In a BusinessWeek article Paul Magnusson reports that while partially protected by tariffs from foreign competition the US steel industry moved vigorously to merge and restructure in order to cut costs.
Even steel executives acknowledge that the temporary tariffs helped the industry get back on its feet. Thomas Usher, chairman and CEO of United States Steel (SXX ), says the tariffs stabilized prices, allowed the U.S. industry to consolidate, stopped the flood of bankruptcies and layoffs, and encouraged a wave of productivity-enhancing investment.
More than half of steel-production capacity today is owned by companies that have merged or restructured, Bush Administration figures show. Usher's company can now produce a ton of steel with just two man-hours, down from two-and-a-half before the tariffs were imposed, he says. And the company's stock, at $27.65 as of Dec. 4, is within spitting distance of its 52-week high.
Contrary to the impression you might get from listening to the many critics of Bush Administration steel tariffs, Magnusson points out that the other steel-producing nations are far from highly principled free marketeers when it comes to the steel industry:
There's no free market in steel because most nations -- other than the U.S. -- either massively subsidize or own outright their nation's steel plants, totally distorting the market.
Ron Scherer and Adam Parker of The Christian Science Monitor report that major changes have recently happened on the shop floor of US steel plants.
Yet probably the biggest change is on the shop floor. In an industry that has a history of difficult union-management relations, much of the animosity in the hot and noisy mills is dissipating. For example, here at Sparrows Point, ISG eliminated 200 overseers, reducing seven layers of management to three. "There are less people looking over their shoulders," says Joe Rosel, a United Steelworkers contract coordinator who helped negotiate the new contract.
Now, the workers are basically running the plant, making many of the day-to-day operating decisions. "We were 50 years coming to this point," says Jim Huber, a union trainer.
The workers are quick to point out that they are working harder too: Sometimes one hard hat is doing the work that used to be done by two or more. Some 165 different job descriptions - with all the union ramifications - have been trimmed to five. "It's been hard to get used to in the last six months," says Mr. Huber, "but a lot of growing pains have eased."
So the tariffs did not cause the steel industry to become incredibly complacent.
My own reaction to the steel tariffs brouhaha is that it has been a tempest in a teacup. The United States has such low barriers to imports that it is running a half trillion dollar trade deficit of about 5% of GDP. In the face of this massive deficit assorted economists and free market advocates have found far more time to castigate the Bush Administration for tariffs than they have to discuss what is doing far more harm to the long term health of the US economy: the gradual build-up of huge debts owed to other nations and the loss of sales by US businesses to foreign competitors. Some argue that the deficit is there because the US government is running a large budget deficit and therefore is sucking in foreign money to buy bonds. There are two facts that, at the very least, have to be reconciled with that explanation:
There is an aspect of the focus of economists on things like tariffs where they have a model that predicts that a certain policy is bad and they are sort of like someone in possession of a hammer who wants to knock away at nails. Meanwhile there are all sorts of nuts and bolts that need attending to (e.g. the overvalued dollar and the huge trade deficit) and most economists do not have nearly as much to say about these other very real economic problems.
To his credit in a recent Tech Central Station essay Arnold Kling took a stab at explaining the US trade deficit problem and argues that the US might be able to shrink the trade deficit by shifting taxes from income to consumption.
The best idea from supply-side economics is to use tax policy to encourage work and thrift rather than as a tool to redistribute income. We should change the mix of taxes to favor saving rather than consumption. That would increase private saving.
Why do foreign investors invest so heavily in dollar-denominated assets and bear the risk of a decline in the dollar? Personally, I think it is because they are stupid. But that is not an appropriate answer for an economist to give.
If I were forced to pick an economic theory to explain the dollar bubble, it would be the theory of the safe haven. In a world of political and economic turmoil, America's securities represent a stable store of value. Are you a Saudi worried about the viability of the regime? Buy U.S. securities. Are you a citizen of a former Soviet republic trying to keep the criminals and kleptocrats away from your savings? Buy U.S. securities. Are you a European who is pessimistic about the prospects for the welfare state? You get the idea.
That flow of money to buy US securities, by driving up the value of the dollar, effectively reduces the demand for actual real American products and services. So one way to explain the US trade deficit is that the rest of the world has enough fear about the stability of their own societies that they want too much in the way of US financial assets. Is this argument correct? There are reasons to be skeptical. For instance, private Japanese investors have ceased to be net purchasers of US securities and yet the Japanese government is buying US treasuries in order to prop up the dollar against the Yen in order to increase Japanese exports to the US while simultaneously decreasing US exports to Japan (and probably do to the same for Japanese trade for other countries since, for instance, China's currency is fixed against the dollar).
Suppose Arnold Kling's argument is correct. This means that foreign people in massive numbers make decisions that cause the US market to become highly distorted. Is it wrong for the US government to try to pursue policies that compensate for this distortion? Or are such policies anti-free market and therefore automatically wrong? The latter position strikes me as ideological. Economists who argue that it is wrong for governments to attempt to compensate for the madness of the crowd are clinging to an incorrect model in the face of enormous evidence that humans do not behave like highly rational homo economicus. Attempts to make policy prescriptions based on false assumptions about human nature have got to lead to bad policy choices.
In the real world foreign investors went through a period of irrational exuberance about the US economy and then when that irrational exuberance finally started to wane other governments stepped in to keep the currency market thoroughly distorted. For example, when Japanese investors lost their enthusiasm for US securities the Japanese government stepped in to replace them.
Foreign investors are growing wary. According to Dr. Rob Van de Wijngaert, a strategist at ABN AMRO in Amsterdam, U.S. Treasury numbers show that "apparently there is not a single institutional fund in Japan which is willing to buy U.S. Treasuries and instead the Bank of Japan purchased no less that $150bn this year" According to Van de Wijngaert, the latest numbers show that foreign "demand for U.S. Treasuries, bonds and stocks is plummeting."
For example, the Bank of Japan has already spent 18 trillion yen (S$283 billion) slowing US dollar losses against the yen this year, and the strongest signals on our charts are for further euro, Sterling pound and Australian dollar gains versus the yen.
In descending order Japan, Britain, and China are the three biggest holders of U.S. Treasuries. It would be very interesting to know in each case what percentage of those Treasures are held by central banks and by private entities.
|Share |||By Randall Parker at 2003 December 05 06:54 PM Economics Political|