Monday, September 27, 2010

Weapons & Movies: The Consequences of Globalization

America’s industrial base is as ruined as an armadillo, splattered on the highway, its squashed and bloody carcass embedded with the tire tread of an 18-wheeler—an 18-wheeler carrying jobs south to Mexico, Asia, and points beyond. 
  
In fact, in America, there are only two industries that still consistently provide the country with a positive balance of trade: Weapons and movies. 
  
Everyone knows that Hollywood movies dominate the global marketplace—which is really surprising: Filmmaking is an almost pure value-added business. You need relatively little specialized equipment—the majority of the cost of a film production is labor. Because of this, you would think that a lot of other places—not just India—would have their own home-grown film industries, and that American movies would be just a small fraction of those markets. 
  
But films made in Hollywood, U.S.A., account for over half of worldwide ticket sales, both in dollars terms and in number of spectators—and this is excluding the U.S. domestic market. Insofar as films go, Hollywood California is where it’s at. 
  
Everyone also knows that America makes the best weapons—as well as the most. Estimates are that the United States accounts for 41% of the world’s foreign arms sales, $156 billion—dwarfing its closest competitor, Russia, which has 17% ($64 billion) of the pie, or France, with a mere 8% ($31 billion). (Source is here.) 
  
Apart from making the most—and selling the most—American weapons are the best: The most sophisticated, the most advanced—American weapons manufacturers are the Rolls Royces and Ferraris of death delivery systems. 
  
Why do these two industries dominate their respective global markets so completely? 
  
Industrial policy is the answer: The markeplace was not allowed to trample these industries. Flying directly in the face of the Globalization mantra, when it came to weapons and movies, their respective marketplaces were managed and cajoled, and directed so as to foment these two American industries. 

In the case of Hollywood, the industry as a whole—not just the workers or the producers or the capitalists individually, but the industry collectively—made a conscious effort to protect its interests in the face of global competition. 
  
The vehicle Hollywood used—and still uses—is the MPAA: The Motion Picture Association of America. The trade association of the major Hollywood film studios. 
  
Originally called the Motion Picture Producers and Distributors of America at its founding in 1922, its original mission was to organize the major film producer and distributors so as to protect their industry, which was under fire because of the pornographic content of films at that time. 
  
The MPPDA quickly established the Hays Code of self-censorship, named after its first president, Will H. Hays. The code—vilified later in the ‘60’s and on until today—was essential to saving Hollywood: It protected the industry from its own excesses by protecting the consumer from what he or she did not want to see. 
   
Perhaps some people in 1922 wanted to see, say, a horse having sex with a woman on a twenty-foot tall screen, silent except for a cheerful piano-driven rag—but most families with small children certainly did not: The Hays Code self-censored the industry so as to make it more “family friendly”. No question some of the measures of the code were ridiculous—it almost kept Clark Gable from saying one of the most famous lines in motion picture history—but the Hays Code protected moviegoers from Hollywood’s excesses: And thereby allowed Hollywood to flourish. 
  
After WWII, the newly renamed Motion Picture Association of America under Eric Johnston self-consciously added the mission of expanding American motion picture distribution efforts overseas. A lot of these efforts were rather unsavory—including bribing foreign theaters so as to show only MPAA product, and disrupting foreign film production, etc. 
  
But a lot of what the MPAA did—most of it—was simply sound business practice that was innocuous in and of itself—and probably more effective in the long term: Encouraging foreign film festivals, such as Deauville, as a showcase for American films; sending big stars on overseas tours and junkets; bringing foreign journalists to Hollywood; etc. 
  
In the case of American weapons manufacturers, a fluke of the law protected their business: The U.S. Department of Defense is not allowed to purchase foreign-made weapons—but any weapons system it buys must be the result of an open competition among at least two manufacturers. 
  
This policy evolved after the Second World War, and was part of the reason for the creation of the Department of Defense. During the War, procurement was haphazard and inefficient. So in 1947, in an effort to streamline the process, the Office of the Secretary of Defense (OSD) was created, in order to have weapons procurement for all branches under one roof. From this office, in 1949, the Department of Defense was formed, unifying all of the armed forces, and centralizing procurement. 
  
