DE-INDUSTRIALIZATION, THE WELFARE BURDEN, AND THE CONCEPT OF "SUMP" INDUSTRIES1 Americans have historically been wont to think of themselves as an upwardly mobile, essentially middle class people. But the development of a significant "underclass" and declining real incomes for many people in the last two decades have increasingly intruded themselves on peoples' attention. President Johnson thought he could eliminate poverty through his Great Society program by a broad spectrum of new welfare programs targetted at the lower ten percent -- apparently deluding himself into overlooking that by definition "poverty" is relative. In a sense he was, at that time, fully reflective of the American people's unsophisticated view of the matter. But upon thought, anyone must realize that when the income of the lowest ten percent is raised to a higher level (short of Marxism's idealistic notion of absolutely equal income distribution -- never attempted during the seventy-one years of the Soviet state), there will still be a lowest ten percent who will continue to feel themselves underprivileged relative to the better-off, to whatever high level absolute incomes may rise. Indeed, there are few, if any, truly poverty-stricken families or individuals in the United States today, defined -- not relative to the contemporary well-off -- but by the standards of only fifty or sixty years ago, let alone incomes of pioneer days or the near subsistence level which obtains in many countries even today. Nevertheless there undeniably remain less privileged groups and individuals in America. And both in terms of self-perception and as a matter of relative income, these people can be described as "poor" by any reasonable definition. Those with a degree of sophistication understand that according to the iron law of genetics, there is a bell-shaped curve of distribution which represents the differing heights, weights, athletic ability, comeliness, and musical talent -- and virtually every other characteristic which can be differentiated in human, animal, or plant population. Nor is the distribution even as between various attributes. That is to say that someone with outstanding skill at football, baseball, tennis, or basketball -- meaning professional level performance in the upper fraction of one per cent of the population -- might well be an undistinguished middle ranker in terms of personal appearance, moral integrity, musical ability, or intellectual capacity. Indeed, as recent events have demonstrated, some may well be at the low end of the scale in some or all of these other attributes. In a free and upwardly mobile society, many unbeautiful people, even moral reprobates, have found their way to a highly successful life as professional athletes, musicians, or actors, based upon extraordinary gifts or talent in one special field. Similarly with businessmen, who may possess this sole talent, yet while unenviable in other ways make a worthwhile contribution to society because of their unique gift in management, finance, or the combined skills of entrepreneur. Somehow contemporary movers and shakers have come to focus their thinking on how to accelerate the development of high tech industry, leaving metaphorical buggy whip (or "smokestack") production behind us -- even while some of us may still depend on metaphorical buggies for transportation (or recreation). In principle, this is fine: a nation should strive to lead the world in new industry and technology. But there is a dimension to the problem related to the "inferior" fifth of the national curve of distribution. Regrettably, those who have been taught from infancy to "aim high" often find the 1 Published in the Proceedings of the Southwestern Economics Association, 1988. The thesis of the paper has been substantially reinforced by two subsequent studies: The Bell Curve: Intelligence and Class Structure in American Life , Richard Bernstein and Charles Murray: The Free Press: New York, 1994; and The Decline of Intelligence in America: A Strategy for National Renewal, Seynour Itzkoff: Praeger, Westport, Conn, 1994. problems of this group beneath their gaze. As with the issue of the welfare threshold discussed above, the higher we push the industrial threshold, the larger the group (in absolute, if not percentage terms) which is unequipped by their limited endowment (of whatever nature) to work in these new "hyper-industries" no matter how much is spent on education, retraining, or re-location grants. The silver lining is that because this problem is concentrated among the unfortunate few who fall within the lowest two standard deviations of intellectual power, eye-hand coordination, or moral capacity (initiative, self-direction, demand for personal independence), with no extraordinary offsetting beauty or musical or physical talent which can be put to use in Hollywood, Broadway, TV (or marriage to a gifted achiever in such field), ameliorating the problem for these unfortunates need not be an intractable task for the rest of society. A great moralist of the Second Century B.C named Mosiah admonished us ". . . Administer of your substance unto him that standeth in need . . . [for whoever] shalt say The man has brought upon himself his misery; therefore I will stay my hand, and not give unto him of my food, nor impart to him of my substance . . for his punishments are just . . . has great cause to repent. I say unto you . . . if God who created you and on whom ye are dependent for your lives and for all that ye have doth grant you life [and you give not to those in need] wo be unto that man. [But] if ye have not; I would that ye say in your hearts: I give not because I have not, but if I had I would give." With the tools of modern taxation and our experience with public welfare schemes there is little need for tender individual consciences in connection