World at Crossroads : U.S. Holds Key to ‘90s Economics

Before she lost her job two years ago, Delany Henderson had no idea where Singapore was. She learned in a hurry.

It was then that low-cost foreign competition forced AT&T; to close its residential telephone factory, the last of its kind in the United States, and move the operation to the tiny island nation in Southeast Asia. AT&T; began streamlining its business phones facility here at the same time and Henderson was one of more than 3,000 people who abruptly found themselves unemployed.

“It felt like a carpet had been pulled out from under our feet from the other side of the world,” said Henderson, 28, who was laid off about the same time her young daughter was diagnosed as having a life-threatening kidney condition. “Before, we thought we were living over the rainbow, but it seems like there’s no ‘over the rainbow’ anymore.”

Henderson is one more American who has felt the jolt of once-remote international economic forces. Insulated for decades from most foreign competition, American business has been forced for the first time to play by the same rules as everyone else.

U.S. Dominance Lost

“The United States swayed the international economy until the 1970s; now the situation is reversed,” said Jack N. Behrman, a former Commerce Department official and now a University of North Carolina professor. “Consequently, the United States cannot dictate, it is merely first among equals.”

An increasing number of U.S. companies are responding successfully to the competitive pressures. As in AT&T;’s case, however, that has frequently required moving some operations abroad, and it has almost always demanded streamlining those that remain in the United States.

Inevitably, many workers have been left behind. A recent Labor Department study found that nearly 11 million Americans lost their jobs from 1981 through 1985 as intensified competition forced plants in the U.S. to close or cut employment.

The United States has salvaged at least some of these workers. Henderson, for one, entered a two-year federal retraining program to learn how to be a respiratory therapist. She is on the verge of landing a better job than the one she lost.

Yet just as the country is learning to cope with massive job dislocations, new challenges are looming that may be just as difficult as those of the recent past.

“During the next five years,” explained John D. Paulus, chief economist at Morgan Stanley & Co. in New York, “the global economic landscape will be turned upside-down all over again.”

Consider some of the economic transformations that are expected to distinguish the 1980s from the 1990s:

--The dollar. Through the first half of the 1980s, the dollar’s rising strength on international markets exposed American producers to a surge of bargain-priced imports that drove many basic U.S. industries to the edge of ruin.

But the dollar has declined over 2 1/2 years to its weakest level since the end of World War II. So foreign firms, lured by the ever-cheaper cost of doing business in the United States, are flocking here to set up shop. As they compete with U.S. businesses on their home turf, they are also helping to rebuild the nation’s industry.

“The political issue of the 1980s was imports, but that problem is in the process of evaporating,” said Paul Krugman, an economist at Massachusetts Institute of Technology. “The issue of the 1990s is going to be the flood of foreign investment into the United States.”

Labor Supply Falling

--The work force. Between about 1970 and 1985, as members of the post-World War II generation became old enough to work, the U.S. economy was faced with the unprecedented challenge of generating millions and millions of additional jobs for them. Even though there are more than 12 million more jobs now than in 1980, political attention was focused on the jobs lost to foreign competition.

Now, however, the number of entry-level workers is beginning to fall precipitously as the generation of the late 1960s enters the job market. The labor surpluses of the past 15 years are about to be replaced by equally worrisome labor shortages.

Although the problem of finding new jobs for displaced workers is not about to disappear, the misleading debate over whether there are enough good jobs for Americans will give way to the more critical question of whether there are enough well-trained workers for the American economy.

--The standard of living. The United States has been living beyond its means during the 1980s as Americans spent more than they produced. Last year, the nation’s output of goods and services fell about $140 billion below consumption and investment, leaving the United States with a massive trade deficit but allowing Americans as a whole to live as if they were $140 billion richer than they really were--an average of $600 a person.

Deficit to Be Felt

Now that bonanza, which flowed disproportionately to upper-income families, is about to fade into memory. Foreign investors are already growing wary of accumulating more and more of the dollars Americans spend to buy foreign goods. From now on, this nation will have to devote an increasing part of its riches to paying foreigners for their earnings on their holdings in the United States.

