Archive Transcript: Speeches
Sol "Chick" Chaikin's Speech at Columbia University, 1981
Sol Chick Chaikin
Columbia University
April 25, 1981
The need for "economic revitalization," like motherhood, is universally accepted in our country. Few, if any, would dispute the fact that the American economy is in serious trouble today and that corrective measures must be taken if we are to avoid even more severe difficulties.
Here, however, the consensus dissolves. When substantive programs of economic revitalization are examined, the differing outlooks remind one of the old tale about the elephant and the six blind men. One of the blind men touched the elephant's trunk and likened the creature to a snake. Another touched its massive leg and said that an elephant was like a tree. And so on. Because each of them focused on a single aspect of the creature, each blind man drew extremely limited conclusions about the true nature of the elephant.
Likewise, some economic theorists tell us with absolute conviction that declining productivity in the United States is the root of our economic problems. Boost productivity, they urge, and everything else will fall into place. With equal zeal, others point accusingly to the money supply. Reduce the amount of money available to the economy, they say, impose high interest rates and tight money policies and the invisible hand of the market place will do the rest. Then we are told that the problem has been that too little money has been available for investment. We are urged to increase the supply of venture capital by improving our national savings rate and drastically reducing government expenditures.
We have been informed by the new administration in Washington that the key to economic success is income redistribution-from the working and middle classes to the wealthy. Mr. Stockman and his friends would increase the rate of return on capital through accelerated depreciation of plant and equipment, reduced tax rates to benefit the wealthiest investors, dramatically decrease the capital gains rate, severely cut back social legislation and, for good measure, impose a subminimum wage for teenagers.
None of these proposals, however, satisfactorily addresses the question which should be the starting point in any discussion on economic revitalization. Why has the American economy failed to replace worn-out antiquated factories? Why have we allowed excessive import penetration to eliminate a number of key jobs in manufacturing industries over the last 20 years? Why has plant capacity utilization been so low during most of the 1970's and currently rests at one of the lowest points since the end of the Second World War? The broad answer to these and similarly based questions is that we have followed policies that have resulted in deindustrialization. The available time is insufficient to examine all of the practices which have contributed to the erosion of our industrial base. Therefore, I shall focus on the implications of two long-standing policies: our commitment to unregulated international trade and the Federal Reserve Board's monetarist approach to the problem of inflation. Each of these policies has been in practice long enough to allow a fair assessment of its ramifications. Each has enjoyed bipartisan support in Washington and has been substantially accepted by successive administrations, both Democrat and Republican.
Our post-war affection for so-called free trade has not been reciprocated by other nations. The competitiveness of American exports is frequently determined not by intrinsic quality or value, but by the dictates of American multi-nationals, cartels and foreign trade ministers.
One might have assumed that our leaders would, like their counterparts in other trading nations, seek conditions which are supportive of domestic industry as a whole. On balance, however, our policy decisions have had nearly the opposite effect.
Some of our policies have been deliberate; other the result of shortsightedness. At the end of the Second World War, we were motivated by critical strategic, as well as economic, considerations. We sought through the Marshall Plan to rebuild post-war European economies to help create the basis for stable democracies.
Through the early 1950's, as Europe concentrated on economic recovery, American industry enjoyed a comparative advantage in trade because we were effectively the only major world producer of goods. Europe was devastated, but the war's destructiveness never reached North America.
The unprecedented financial assistance provided to Europe through the Marshall Plan and then through foreign investment by American corporations led to economic recovery. They created demand for U.S. exports, which would not otherwise have existed. This foreign demand decreased the impact on American manufacturers of the reduced expenditures for war material following the Allied victory. Consequently, the severity of the anticipated post-war economic slump in the United States was largely mitigated. U.S. industry could absorb, without undue difficulty, the millions of returning servicemen. Because demand remained high, new business starts increased, technological innovation was introduced on a large scale, and peace-time applications were found for production facilities and research.
Sharing of our industrial know-how and our ability to supply the market of the European democracies did diminish and ultimately eliminate the comparative advantage which U.S. manufacturing enjoyed in the period immediately following World War II. The implicit decision to foster competition for U.S. industry was tied in with the establishment of a strong Western Alliance. The absence of global conflict and more specifically the essential absence of regional warfare in Europe in the past 36 years is one outcome of these circumstances, one whose value is incalculable.