with looking after the ungifted minority. The danger is that the failure of current programs is leading an increasing number to "stay their hand". By any reasonable statistical definition, the larger portion of the group essentially ungifted in any marketable attribute, which, given the broad cross distribution of talents, probably accounts for substantially less than 16 percent of the population -- i.e. those within one standard deviation of the norm for any marketable attribute. In former days these made their way in the world in such low tech jobs as farming, mining, and basic industry. Indeed, in 1900 when 40 percent of the population worked in agriculture, the slow, but honest and hard working plodder could get by sowing what his better informed neighbors planted and imitating their behavior with regard to cultivation practices and date of harvest. In an earlier age this ungifted and underprivileged fifth thus needed little or no special consideration. But today, when the maladjustment of this group is manifest, and a normal supply of appropriate jobs no longer exists, we don't like to think about the problem, preferring to blame drugs, street crime or a welfare system run amok for the urban unemployed -- allowing public attention to focus on the more exemplary (though not necessarily in a moral sense) "beautiful" or exceptionally talented people at the other end of the scale. And while the truly incapacitated two percent were earlier warehoused in state hospitals, modern "enlightened" society has pushed them on to the streets to sleep on park benches and abandoned warehouses. With less than two percent of the population of the U.S. in farming today (now a high tech industry by any definition), with declining mining, timbering, and other basic industries, and with a population five times what it was in 1900, we are talking of an absolute number of disadvantaged individuals in the U.S. larger than the total population of several industrial nations -- as many as 8.5 million persons. If those formerly warehoused (and who have today been returned in large numbers to family care, group homes, or the streets) are included, we may be talking of 9 million individuals. By and large, with the exception of those temporarily affected by bad health or bad luck, this underclass (including non-working women and children) of nearly 20 percent of the population accounts for a good part of the ballooning welfare burden, which has become the offsetting factor for former employment in low tech work e.g. farming, mining, and basic industry. Today, some 30 percent of GNP goes to various types of Welfare -- not in least measure to support this substantial minority displaced from useful employment, in part due to the shift into a high tech and professional/service economy -- as well as production lost to our deteriorating international trade position. With the resultant stress on the national budget, people are for the first time seriously asking how we can reduce the perpetual deficit, breaking out of our "spend/spend" budgetary cycle. The answer clearly is not to restore the disincentive of high taxes which helped shift U.S. industry abroad, while providing competitive advantages to foreign suppliers of industrial and consumer products to invade the U.S. market; nor can the answer be the simplistic alternative of just cutting off welfare as some have proposed -- at least until alternative provision is made for a substitute livelihood for the disadvantaged lower fifth of our population. Traditional economic theory is presented in terms of perfect equilibrium in all marginal conditions: production and wages, consumer preferences and output, investment demand and the cost of capital, and long-term equilibrium in external trade--with instantaneous adjustment when one or another marginal equivalency is disturbed. Classical economics treats all Land, Labor, and Capital as perfectly homogenous. It would indeed seem that most economists have progressed little beyond the Classical view, having learned little from Edward Chamberlain's significant insight that most of the economy performs in conditions of "imperfect competition", or Professors Hechsher and Ohlin's insightful observation concerning multiple factors of production, i.e . the relative non-transferability of certain types of labor. Nor have we apparently learned from the modern theory of second-best, that when one country gets ahead of its trade partners in liberalizing its economy (or permits one or another of its partners to lag in liberalizing their economy -- the situation with regard to Japan and the E.C.), this will not necessarily result in an increase in national or world welfare as naive free-traders continue to imagine. On the contrary, through distorting the equilibrium of the international economy, it can lead to a third-best situation in which industries turning out goods which might most efficiently be produced in one country, are lost to less efficient competitors. In such circumstances, the profession now knows--though few individual economists seem to have digested the fact--that the introduction of carefully considered non-protectionist, but "distortion offsetting" counter-measures can recover a second-best position in which both national and world welfare are enhanced. Indeed, if even the threat of such measures results in anticipatory liberalization by the various trade partners, the world could move to a first-best, free trade position in which the welfare of all would be not only optimized, but maximized. Let it be reemphasized, we are not talking here of "protectionism", or even crypto-protectionism. We are talking about efficiency-enhancing, cost-effective, carefully calculated, distortion-offsetting measures to restore optimal efficiency in the already heavily distorted third-best world in which we live