Thus the U.S. trade deficit inevitably will shrink, but the cost will be dear--a downward pressure on the U.S. standard of living.

Righting the global economic imbalances could be messy. A sudden jolt could force the world economy into deep recession and might set off a devastating international trade war.

A more benign transition remains possible, most analysts agree, if the United States slows its consumption and generates more exports at the same time the rest of the world spends at a faster rate, sustaining growth in the global economy.

The United States can fill its part of the bargain, but only if both the government and the business sector adopt appropriate policies.

For the government, that means gradually reducing the federal deficit, which is widely viewed as a prime force behind global economic imbalances because it has contributed to America’s pattern during the 1980s of spending more than it produces.

Danger of Recession

“If nothing is done about the budget deficit,” an international group of 33 economists said recently in a statement prepared under the sponsorship of the Institute for International Economics, “then over time, evaporating confidence in the financial markets could depress domestic demand in the least desirable way, via a recession.”

And businesses, most analysts believe, must replace the rusting formulas of America’s insular past with approaches more suitable for the international challenges ahead. Industry has scored recent gains in productivity and investment, and now it must supply more desirable, higher-quality goods and services to the nation’s own consumers and to the rest of the world.

The service sector, which has grown even through the recessions of the early 1980s, has already established itself. Now the manufacturing sector must keep pace--and many analysts believe it is up to the challenge.

“We have had a bicoastal economy in which the service economy prospered while manufacturing suffered,” said Jerry Jordan, chief economist at First Interstate Bank in Los Angeles. “Now it is the Heartland’s turn to get richer.”

Shreveport has proved that it can be done. For all this city’s lingering woes, its government and industry--at least at the local level--have cooperated to meet the competitive challenge from abroad.

Example of Shreveport

Shreveport’s experience also teaches a less cheerful lesson--that success can leave many victims. Shreveport has failed to prepare employees for unavoidable job losses or to help the work force cope with continuing disruptions in employment patterns.

“Shreveport faces most of the challenges present in our national economy, from chronic minority unemployment to the restructuring of global manufacturing operations,” said Edward Morrison, a Boston-based consultant on economic development who played a key role in helping Shreveport and Bossier City, its neighbor across the Red River, develop their own economic initiatives.

Shreveport, like many other Southern cities, began to thrive in the economic boom of the 1960s by using cheap labor to lure manufacturing firms from the North. Already riding the fortunes of the local oil industry, Shreveport diversified when AT&T; opened a Western Electric telephone factory in 1967. That move was followed by major factories from General Electric, General Motors and a handful of other large companies.

But in the 1980s the Shreveport area, like the U.S. economy itself, took a series of blows that demonstrated its vulnerability to forces outside its control.

Price of Oil Slump

First, Federal Reserve Board Chairman Paul A. Volcker and central bankers overseas squeezed the global economy by forcing up interest rates to bring the raging inflation of the previous decade under control, and worldwide oil prices collapsed. Tumbling down with them came the economy of Texas and the rest of the Southwest, which had enjoyed a giddy boom based on the unrealistic expectation that fuel costs would escalate endlessly.

Then, as the U.S. dollar soared to new heights--largely because higher interest rates and stronger growth in the United States attracted increased capital from abroad--its rising value bit harder and harder into the ability of American manufacturers to compete with foreign rivals.

It was almost exactly when the dollar peaked, in early 1985, that AT&T;, struggling to cope with the erosion of its telecommunications monopoly, announced suddenly that it could not continue making home telephones in the United States. Instead, it would join its overseas rivals by opening a factory of its own in Southeast Asia.

AT&T; remained committed to producing business telephones, including those of its popular Merlin line, at its Shreveport Works on the southern edge of the city. But for the rest of the year, wave after wave of layoffs hit the area with little warning as the firm phased out home-telephone manufacturing and restructured its business-phone operations to take advantage of advances in automation.

