Chapter 10

A History of the Industrialization of America


Early US gained from protectionism

Without protecting the fledgling poorly capitalized firms in America against the British and others, the US would never have become the industrial power that it was by the 1920’s when our government decided free trade was more important than a successful America. Let’s retrace some history so we can learn again how we built up our industrial complex the first time. We surely can do it again.

History – The first Industrial Revolution

The period in US history known as the First Industrial Revolution came about between 1820 and 1870. This was a time when the country changed from “hand and home” production to machine and factory. This industrial revolution was important as inventions permitted massive outputs to be produced in factories.

For example, one of the most important industrial inventions that predate the revolution was Eli Whitney’s cotton gin. He built the first one in 1794 to split out the cotton seeds from the cotton crop. Additionally, during the same time, huge spinning and weaving machines were developed that could be operated by water power even before electricity was readily available. Later the water powered units were often replaced by steam, and then finally electricity. These inventions and the risks taken by American entrepreneurs helped spur on America’s growth, making the country a modern and more urban industrial state. Protective tariffs were used by government to assure the American companies were successful.

The Second Industrial Revolution occurred approximately from 1867–1914 though some see a combination of the first and second industrial revolution occurring in the 1850 time period and beyond. Some may have slightly different dates for this period, but they are all in the same vicinity.

The ability to produce clean steel is often given as the first of several new areas for industrial mass-production, which are said to have brought on the second industrial revolution even though the major method for mass producing steel was not invented until the 1860s, when Sir Henry Bessemer developed what was known as the Bessemer Process.

Most of the great American innovations were brought forth during this time. Instead of using vision, trial and error, and tinkering, the inventions and innovations of the Second Industrial Revolution were science based. During this period, there was the development of steam-powered ships, railways, and later in the 19th century came the internal combustion engine and of course electrical power generation. Again, protective tariffs were used by government to assure the American companies were successful.

From the 1890’s to the 1920’s, the time period is given the name the Progressive Age. By this time, a middle class had formed in the US and this group was not trusting of the business elite or the radical political movements of farmers and laborers in the Midwest and West. These people took on the label of “progressives.” Like the progressives of today, these people favored government regulation of business practices. Their pet peeve back then was monopolies as opposed to the environment, but their zeal for regulations matched the zeal of today for environmental regulations.

The progressives were not quite as socialist back then though the socialist and communist movements were well underway in other countries at the time so they were much influenced shall we say.

Some good came during this period such as laws regulating railroads in 1887 (the Interstate Commerce Act), and laws preventing large firms from controlling a single industry in 1890 (the Sherman Antitrust Act). Though they looked good on paper, it took Teddy Roosevelt to begin enforcing the laws for them to become effective for America. Roosevelt was the bane of the robber barons and he characterized them as "malefactors of great wealth."

When President Woodrow Wilson (1913–1921) came into office, the progressives gained in popularity for awhile as he was very sympathetic to their views. Many of today's U.S. regulatory agencies were created during these years, including the Interstate Commerce Commission and the Federal Trade Commission. With the US suffering under excessive paperwork and paper forms and regulatory burdens today, it is easy to understand that again the progressives are responsible.

From the progressive era, the country moved through the roaring twenties and through the great depression. Of course there were substantial contrasts with the periods. The twenties were full of mirth and prosperity as the auto industry brought along the oil and gas and road construction industries. Good jobs were plentiful. Telephones and electricity spread even to the countryside. Then in 1929 the Stock Market crashed and the great depression took hold of the country.

Many credit World War II (1941 to 1945) with getting the US out of the depression. When the war was over, the US enjoyed a long period of prosperity from 1945 to 1973. It was the golden era of US capitalism. The US could to nothing wrong with major companies like IBM leading the way with technology innovation after innovation.

The US was doing so well that Congress kept playing with the tax code and had upped the top tax rate to 90% before JFK said, “enough!” There was so much money in the Social Security fund that after Kennedy, President Johnson stole it to finance the Vietnam War in the late 1960’s.

In addition to the war spending, President Johnson was the first president that spent all he could waiting until the hogs came home to stop spending. Most hogs never, never, came home and the few that did got barbecued at the LBJ Ranch. Johnson began one social program after another truly believing the pot had no bottom. For example, Johnson began both Medicaid and Medicare and his administration financed some of private industry's research and development throughout these decades. A number of the projects were visionary and successful while others were merely redistribution efforts. One of the greatest achievements from all of this was the ARPANET, which would eventually become the Internet in the late 1980’s.