For obvious reasons, no major power wants to be dependent on a foreign supplier of weapons. Between the world wars, American weapons manufacturers were the backward sibling to their European and Japanese counterparts—but following Lend-Lease and Pearl Harbor, and because it was the only major power not to have suffered any war-related damage to its industrial infrastructure, the United States became the dominant world player in weapons manufacturing. 
  
Because of the Cold War, and because of NATO and its defense committments, the United States continued building and developing state-of-the-art weapons systems, all under the protection of Congressional mandate. 
  
In other words, American weapons development was managed by a de facto industrial policy. Likewise in films, there was a self-conscious trade group that managed a common industrial policy. 
  
Both of these approaches directly contradict the Globalization orthodoxy—and point to how Globalization wrecked the American industrial base, and ultimately the American economy. 
  
Right now, aside from weapons and movies, in 2010, almost no other American business consistently adds a positive to the balance of trade. Only service-oriented businesses—such as health care—flourish in America. Industrial, productive businesses are dead as the aformentioned armadillo. 
  
Why? Simple: Globalization. 
  
First of all, what is Globalization? It’s the economic convention, based on the flawed principle of comparative advantage, of allowing open borders and free, unrestricted, unregulated markets to dictate global production. 
  
For instance, suppose you own a sheet-metal factory in Akron, Ohio. Globalization says, If you can install a factory in Vietnam producing the same (or more) sheet metal at the same (or less) cost, you ought to shut down the plant in Akron, and move your operation to Vietnam. 
  
This is a simplification, of course, but it gets at the basic idea: The comparative advantage of different regions ought to be exploited, for the benefit of the individual business. 
  
This of course presupposes that the good of the individual business, in aggregate, is good for the society as a whole. 
  
Right away, the obvious flaw in Globalization is evident: What is good for an individual business is not necessarily good for the industry overall. And what is good for the individual is often not good for the society as a whole, either. 
  
The export of jobs started with lower-skilled labor—the garment industry starting in the 1950’s began exporting jobs overseas. Manhattan’s Garment District was the epicenter of this Globalization. 
  
But during the ‘70’s and ‘80’s and ‘90’s and Aughts, the skill-level of jobs being exported from the United States rose with each year. At first it was the low-paid schmatte workers in Asia and Central America. But then it was steel in China. The customer service representatives in India. The financial software designers in Bulgaria. The industrial designers in Chile. The high-end consumer electronics factories in Vietnam. 
  
Each of the industries that exported their jobs gained some profit—but the cost of this profit was the industrial core of the United States. The individual business made a few more miserable percentage points of earnings the year they laid off their American workers and off-shored their factories. But American industry as a whole? It lost. 
  
Why was this policy carried out? Because of distorted metrics. 
  
Private businesses carried it out because it was a relatively easy way to substantially boost profit and apparent performance. The business’s management could claim success—and therefore demand more money—by exporting jobs and thereby saving money, savings which showed up on the balance sheet as spectacular but short-lived profits. 
  
Politicians in the government and the Federal Reserve thought it was great too—gross domestic product was given a boost, with every business that off-shored its activities. 
  
To any nay sayer, the typical line was, “We are benefitting the American consumer with cheaper products—and besides, the loss of jobs is just capitalism’s creative destruction. Don’t worry, the unemployed will find new jobs.” 
  
But they didn’t. 
  
Notice how, after the recession in the 1990’s, there was talk of the “jobless recovery”—that’s because there was no recovery: The metrics had been gamed. Profits were rising, as factories were closing and shipped overseas—so the elites in the private sector seemed to be blameless. Because of the corporate profits, the GDP numbers rose—so the elites in the political classes seemed to be blameless as well. 
  
By the numbers, there was a “recovery”—it’s just that there were no jobs. 
  
A recovery without jobs is no recovery at all. It’s just a recession disguised. 
  
That’s what happened across America for about 40 years: A recession disguised. Industry after industry in America was hollowed out, all in the name of Globalization . . . 
  
. . . and now in 2010, people wonder how come the American middle class is dwindling. How come there are more poor people in America as a percentage of the population than in many Third World countries. How come median incomes among that dwindling middle class have been stagnant over the last 20-odd years. How come—even though the last 40 years have been “the greatest economic expansion in history”—things pretty much suck. 
  