today. Such conditions would restore a substantial number of low-tech job opportunities for our less-gifted 20 percent, who would not then be constantly threatened by displacement and unemployment, and would not then be a perpetual welfare drag on the more productive 80 percent -- resulting in higher savings, investment, and greater attention to restoring our competitive position in the world. For the most disadvantaged two percent, we nowadays readily accept the concept of "protected workshops" to restore dignity to the individual and permit their release from hospital or institutional custody to special homes with a residential caretaker. Has the time not come to consider the introduction of low tech "sump industries" to assure the second-best productive contribution of this genetically less-gifted 18 percent? We might thus realize the dream of "workfare" without the need for wasteful state-directed "leaf raking", by making it possible for U.S. industry to provide useful, if low-tech work, as in the historic past. This would eliminate (or importantly reduce) the administrative overhead that has characterized our ballooning welfare programs in recent years, restore the dignity of work to large numbers of demoralized unemployed, and break the generational welfare cycle by setting a work-ethic example to millions of children growing up in households who have nothing but the welfare-ethic before them on a daily basis. How can this be done? The nation takes for granted the rightness of preserving coastal shipping for U.S. registered shipping, preserving internal radio and telecommunications for domestic companies, leaving the states to decide whether or not foreign bankers or insurance companies may operate within their borders, and reserving domestic air transportation for national carriers. Perhaps there is something to be said on other than benighted protectionist or national defense grounds for reserving a specified share of domestic heavy industry, textiles, shoes, clothing, and other selected low-tech areas, to be designated by legislation by some euphemistic alternative to "sump industry". Job access could be reserved for those holding certification from the Department of Labor that they have been displaced from a declining region, e.g. Appalachia, or by foreign competition (e.g. shoes, textiles, VCRs and television sets). Perhaps tax incentives, or even SBA start-up loans, could be made available to provide incentives for business to undertake such low-tech revitalization programs. Or perhaps salaries for recruits to such approved "sump industries" could be directly subsidized, in lieu of current welfare disbursements to beneficiaries -- establishing an entirely new concept of "workfare". Financing might come from a "Competitiveness" or "Market Access Equalization Tax" levied on a five year moving average of the trade imbalance between the United States and any of its trade partners not otherwise exempted on grounds of being an LDC whose development we wished to encourage. Both GATT and the OECD held the conceptually similar Interest Equalization Tax of the mid-`60s, to be compatible with U.S. trade obligations. A CET should be equally acceptable, despite its superficial resemblance to a duty surcharge, as a measure for restoring second-best optimum to the world trade climate and to enable the United States to overcome its chronic balance of payments disequilibrium. This paper does not attempt to provide a blueprint for "Sump Industry" policy. But it is hoped it sketches the philosophical and theoretical basis for undertaking a dialogue looking towards reducing the 6-7 percent plus unemployment levels which seem to have become the acceptable "natural" rate of unemployment in the United States. The enormous waste in welfare outlay and demoralized human lives -- the negative effect on the rising generation as a result of the spreading welfare ethic, and the effects of continuing $200 billion budget deficits (and equally destabilizing balance of payments deficits) which are threatening the world's economic equilibrium, while piling up new problems for future generations, demand fresh and unconventional thinking. Franklin Roosevelt saved American free enterprise by his willingness to take a step in a different direction at a moment of great peril. Charles DeGaulle, a profoundly conservative man, saved French democracy by adopting revolutionary policies. When a country faces a major crisis--and our enormous trade and budgetary deficits can be described in no lesser terms--successful resolution of the problems requires revolutionary policy innovations. Perhaps it is time for one of the most fundamentally conservative American government in 50 years to adopt some extraordinary measures to salvage the American economy. AmEmbassy - BucharestAPO AE 09213-1315 October 20, 1994 Editor The Economist 25 St. James Street London SW1A 1HG ENGLAND Dear Sir: Always fascinated by my favorite magazines fresh new insights on economic thinking. Was impressed by the comment in your Economic Focus piece The Minimum Wage Debate that "It might in fact make sense to subsidize low-paid workers, both to attack poverty and improve incentives to work [by imposing] explicit taxes on the incomes of the non-poor [which] would be honest and take fewer chances with low-paid unemployment." I enclose a paper I presented at the South Western Economic Association meeting in San Antonio three years ago following much the same line of reasoning, which attracted some attention in the Section in which I read it and which was selected for publication in the Proceedings of the SWEA . Regrettably, the notion generated no attention in Washington from either the Bush or Clinton Econo-mavens. Perhaps your article will be better received. Sincerely, D. B. Timmins, PhD (Harvard) Professor of Finance & Economics (ret.)