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What caused the deterioration of the rust belt?

What caused the deterioration of the rust belt?

A lack of government support at a time when their main foreign competitors had plenty of it.

In 1960, both Japanese and American steel companies needed more than 20 worker hours to produce 1 metric ton of steel. By 1970, Japanese steelmakers had cut this cost down to 7.5 worker hours on average, while American steelmakers still needed 15.

The collapse followed shortly after. In 1973, US steelmakers were still producing 111.4 million tons. By 1978, this figure had dropped to 97.9 million, while steel imports had ballooned to 24 million.

Japanese steelmakers were able to boost efficiency so quickly solely because of state support. In 1952, the Ministry of International Trade and Industry designated steel a ‘strategic sector’, meaning all its domestic sales, all its imports, and all profits from its exports were tax-exempt.

Just as importantly, it would benefit immensely from the bureaucracy’s ‘administrative guidance’. Effectively controlling private banks through a selective discharge of Bank of Japan reserve funds, the bureaucracy channeled low-interest loans towards the steel industry, provided the industry with cheap and sometimes free land, and dredged harbors specifically for steelmakers so they could place their factories dockside, significantly reducing transport costs.

In parallel, the Japanese bureaucracy did whatever it could to increase the supply of credit so there would be plenty for ‘strategic sectors’ to borrow. The Bank of Japan gave each private bank a waku (loan quota) which was usually much higher than its managers were willing to risk.

MITI had sole control over the sale of large sums of foreign currency, and used this power to restrict the import of foreign technology, preventing current account deficits (and making IP theft all but inevitable). Finally, the diet voted for tax writeoffs for anyone depositing in the state-run Japan Postal Savings Bank, providing the state with the single largest capital reserve in the world (by 1980, the JPSB was three times the size of Citibank).

To ensure this money and privilege would be well used, Japanese regulators revised business law to defang the power of shareholders. This left corporate management with only two goals; beat interest rates, and keep the government happy. To prevent “excessive competition”, the bureaucracy also set production ceilings for each firm.

With an endless supply of capital, state-provided cost advantages, no need to care for their owners, and a ceiling on how much they could produce, Japanese steelmakers did the only thing that could increase their profits in the long-term: tear down their plants and rebuild them with every technological change. For the Bank of Japan to approve a ‘reconstruction loan’ (it approved all loans, as private banks submitted each request to the government), the required increase in output was only 10%.

This meant that Japan’s largest steel mills were being demolished and rebuilt from the ground up every 5-10 years for only marginal increases in productivity. They were at the cutting edge of technological advancement, and their floor plans were optimal.

In the American steel industry, in contrast, the main mode of modernization was ’rounding out’, or the replacement of the oldest and most unreliable machines within a plant, usually with no changes to the floorplan.

This was the method of modernization that produced the highest short-term return on investment, but in the long-term doomed the industry to technological stagnation. American steelmakers likely would have adopted the more ambitious “raze and rebuild” approach if they could, but, due to a mix of labor pressure, management corruption, and a total lack of government support, they lacked the resources.

In the aftermath of the Great Depression, the US government broke decades of uninterrupted support for business interests in labor disputes bypassing the National Industrial Recovery Act. The act, among other measures, created the National Labor Relations Board to mediate labor-management disputes and all but ensured that management would be forced to engage in collective bargaining with workers, stripping owners of many of the coercive powers they could use to suppress unions before (such as threatening to fire anyone who supported the formation of a union).

For the next four decades, the NLRB helped create a high-wage equilibrium that historian Jefferson Cowie called ‘the Great Exception’. Flanked by eras of high corporate profits but stagnant worker incomes both before and after the period, the 1933-73 period was an outlier in American economic history, involving the very opposite.

Unable to suppress unions but still beholden to shareholders who demanded short-term profits, management’s interest was to solve labor disputes quickly and enrich themselves in the process.

The Great Exception in the steel industry involved a constant cycle of labor demanding revisions to wages and industrial management timetables (i,e. the number of seconds shoveling 3 pounds of coal was supposed to take), and management quickly granting their requests along with a blanket raise for all employees, themselves included. Shareholders were powerless to stop this cycle because of the NIRA’s rules.

The destructive effect this cycle had on steel profits led bitter steel executives to blame the unions for the industry’s collapse, a talking point quickly adopted by right-wing American pundits. Critically, however, unions were only 1/3 of the cycle, with the other two players being the NLRB and corporate management.

Neither of these entities had the best interests of the company at heart, with the NLRB seeking quick resolutions for political stability, and management seeking to line their own pockets – something which was only possible if they caved in, not if they stared the unions down.

American economic historians often cite the above, more nuanced interpretation of the collective bargaining cycle as the primary reason for the steel industry’s collapse. In reality, however, the cycle was of only secondary importance in the industry’s decline.

The formation of the American “Rust Belt” mirrored similar downturns in the European steel industry, all of which were egged on by the meteoric rise of Japanese steel. At the end of the day, this was not a fair fight. Even with perfect labor-management relations, American steel had no hope unless Washington was willing to provide the same level of support as Tokyo.

The US government attempted to protect the industry but did so in a characteristic and ineffective way: restricting imports. The 1970s and 80s saw repeated restrictions on imports in the steel sector and others suffering from Japanese competition, which eventually escalated into a full-blown trade war. The US government was not willing, however, to foot the bill for the modernization of the sector, so the basic problem remained unsolved.

1. Written by u/Cal_Ibre.
2. Johnson, Chalmers. MITI and the Japanese Boom.
3. Cowie, Jefferson. The Great Exception.
4. Libermana, MB. Comparative productivity of Japanese and US Steel Producers, 1956-93.
5. Hoerr, John. And the Wolf Finally Came: The Decline of the American Steel Industry.
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