Globalization. Or in other words, an unrestricted, global free market. America exported all its jobs, and in exchange imported cheap doo-dads and corporate profits. Now, they’re dealing with the consequences. 
  
Had there been sensible, coherent industrial policies—like there was in Hollywood deliberately and in the arms business accidentally—American industry would still be standing. But it’s not. 
  
The political Right and Left are equally to blame. 
  
Many on the political Right are free-market reactionaries—understandably, but foolishly. 
  
Their motivation is, when it comes to the efficient assignment of resources, free-markets are far superior to command-and-control economies, which is what the Left was advocating until only very, very recently. (People forget that, by the way: Only very recently has the Left seen the light—and when they saw the light, they became the New-New Left.) Such C&C economies failed miserably—eventually. The collapse of the Warsaw Pact proved that. 
  
But the Left kept insisting on them for so long—since the 1900’s all the way to at least 1992—that the Right developed the tic of reflexively defending free-markets: Automatically, at all costs. 
  
However, free markets are a tool—they are not an end in themselves. Think of free markets as a hammer: Very useful for most house-building jobs—but would you use a hammer to draw up the architectural plans? Would you use a hammer to cut glass? Certainly not. 
  
Yet that is what both the Right and later the reconstructed “New-New” Left did: They allowed free markets to dictate American industrial policy. In other words, they used a hammer to cut glass. 
  
The Right was so terrified of anything that even smelled of state planning of the economy, that they undermined any effort at sensible, coherent industrial policy. Coupled to that, capitalists co-opted the Right, so as to advance their do-not-touch-private industry agenda. Just like pornographers who bucked the Hays Code, Capitalists undermined sensible industrial policies, so that they might do as they please in order to enrich themselves at the expense of American industry. 
  
The Left didn’t help matters much—rather than having the government act as an honest broker, the political Left kept trying to use government to control private industry. 
  
Or else, the Left unreservedly—and often unreasonably—sided with the workers, at the expense of the overall industry. Think of all the ridiculous benefits Big Labor got from businesses during the ‘50’s, ‘60’s and ‘70’s, benefits that the unions—even as they negotiated the agreements—knew could never be honored by the companies without breaking them. Look at GM—broken by its pension liabilities. 
  
And if using the government or the labor unions to screw businesses didn’t do the job, the Left would lob incendiary cries of “Collusion!” or “Anti-competitive schemes!” at anyone trying to bring any one industry together to formulate a sensible, long-term plan. Pretending to stand up for the consumer, when all the Left was doing was venting its rage at having backed a losing economic ideology. 
  
So the Right reacted predictably: Free markets, all the time, everywhere—and any call to regulate or manage them was shouted down as “Socialism! Socialism! Socialism!” 
  
The Right never saw how advantageous sensible industrial policy could be. The Left never allowed for the possibility of cooperation between labor and management—all they did was encourage confrontation. 
  
The old-style, “The Internationale”-singing Socialist Left was swept away with the collapse of the Eastern Bloc. They were replaced with the New-New Left—the Left of Bill Clinton and Tony Blair. The intellectually cynical Left that embraced capitalism out of electoral pragmatism, and free markets and free trade agreements out of political calculation. 
  
So the result was Globalization: Free unrestricted markets, without rhyme or reason. Or in other words, If all you’ve got is a hammer, then every problem looks like a nail . . . 
  
The terrible thing is, American elites of both the Right and the New-New Left were proud of this Globalization. The Right saw it as a triumph of capitalism—they had been right after all! The New-New Left saw it as a chance to show voters that they really did believe in capitalism, after the fall of the Berlin Wall had left them intellectually naked. Both political bands were proud that they were “improving the efficiencies of American industry”—by shutting down American industry. These “efficiencies” were nothing more than cost savings run amok— 
  
—like those poor sick anorexics, who see muscle beneath their skin and think it’s “fat”, and so therefore starve themselves some more, until that “fat” is gone? Same thing with American industry: They cut and cut and cut, outsourcing all they could, sending overseas as many jobs as they could, until . . . now: There is nothing left. 
  