Our policy with respect to post-war Japan had similar ramifications. Emergence of a stable, friendly, economically viable Japan was, as in Western Europe, a vital American concern. Unlike Europe, however, Asia did not readily offer a sufficient market in the immediate post-war period. Nonetheless, we provided aid and shared out [sic] technology. The war in Korea helped create the basis for an impressive part of the rebirth and growth of the Japanese economy as Japan became a crucial supply base for American and U.N. forces. We also provided an additional critical inducement to assist Japanese industry. By establishing a foreign exchange rate most favorable to Japan and maintaining it over the years, until 1971, in fact, we encouraged Japanese exports while that country continued to pursue a highly protectionist policy on imports.
America's post-war export predominance could not continue indefinitely, particularly as post-war Western Europe and Japan recreated their industry. In the absence of large-scale military expenditures, both Japan and Western Europe concentrated on rebuilding plant and equipment and on consumer goods output, raising living standards and, later, as their industrial plant grew, on increasing their exports. American multi-nationals, then in the process of formation and rapid growth, set up subsidiaries in Western Europe and, to a far lesser extent, in Japan. Initially, we were not severely affected. Domestic growth in the United States compensated for the relative decline in our exports to Western Europe and Japan.
By the early 1960's, however, American workers, including those in the less skilled sectors of the apparel and textile industries, began to be affected by cheaper imports from Asia, particularly Japan. Employers and unions were told by Washington that the Japanese were doing us a favor. The American economy was better off without these so-called "sunset" industries, the policy makers said. The American economy is still expanding, it was asserted, and displace workers could easily find new jobs in labor-intensive industries where skills were roughly comparable, such as electronic assembly. This counsel proved to have little merit. In a few short years, the Japanese had also established a dominant position, first in radio, then in television and other consumer electronics. America's unilateral free trade policy had helped to erode the very industries that were to ameliorate the first wave of market and employment dislocations resulting from Japan's post-war economic revitalization.
Our appeals to Washington for a rational policy of fair trade fell on deaf ears. We were told that the Japanese were merely doing what they could do best and that America should do the same. We were advised that the backbone of the American economy, our high-technology, capital-intensive industries, could provide plenty for all. Americans who were idled by import penetration in labor-intensive industries could be retrained for jobs now in steel, auto, or computer technology. Yet, it is precisely workers in these industries who are today facing similar dislocations, the result of the ever increasing flow of Japanese imports.
I am not using Japan as a bette noir. If Japan were an isolated case, perhaps the issue of trade policy would not bear so heavily on our current economic problems and their solutions. But Japan is not an isolated case.
Rather than acknowledge that there are limits to the U.S. economy's ability to absorb imported goods, our policy makers have encouraged a growing number of developing nations to increase their exports of labor-intensive products to the United States. Korea, Taiwan and Hong Kong are just a few of the nations which look to the American market for sustenance in a number of key export products and the level of their import penetration continues to increase. Under these circumstances, some firms in the affected industries are reluctant to make new investments in the United States. They correctly perceive that, given government trade policy, imports from unconscionably low-wage nations can and will diminish the market share of domestically produced goods.
Some economic policy experts even suggest that industrialized countries, particularly the United States, abandon manufacturing and concentrate on service industries. The service sector in the United States has grown significantly in the wake of technological advances and fewer industrial workers are required. However, in the process we are losing the needed interrelationship between the goods-producing sector of an industrialized society and its service sector. So long as a powerful foundation continues to exist in goods production, a service superstructure can be expanded. In many poor nation service sectors-broadly defined-are large in relation to the goods-producing sector at least as far as the "economically active" part of the population is concerned. This clearly has not contributed to higher living standards for most of their people.
Carried to a logical conclusion, this view, in effect, proposes that the United States become a rentier nation, living off the income of its foreign investments. The idea is, of course, preposterous. It ignores the great mass of people and how they are to earn reasonable livings. Profound distress leaving to even more severe social problems than those we have today would result. This would be the inevitable outcome if we seriously diminish or lose our goods-producing base and reduce incomes for most workers to the low levels paid in the service industries, assuming that service industries could absorb the overwhelming part of the American work force. An economy which forfeits its right to produce for its own needs would also be unable to encourage technological skill or innovation. Forfeiture of our goods-producing sector would compel our best technological minds to migrate. Nevertheless, our trade policy and the resultant investment practices of the multi-nationals will ultimately result in an America devoid of manufacturing.