From the mid-1970’s to the early 1990’s was a period that some call deregulation and Reaganomics. Because of poor productivity growth and increasing operation and capital costs in several key sectors, presidents in this period turned back the spigot on regulations.

Many conservatives see Barack Obama as the worst president of all time. However, there is one president who many recall that in the pre-Obama era had carried the title well. Like Obama, President Jimmy Carter put forth a huge fiscal stimulus package in 1977 in order to boost the economy but like the Stimulus I of 2008, and the little stimulus of 2010, and the projected jobs bill stimulus of 2011, the Carter stimulus failed miserably. In fact, inflation was never so bad in the country. It began a steep rise beginning in late 1978, and it jumped into double digits and hit 20% with the 1979 energy crisis.

In the Reaganomics era, there were no stimulus packages as they had proven not to work. Dr. Arthur Laffer became a major economic adviser to Reagan for Supply Side Economics which was Reagan’s Answer to the failed Keynesian theory practiced by Carter and now Obama. Reaganomics brought a, fiscally-expansive economic set of policies. Like Kennedy, Reagan cut taxes to promote economic growth. In fact, he cut marginal federal income tax rates by 25%. Inflation then dropped dramatically from 13.5% annually in 1980 to just 3% annually.

Unfortunately, at the same time that mostly positive massive deregulation began under Reagan, so also did the offshoring of manufacturing jobs. Reagan did not do everything right. At the time, there were many that did not really think that offshoring would work while some pioneers chose to give it a try?

Long before Reagan, almost right after World War II, the US was doing so well that it stopped protecting its own industry base with tariffs. The removal of tariffs began in the Wilson years but like a slippery slope, the US gave up more and more of this revenue and the associated protection it gave American industries.

The country began to embrace the notion of free trade but an analysis of the work our negotiators did in these agreements has proven that Alfred E. Neuman as president would have done a better job. There was no trade deal from which the US benefitted.

The US trade negotiators were outflanked and out-tricked and outsmarted and every deal was bad for the US. In addition to the fiscal deficits that came with one president after another adding to the pile, the U.S. started to have large trade deficits. Nobody seemed to connect the dots that the two were related. Free trade policies were undermining the US economy and we all just stood by and watched as other countries became successful at our expense. At one point, you may recall Americans thought that Japan was about to buy all the real estate in the US.

Too big to fail

The problems with the too big to fail rescues of the banks in 2008, when the banks began to fail, began during the Clinton years as this liberal President undid some regulations that even Reagan would not touch. Some say Clinton’s action did more to repeal FDR's New Deal than Reagan ever did. Clinton dismantled the Glass Steagall Act. This action permitted the creation of mega banks like the rescued Citibank and now after the bailout, banks like J.P. Morgan Chase, an amalgam of some of a number of Wall Street's formerly famous institutions, Bank of America, taken back by its own acquisition of Merrill Lynch, and Wells Fargo, the biggest West Coast bank. Together, these banks now issue one of every two mortgages and about two of every three credit cards. On November 29, 2011, it was announced that these banks were given unsecured loans over $7 trillion by the Fed in 2008 to avoid their potential failures.

In addition to Glass Steagall, Clinton removed oversight on derivatives and he got on the free-trade bandwagon just like Reagan and continued gutting American jobs through NAFTA and his permissive attitude towards offshoring.

Bush / Clinton – free traders!

Bill Clinton was a romantic regarding free trade and offshoring, both of which were killing the country during his presidency. In his 1992 presidential debate with George Bush and Ross Perot, it was not Bush or Perot who made the big statement of offshoring and its effects on jobs. It was Bill Clinton, himself. Regarding offshoring Clinton said it “will, on the whole, do more good than bad… if [the US] has a genuine commitment to educate and retrain American workers who lose their jobs.” That is how either naïve our leaders were / are or how much they simply had sold out to corporate America.

In March, 2006, buoyed by his reelection after a very aggressive first term regarding free trade and offshoring, George Bush took his message to India, a fine country, but one which consistently defeats the US in any trade negotiations. The Indian people are the sharpest in the world in putting together offshoring deals and the US is India’s # 1 victim. Yet, despite how miserably the US performs in trade deals compared to India, Bush II did not see it that way any time throughout his eight years in office.

When he went to India in March 2006, President George W. Bush addressed offshore outsourcing (offshoring) to India. He surprised me at how little he cared for Americans jobs.