The best way to save money in a business is to shut down the business. With Globalization, that is what America did. The business elites and commentariat thought it was a good thing. 
  
They thought wrong. And now, America is paying for that mistake: Because if ever there is a “recovery” from this Global Depression, there are no industries left to regrow. They’re all gone. 

15 comments:

  1. Don't forget the US cultural dominance of main stream entertainment in Europe, Australia and much of Asia. This dominance explains the continued existence and success of US media producers, including Hollywood and all the other myriad forms of electronic entertainment, and would seem as least as important as the Hays code in providing success to the industry as it grew. Whether they would put a US built car in their driveway or not, a lot of people aren't going to switch to Bollywood or China for their entertainment for a long time.

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  2. I sympathize with the overall tenor of your post, but the U.S. still produces food, pharmaceuticals, and semiconductors as well as movies and mayhem.

    I also agree that the current crisis is more the result of a long, heavy tidal shift as opposed to an abrupt tsunami of financial destruction. People get upset (myself included) about Poulson, Bernanke, and Geitner et. al., but the decline really started back in 1971 when Nixon nixed the gold standard and domestic oil production peaked.

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  3. Brilliant! thanks.

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  4. Our political economy is so immoral, so lacking in humanity, that slight participation renders me spiritually exhausted. Turn on the tv and see violence. Open a newspaper and see calls for more war. The movies display the product line of military contractors (Transformers 2). It is gross. Lira, you're right. The economy is rooted in war and the production of the tools of war.

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  5. Yet another well written and thought provoking article.

    However, given the complexities of international commerce, I will submit that larger forces were at play that led to the evisceration of the U.S.'s industrial base. One was corporate management's failure in the late 1950's and throughout the '60's at recognizing and incorporating improvements in industrial technology; improvements that were embraced by Japan and Western Europe following WWII. Another, and probably more important reason, was Nixon's closing of the "gold window" back in 1971. (I disagree that peaking domestic oil supplies were a major factor in the decline of our industrial base. Look at Japan, Germany, South Korea, etc. who have very limited, if any, domestic oil supplies as evidence of this.)

    Keep up the good work.

    Hammrofgodz

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  6. "America" is a continent, not a country.
    "USA" means "United States of (the continent) America". So saying "America is ..." is like saying "Canada, USA, Mexico, Argentina, Cuba, Brasil, etc.etc. is ...".

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  7. I appreciate where you're coming from regarding the costs of globalization in this post, but free trade is still a net positive, even at the cost of deindustrialization. It's all a matter of opportunity cost. Why do yourself what you can pay someone else to do for less and pocket the difference? This is especially true if Americans (ahem, USA-ians. Sorry, Geo. ;)) can focus on a more profitable activity, in which case everyone benefits. The trouble is that America has been unable to find a better opportunity to justify placing those industries elsewhere, and the rest of the world just doesn't want enough of what we've been offering. If you could take currency out of the equation for the sake of simplification, we're trading little or nothing to the world in exchange for millions of goods from them, and obviously, that's a prescription for a haircut to the US American standard of living. Between that and government policy monkeying with our global competitiveness, we're up a creek.

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  8. All I can say is, "You must live in Connecticut." I do. And the only industries left are weapons and movies. And both are subsidized like crazy by our dear leaders.

    Hartford wrote special legislation to attract filming crews from California, promising extra low taxes at the expense of all other businesses in Connecticut. And no politician would EVER stop "fighting" for "job creation" by building more subs, more attack choppers, and more fighters at Connecticut's last working factories.

    Even the maniacal Rosa DeLauro criticised Obama for axing the F-22 that would have been built in Connecticut. She had to. Those were jobs. Even though much of the countless billions would end up in some Caymans account maanged by the executives' attorneys.

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  9. GL -

    Another excellent, thought provoking piece.

    Disagree however, in two areas:

    "...government act as an honest broker..."

    Government cannot, by virtue of its propensity to grow and accrue power unto itself, ever be an 'honest broker' of Anything.

    "...sensible industrial policy..."

    This would be akin to the oft quoted: 'Sensible gun legislation'.

    Again, because of the inherent nature of government to grow and amass power & control, there is very little the government provides which can be construed as 'sensible'.