In fact, profit seeking, regardless of its cost to our nation and our people, has been central to the process of deindustrialization, particularly in the last two decades. The rate of return on U.S. direct investments abroad, on average, is significantly higher than profits on domestic investment and some of the largest corporations and banks make from 50 percent upwards on their profits abroad, providing an irresistable [sic] allure to those corporations with sufficient resources to operate on a global basis.
In the developing nations, particularly those of Western Europe, American-owned factories produce products that in prior years would have been exported from the United States, manufactured by American workers. The corporations now reap the greater profits of that production abroad while the American workers in American plants have been idled. In developing nations the multi-national corporations have the best of both worlds. Their massive resources place them in an enviable position to negotiate with a prospective host country, enabling them to exact favorable conditions. Tax abatements, donations of land, site preparation, and acceptance of their non-compliance with government regulations are among the standard concessions made to global firms. Less publicized is the de facto subsidization of profits which occurs when the host country takes measures to keep wages artificially low. In the developing nations, ruled by autocrats, it is easy to keep wages artificially low. In the developing nations, ruled by autocrats, it is easy to keep the work force in line. The incentive for such repressive measures comes from the certain knowledge that there are other developing nations, eager to host multi-nationals, where the living standard is even lower. The outcome of the resultant competition among developing nations to provide conditions most attractive to corporate investors has been in stark contrast to our goals in post-war Western Europe and Japan.
Moreover, the massive capital transfer abroad by U.S.-based multi-nationals robs our economy of the one most essential resource for revitalization. In the twenty years 1960 through 1979, the net outflow of capital from the U.S. has been almost $70 billion, excluding even larger retained profits abroad that are not repatriated. In the last 15 years such investment has approached $60 billion. Does U.S. business really need additional sources of venture capital as proposed by the Reagan Administration? What guarantee do they provide that any new investment monies will not further when the business community's appetite for foreign undertakings?
For incentives to business to have any real significance to the American people and in the American economy, we must create a rational system of fair trade to help save American-based businesses and jobs for American workers. Central to a rational trade policy would be import quotas negotiated on a global basis in those sectors where import penetration has significantly diminished domestic employment.
Let me emphasize that the ramifications of our approach to international trade are inexorably linked to our domestic economic policies. Almost 90 percent of our consumption is produced within the United States. The adverse effects of our import policy would, therefore, naturally be of less concern if our domestic policies contributed to a booming economy.
But it is apparent that to combat inflation our policy makers-in the Nixon, Ford, Carter and Reagan administrations-have intentionally restricted growth. In the process we have created unemployment. We have stifled basic research. We have delayed the productive application of state-of-the-art technology. We have consciously contributed to further erosion of our industrial base. And, worst of all, we have, in the process not abated, but exacerbated, the ravages of inflation.
We have been exposed, in the last decade, to many nostrums to "cure" inflation. The initial medicine was recession. The idea was to bring down the fever of inflation by cooling down the economy. The theory was that prices would be held down if demand were held down. To accomplish this goal, it was desirable to make money scarce by raising interest rates or playing with the Federal Funds rate.
We have been taking that medicine, in one form or another, for more than ten years and the medicine is making the patient-I mean this country-even sicker. And the reasons are not hard to find.
- When interest rates go up, the cost of money rises, pushing up the cost of everything in our economy that involves money-the total economy.
- When interest rates go up, small businessmen find it hard to survive. Their place in the market is taken by the giants who move increasingly to monopoly positions-who set prices with the usual inflationary results.
- When the economy is deprived of capital to expand, supply runs short-and that is inflationary.
- When prices outrun purchasing power, inflation brings on unemployment. People don't have enough to buy what we produce.
- When people can't buy and when plants don't operate at close to capacity, we have unemployment.
- When plants are run only at partial capacity and idle overhead adds to unit costs, that recession becomes inflationary.
The dangerous dogma that offers us two miserable alternatives-unemployment or inflation-has been so widely accepted that it has come to be treated as an incontrovertible truth. Yet we have both at the same time. Maybe, in time, retrogression will help to decrease inflation but at what price, at what suffering for millions and millions of Americans.
You are among the best educated and most talented minds this nation has to offer. Your training and talent is for innovation. Yet, I must admonish you that your national desire to innovate will be stifled if we continue the unspoken, but obvious, policy of the 1970's to check growth.
In the 80's we must spur growth in order to hold down prices. We must multiply the supply of goods and services to make it possible for American to buy what they need to live decently. We must start moving immediately in four vital areas: fuel, food, housing and health care.