Henderson, who had been earning about $10 an hour, was one of those who lost her job in the first wave of layoffs. “There were endless rumors, but when the announcement came I don’t think anybody was prepared for how bad it was going to be,” she said in an interview. “And then they kept saying things wouldn’t get any worse, but they did.”

Henderson was luckier than many others in similar situations. Just a few days before her company-paid medical insurance ran out, her daughter, then 4 years old, went into the hospital for a costly operation to cure her kidney ailment.

“Sarah wouldn’t have lived had we not had it done then,” Henderson said. Even with the insurance, which an estimated 35 million Americans lack, the family spent two years struggling to pay off the out-of-pocket expenses.

Meanwhile, Henderson’s husband, who had lost his job about the same time she did, “almost miraculously” found various jobs in the severely depressed local economy and she entered the federally sponsored retraining program to learn respiratory therapy.

The AT&T; plant cut its work force from 7,400 to fewer than 4,000. Together with the disaster in the oil industry and other manufacturing cutbacks, unemployment in the area reached a peak rate of 14% at the end of last year, long after most regions of the country had emerged from the 1981-1982 recession.

Don Jones, mayor of Bossier City, said that AT&T;’s decision to cut back was what finally jolted local officials into action.

Change of Outlook

“Before, I guess we thought of ourselves as a sleepy Southern town with cheap labor to offer corporations from the North,” Jones said, “but we realized that we couldn’t keep competing in the global economy on that basis any longer. We’d never be able to match the wage levels of Third-World nations, so it was time to see if there was any other way for this area to survive.”

With the help of Morrison’s consulting firm, local business and political leaders developed a plan for stimulating realistic investment projects that took advantage of Shreveport’s location.

“Shreveport is where the South meets the West,” Arnold Lincove, a business mover and shaker, said with a touch of local boosterism. “That gives us a crucial advantage at the center of a key population region of the country.”

In fact, Shreveport’s location--close to where the nation’s population center is expected to be in the year 2000--has already attracted major distribution facilities run by Honda, the Japanese auto and motorcycle firm, Upjohn, a major drug manufacturer, and even AT&T.;

Like many other local leaders around the country, the Shreveport political and business establishment is desperate to attract foreign investments, particularly from Japan. Bossier City’s Jones acknowledged a lingering public resentment over Japan’s role in World War II and its more recent business conquests, but he said that such objections have been overwhelmed by the pressing need to find a source of wealth to generate jobs.

War Grudge Dismissed

“We could stay mad for another 40 years,” Jones said, “but that would just mean that someplace else would end up with the business.”

People here dismiss fears over the influx of foreign investment and demonstrate none of the anxiety visible in some parts of the industrial Midwest over the establishment of new foreign manufacturing operations.

In contrast to Rep. Marcy Kaptur (D-Ohio), who recently complained that the Japanese “come in and establish what amounts to colonies in the United States with their own suppliers,” Jones said he was proud that his five trips to Japan in recent years have brought Japanese business to his area.

“We have to go where the money is,” said Lea Hall, a real estate developer. “We are trying to shake off our reliance on the oil business. It was overbuilt, over-borrowed and over the edge.”

Hall is building a huge warehouse center, called the Interport project, next to the AT&T; plant under an obscure federal law that allows local public entities to establish “foreign trade zones.” Dozens of areas throughout the country have set up such foreign trade zones, which allow them to bring in duty-free parts and supplies from overseas for local manufacturing and then export their products with low tariffs or no tariffs at all.

Local, State Responses

More so than at the federal level, some state and local politicians are reshaping their own agendas in response to global economic trends. There is no talk of retreating into protectionism, for instance, in a recent report from the National Governors’ Assn. entitled, “Making America Work: Jobs, Growth and Competitiveness.”

“We must now marshal our best resources--our people, our ideas, our knowledge and our skills--to adjust to a new economic reality and create opportunity for every American,” the governors’ report said. “The answer is not to put an end to competition, but to become a more effective competitor.”

Michigan Gov. James J. Blanchard is a pioneer in the new approach to state economic development that emphasizes fostering a climate for competitive industries rather than dangling tax incentives for building big plants or raiding other states for businesses.