    Moreover, it is not government's station in the first place, to be involved in anything outside of Constitutional mandates or curbs on governmental power.

    In other words, we need government to do only what it was originally prescribed to do, which, even in these 'modern times' is quite effective, because although centuries have passed, human nature remains the same.

    If our Constitution is/was anything, it is/was a limiting factor on the excesses of human nature - specifically, man's inherent desire to rule over his fellow man and in the process, rob him of his God-given Liberties.

    What we need is Faith in our fellow citizens to contract amongst each other without the nattering-nabob's of the Nanny-State interfering with our every moves, while $greasing their dirty palms with our sweat-equity in the process -

    "People who govern themselves, govern best"

    "The government that governs least, governs best."

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  10. Great article.

    I would follow Agent P in assigning much blame of our present globalization to our Rulers in Washington. The overwhelming pressure from government regulation, taxes, subsidy and unions over the last two or more decades have created much of the present situation.

    We are getting exactly the kind of government, economy and society we want. Until the people see the consequences of this "free trade", nothing is likely to change. As long as people believe we can shift the cost to others - foreigners or future generations, nothing will change until the collapse

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  11. GL put into words what I have been thinking for a long time. Specifically his left right political analogy was spot on. For crying out loud, sensible free market oversight! The effects of NAFTA and the like are acute in some areas and hardly noticeable in others. I live in the southeast where the textile industry, at one time, supported the entire region. After NAFTA, gone. We now have the auto manufacturers which is only here because organized labor is not. GL has a real world, sober, spot on point of view.

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  12. Pretty correct. I believe that what broke GM was it's finance division, GMAC, that diversified into home mortgages. They had already negotiated the UAW workers' pensions and wages down previously, but they couldn't do anything once GMAC started hemorrhaging money. (The same with AIGFP killing AIG, the finance arm killed the company.) By your argument, Ford would have gone broke as well and they survived.

    Automation has hurt a lot of people. As computers have gotten faster and smaller, jobs have disappeared as processes requiring human workers have been replaced by computers. Hollywood's labor costs may fall if Cameron's technology takes off. Once you've digitized the actor, all you need is their voice and maybe some motion capture together with an ILM or Digital Domain and a render farm. But what happens to LA when good jobs disappear?

    Overall though, globalization is bad for the country either having jobs insourced (nursing, grad students) or outsourced (IT, biomedical research, manufacturing, refining). The petrochemical industry and agriculture are still producing, though both are on the decline. So, overall an excellent article and dead on about both parties bringing about the decline.

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  13. I recently discovered this blog and have added it to the must-read list.
    In the '80s I was a manager at a small electronics manufacturer in CT. We transitioned from in-house to outsourced manufacturing, not because we thought it was a good idea, short-term OR long-term, but because we had to to remain profitable competitively with other manufacturers who started doing this. Since there was nothing to restrict the trend, everyone climbed aboard - despite EVERYBODY knowing what the result would be. I can't help but think the lack of regulations to restrict this trend had to have been by some nefarious design since the end result was so plain to see.

    Also at that time, Japan was just starting to compete with the American car companies. My first Honda was a 1978 Honda Accord hatchback. Instead of competing on quality, the GMs of the world offered longer and longer warranty periods. When the car broke down, you no longer needed to worry about the cost of repair. Theoretically. But they (arrogantly) didn't factor in the cost of their customer having to take their car to the shop or how the consumer felt about their lack of attention to quality. A 60-minutes show on the exploding Pinto was devastating. Japanese cars never needed repair in the first place. As a side note, the American car companies operated more and more in the red but the finance arms saved them (GE, too). Interesting that as industry faded, finance (debt) rose from the ashes.

    At any rate, thinking that we could have kept the car companies here with an industry "plan" makes me think we'd still be driving cars of the same level as Hollywood movies. Exploding Pintos with caps on liability. Shudder.

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  14. Again, superb insight and stylistically sharp.
    However, I would like to add that the LEFT / RIGHT dichotomy of the ascension of globalism in the United States got a huge NUDGE by such unaffiliated "globalistas" of the global financial oligarchy.
    To the extent that the trappings of globalism feed the international bailout con of fraudulent paper, your articles regarding hyperinflation surely recognize this important point.

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GL