I do not select these areas at random. I pick them because they are the areas of economic necessity. I pick them because these four items-fuel, food, housing and health care-make up about two-thirds of the budget of the typical American family and 80 percent or more of the budget of our less fortunate families. I pick them because in all four of these fields we put up with needless scarcities in today's economy.
We have the potential in this country to overcome our painful fuel scarcity and the persistent increases in oil prices. Beyond petroleum and nuclear energy, we are geographically blessed with many other resources: coal supplies for hundreds of years that can, with a bit more attention, be cleaned for burning, can be liquefied for use in vehicles, can be gasified for pipe transport; solar and wind and tidal energies that are readily at hand that are non-polluting; tar sands and shale oil and heavy petroleum and geothermal sources; mountains of waste that can be converted through bio-mass processes into energy; and down the line, there is fusion, a safe and clean form of nuclear energy that is almost inexhaustible.
Development of these supplemental sources of energy must be our number one priority. We must be energy independent-for economic reasons, for political reasons, and for military reasons. Just as we have resolved at one time that we would never let a Hitler become our master, no matter what the cost, so must we decide that we will never allow our economy or our political policy to fall under the rule of any sheikhs in the Persian Gulf, no matter what the cost.
By increasing our energy supply from many new sources we will do more than declare our economic and political independence. Increased supply will hold down prices. Cleaner sources of energy will decrease pollution. And we will have decades of work for people in the building and construction industry, as we install new facilities.
We cannot expect to achieve energy independence overnight. But if we do not start now, we will never reach the goal we must reach. And if we do start now, we will begin to relieve some of our immediate pains while working toward a full cure in the years ahead.
In the second great area of concern-food prices-we need not anticipate delay. We have the capacity right now to increase our supply of agricultural goods and to increase it prodigiously.
To the extent that there has been a problem in food production, it has been the threat of too much, not too little. It has been the policy for years to reward farmers for not producing and to penalize them for producing. We have maintained artificially high prices by supports and parity payments. The government has repeatedly stepped in to buy up farm products to keep them off the market.
We have done all this in the name of keeping prices up to help preserve the small farmer. Yet there are ever fewer and fewer such farmers. Those that exist are, in essence, merely underpaid contractors for American agri-business.
Is it not time for us to rethink our agricultural policy to protect the small farmers and the consumer against the financial powers that sit astride our food industry, underpaying farmers and overcharging consumers? Is it not time to devise policies that will give small farmers a guaranteed income that will grow as our per capita income grows? We could, at the same time, multiply our farm output-to enlarge our supply so that we may not only hold down prices, but also combat malnutrition and outright starvation both here and abroad.
The third area of concern-housing-is rapidly assuming crisis proportions. For the first time in our nation's history, the average family cannot afford to buy a new home: it is too expensive.
The cost of private dwellings is not high because of labor costs. Despite their relatively high standing in the world of wages, labor costs in construction are now about half the percentage of total costs that they were a generation ago, having fallen from 38 to 40 percent to something around 18 to 20 percent. The big costs today are financing and land. In our lifetimes, they have tripled and quadrupled as a percentage of final cost.
Financing in prohibitively high because of the repeated hikes in interest rates. Contractors must pay more for mortgages; buyers must do the same; the shortage of new homes put on a third inflationary pressure. I would suggest to you that if the Federal Reserve System knows how to push rates up it must be smart enough to know how to bring them down.
Something can also be done about land costs that are escalating incredibly in a society where about 90 percent of the population is crowded into about three percent of the land area. I believe that we can and that we will inevitably reverse population flows, redistribute our people, if we have the vision and the will.
The history of America is the history of a people on the move-generally in response to economic opportunity. Millions came to this land for precisely that reason in the first place. The Homestead Act of the 1860's moved hundreds from seaboard [sic] cities to inland [sic] farms because free land was available. The gold rush moved populations. The development of the auto peopled spots on the map with big cities, making tires, cars, and refining oil. The mechanization of American farming forced millions of Americans out of rural and into urban America.
That can, and indeed, will happen again as we develop vast new sources of energy in areas that are now deserts, prairies, deserted coastal regions, mountain valleys. To gather new energy supplies we will not only have power plants. Manufacture will cluster close to such sources. Indeed, reindustrialization can become truly meaningful as American manufacture ceases to be dependent on expensive outside sources of fuel.