“The competition over prosperity is not of our choosing, but it cannot be avoided,” Blanchard said. “The winner gains quality jobs, healthy businesses, strong communities and bright prospects for the 21st Century.”

Short-sighted corporate practices, however, remain major obstacles to further improvement in U.S. industrial competitiveness. Many companies, for example, give employees little time to adjust to the trauma of losing their jobs--a policy that can kindle fiery political opposition to necessary economic adjustments.

Short-Notice Layoffs

AT&T;’s cutbacks were typical. The layoffs were effective within a week of being announced, making it all the more difficult for employees to prepare for an uncertain future.

“Providing advance notice is important to help cushion the blow,” Morrison said, “and it allows the community time to deal with the whole issue of closing and creates the opportunity to establish a one-stop adjustment center where people can learn about their options.”

Sen. J. Bennett Johnston, a moderate Louisiana Democrat, complained bitterly about AT&T;’s action during a contentious Senate debate this summer over federal legislation to require 60 days’ advance notice of major plant closings.

“In this case, they knew they were going to move,” Johnston said. “They had carefully laid their plans and then had made comments like, ‘We will never move,’ and people proceeded to build their lives around the announced plans of AT&T.; Federal regulation is required because companies are sometimes completely unreasonable, completely incredible in their insensitivity to human beings who can lose their jobs without notice.”

AT&T; officials vigorously defend their actions. “You have to remember that our whole world changed with deregulation and the breakup of AT&T;,” said Robert Allen, AT&T;’s Shreveport plant manager. “We tried everything we could to remain competitive in residential products, but at the time we were just babes in the woods in terms of industrial manufacturing.”

Causes of Layoffs

Allen said that most of the job losses resulted from unexpected events forced on the company by the sharp drop in demand for its phone products because of the sudden influx of goods from its competitors, all of whom manufacture abroad. “Only 600 of the layoffs were directly caused by the move of our residential products operations overseas,” he said.

The announcement of the initial round of layoffs was postponed until the last minute, AT&T; officials contend, because of the fear that disgruntled workers would weaken factory output. “We complied with all the union requirements,” said plant spokesman Jim Bolch.

Despite the still-sour state of the economy in Shreveport, signs of rebirth are emerging. By reorganizing its facility, AT&T; has substantially boosted productivity so that it can compete with low-paying factories abroad and win back business that it lost in the first half of the 1980s.

Aided by the depreciation of the U.S. dollar, the company announced this month that it has turned the tables on some of its Far East competitors. It expects to attract at least 10,000 customers in Hong Kong and Taiwan in the next two years for a new, small-business phone system manufactured in Shreveport.

Black Enterprises Saved

At the same time, several struggling black-owned businesses, including a 45-employee apparel firm, have been saved through efforts of the local economic development foundation. “We can probably only make a difference on the margin,” said Morrison, “but sometimes it can be the critical difference.”

The jobless rate in the Shreveport metropolitan area of about 350,000 people has finally begun to shrink. It fell from 14% to slightly above 9% this year--still well above the national average of 5.9%.

There is only so much those here can do. Whether they can continue their gains will depend critically on the ability of Washington’s economic policy-makers to mesh national goals in the years ahead with those of other major countries.

To most analysts, that means reducing the nation’s trade and budget deficits, laying the groundwork for Americans to save and invest more money on their own and, in the longer run, educating and training a work force that can meet the demands of a technologically advanced economy.

The October crash in stock markets worldwide portended the shocks that may accompany the transition to a more balanced world economy, one in which the United States produces about as much as it consumes instead of running a massive trade deficit.

“If this adjustment occurs mostly through lower U.S. growth or increased protectionism, then the world will slip into recession or depression,” Alan Stoga, an international economist with Kissinger Associates in New York, wrote in a recent article. “If it occurs with higher exports, then the world economy as a whole will prosper.

“Eventually, and the markets seem to be saying sooner rather than later, we will have to choose.”

Tom Redburn, who is based in Washington, recently visited Shreveport to report this story.