Bush stated that outsourcing offshore needs to be accepted as a natural part of the global world. He said it should not be feared but embraced. Bush noted that he felt that offshore outsourcing will assist the U.S. in the long run in many ways. According to him, globalization facilitates great opportunities and offers new ways to any country for future growth.

Bush admitted that “several people” do lose their jobs as a result of the full globalization procedure, and he acknowledged it was painful for those losing their jobs (the losing side). Despite the loss of jobs and the personal tragedy it brings, Bush concluded that the offshore development process is really a very fruitful process and would definitely help both India and the United States in the near future.

If we fast forward to the end of the Bush era and into the Obama years, if this were a Burger King ad, somebody would be asking, “Where is the beef?” Since we not only export jobs to India, the US gives lots of hi-tech visas to Indian people so they can come to America to take American jobs. Bush was right. It is a great deal. Unfortunately, it is only a great deal if you are Indian, or Chinese, or Indonesian. If you are American, it is a personal tragedy. Obama, who seemingly hated everything Bush did, continued these policies.

George Bush also said that the US sells lots of air conditioners to India from GE and Whirlpool. He felt that made up for all the jobs they took from US. As of 2008, though it so far has been unsuccessful as GE has been trying to unload its appliance division completely and Whirlpool has been in so many joint ventures with the Chinese that you know it is just a matter of time before Whirlpool can ship those fine air conditioners from their plant of origin in China to India and save a few miles on freight.

No matter how you look at it, the point is that offshoring does not help US jobs one bit. Whether George Bush was lying about that is something that the history books will have to sort out.

So, now in this historical trip, we enter the Obama Administration and its response or shall we say non-response to offshoring. In November 2010 after he had two years to think about it, the President reshaped the notion of offshoring simply as a part of international trade. As a globalist with a number of free trade agreements to his recent credit, the new Obama position on offshoring is to ignore the impact on American jobs. Instead of complaining about American jobs moving to Bangalore, just like George Bush before him, the President soothed India's leaders bysuggesting that trade works both ways.

In his own words: "I want to be able to say to the American people when they ask me, 'Well, why are you spending time with India? Aren't they taking our jobs?' I want to be able to say, 'Actually, you know what? They just created 50,000 jobs.' And that's why we shouldn't be resorting to protectionist measures; we shouldn't be thinking that it's just a one-way street. I want both the citizens in the United States and citizens in India to understand the benefits of commercial ties between the two countries." Thanks for the pep talk Mr. President but it is not trade deals that are needed. It is protection from trade deals. One year later, in 2011, and there have been no results—but it was a good speech! There are no 50,000 jobs. There are none.

Under Republican Administrations and the Clinton Administration, the US has been going global. When Democrats took over in 2007, they said no more trade deals. They were right. Yet, in October 2011 Congress passed three long-awaited free trade agreements. South Korea, Colombia, and Panama are the beneficiaries of these agreements. I see it as US, 0—trade partners, 3.

Despite protectionist sentiment, which is the appropriate medicine and long overdue, President Obama, the new globalist on the US team, claimed victory by getting the three agreements passed. For Obama, it makes him appear politically strong while he is in campaign mode, though the benefits to Americans at best will be minimal and if it comes down like every other trade agreement, the US will lose more jobs.

As a sweetener, to show confidence in a plan that should need no sweeteners, House Republicans agreed to approve an expansion of benefits for displaced workers. So, who is to benefit? Word is that banks and law firms should gain but manufacturers, and the ailing textile industry, which likes to operate in America, in particular, are expected to get another whack right on the chin.

The US is becoming a banana republic

Our esteemed corporations and their incessant outsourcing of what were once American jobs from the 1980’s on have created major economic woes in America. This great recession, which continues into 2012, is replete with runaway spending and corruption galore. It is so bad that some predict that we are becoming a banana republic, if we have not already arrived.

O. Henry created the term "banana republic" in his 1904 book Cabbages and Kings. It is about the fictional Republic of Anchuria—a servile dictatorship engaging in the large-scale production of bananas. Today, the definition has expanded to mean the collusion and even the melding of government and private enterprise. When government and private enterprise collude, who wins and who loses?

One can see many similarities of O. Henry’s vision with a modern government that encourages its corporations to offshore jobs. In this scenario, the taxpayers incur the expenses, (unemployment compensation etc.), while the profits are taken in by the corporations. I’d say that about explains how the United States got to where we are today.