, the US 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 state-assisted and dynamic economic change. But what most people in the US, as in Europe, want is not the possibility of better jobs or higher incomes thanks to economic growth but security for the jobs and incomes they already have.

People who are employed and who are 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 the unemployed, and to feed the inefficient bureaucracies that stand between them and the assisted.

A vast segment of the political spectrum is thus left vacant. In American politics, that was the space briefly occupied during the 1992 election year by the caprices of Ross Perot and latterly by Buchanan. There was nothing specifically American about Buchanan's message. Just as turbocharged 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 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.

The writer is director of Geo Economics at the Centre for International Studies in Washington. This piece is an edited version of a longer article in the current issue of the "London Review of Books".

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