New towns and cities will grow up in new places. And with a bit of planning and foresight, these can be places where the present landlord is Uncle Sam, who can make land available with a bit more generosity than the gouging speculator.
In such new communities, homes can once more be brought within the reach of the average family. In such new communities, too, some of our best brains can be put to work to design planned urban areas that will provide the amenities presently lacking in many of our older cities that grew up as accumulated accidents.
Our fourth and last concern is health care. Even with third party medicine, it is becoming prohibitively expensive, especially for lower income groups which can hardly afford the deductions that will be necessary to provide them with a comprehensive system. To help distribute the costs of such third party medicine, members of the Union of which I am President are passionate advocates of national health insurance.
Such a system, however, must go beyond providing a means to pay the bills. It must focus on the delivery of health services as well as on the costs and eliminate duplication, segmentation, needless overheads and overconcentration in some areas and underservicing in others.
We must also begin to pay greater attention to maintaining health standards instead of solely curing the sick. American medicine has performed miracles in the art of detecting the illness and then prescribing the remedy. We have not done as well in educating our people on how to avoid illness in the first place.
We must get about the business of wellness as well as illness.
To cut fuel costs, we seek to conserve energy; to cut medical costs-whether private or public-we must learn to conserve our health.
I have suggested a way to combat inflation in the four fields that are decisive. We can do so while maintaining, almost guaranteeing, full employment. We can do so while increasing, rather than exhausting, our resources, especially in fuel and food. We can do so while improving our environment. We can do so by increasing our supply of goods and services rather than by decreasing demand. We will get stronger by growing rather than by shrinking.
In Republican ranks, this is now called "supply side" economics. Indeed, some administration stalwarts may even complain that what I have said here is just an echo of their proposals.
There is, however, a difference-a profound difference. The typically Republican way to spur growth is, as I said earlier, to make the rich richer. They propose that a greater share of the nation's income go to the investing class; they propose that they chief beneficiary of tax cuts shall be the investing class; and finally they propose to "restrain demand" by reducing that portion of the nation's income that goes to the working class.
Such a policy is not only unjust but downright dangerous. It is unjust because it seeks a redistribution of the national income with a greater flow to the top at a time when there should be a flow in exactly the opposite direction. The gap between the top and the rest of us is too great as it is; if our democracy is not to become an elitist society, with a handful living in luxury and the rest of the nation living in poverty, we should seek a redistribution of income that will give a greater share to the people who work.
From a practical point of view, moreover, the proposal to enrich the rich so that they may have more to invest and to create jobs is counterintuitive. No sane businessman will invest in the production of a product he cannot sell. Before he puts a penny into the project he wants to know what market there is for the commodity-or the service.
The American market is the American worker and his family. If they get a smaller share, they can only buy less.
What then will the investing class do with its money? It will do what it's been doing for the last couple of decades. It will not set up new productive facilities; it will buy existing facilities, it will use its riches to gobble up the small, to concentrate ownership, to build monopolies and oligopolies. It will use its riches to buy land then sell it at higher prices. It will use its funds for speculation.
Once more we will be back to where we were in 1929 when the economy grew to top heavy that it toppled and dumped us all into the pit of deep depression.
We don't have to maldistribute our national income to get funds for investing. Indeed, we will do much better if we get a more equitable redistribution of income.
Where will the funds come from if not from the investing class? They will come from workers whose present pensions are the single largest source of new capital formation in America. The funds will come from workers who can afford to buy life insurance policies, to put a few extra dollars in a savings account, perhaps even purchase some shares directly or through mutual funds.
At the same time, we will be putting a solid base under the American market—to encourage investment here to produce products for eager buyers.
I have been talking about economics, bread and butter. But what I have proposed has implications that go far beyond jobs and income, beyond fuel, food, homes and health care.
I am defining a national purpose-a national purpose that every American can understand. I reject the negativism that says America has no future expect to shrivel and shrink. I see a positive future.
We are a rich land. We do not lack space. We do not lack resources. We do not lack talent.
We do not even lack will. But we do lack a vision for all Americans.
In the absence of such a vision, we are lost-like a mariner on a storm-swept ocean without a compass. We are lost and the young are doubly lost because they grew up in the recent decades when the exhilarating experiences of our war against the Depression and our war against dictatorship were just items for the history books.
To me, the rebirth of our economy, with plans reaching from now into the next century, will mean a rebirth of the American spirit.