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The Changing Global Economy and the Challenge to American Values (1)

by Robert Perrucci

I started writing this paper on September 5th, 1994. It was Labor Day and my university was closed for the holiday. It seemed fitting that I should work on this paper on a day honoring American workers. The newspaper stories that I read on that morning of September 5th covered a number of somber accounts about the conditions of the economy and the workforce. One story discussed the decline in union membership, which is now at a low point in the labor movement's history -- 11 percent belong to unions compared to 36 percent after World War II. A second story was about the declining "real" wages of American workers, which, when adjusted for inflation, have not improved for over a decade. The article included new findings from a report entitled, "The State of Working America, 1984-1994," by the Economic Policy Institute. It indicated that, despite an improving economy which created four million new jobs, the "real" wages of workers with college degrees had fallen between 1989 and 1993. We already knew of the wage decline for workers with high school diplomas, so these experiences of college graduates could perhaps be understood within the context of another story about the "restructuring," "downsizing," "reinventing" of America's corporate giants that were in the process of eliminating millions of white collar jobs.

A final story I read that morning was about Lincoln Electric Company, the nation's leading maker of welding equipment. For two decades, Lincoln has been held up as a model company when it comes to motivating workers. They had a system of productivity-linked bonuses and no-layoff guarantees that attracted thousands of managers from other companies eager to learn the secret of their success. Between 1986 and 1992, Lincoln embarked on an ambitious plan to establish 21 new plants in 15 countries. Things did not go well, leaving Lincoln with large losses in corporate income and substantial debt incurred by the expansion. These financial problems put a deep dent in worker's incentive pay and bonuses, and has led to disgruntled employees at Lincoln, taking the attitude, "We didn't create the problem, so why should we pay for it?"

These stories from my Labor Day newspapers provide a capsule summary of the problems that have plagued American business and workers for almost two decades. They are indications of the changing position of the United States in a global economy, and they point to the importance of moving beyond narrow economistic thinking when considering our nation's competitiveness. The success of economic activities depends upon their embeddedness in the social and cultural life of a society, so we must examine questions of economic growth and competitiveness within the context of a broad range of social values that impinge on the economy. Some of the values involved are related to the rights of corporations, the meaning of community, and the centrality of work.

The Changing Global Economy

For nearly 30 years following World War II, the United States dominated the global economy. The United States accounted for three-fourths of the world's invested capital and two-thirds of its industrial capacity. As a consequence, by 1950 the gross national product of the U.S. was three times that of the Soviet Union, nine times Germany, and twelve times Japan. During this period there were sharp increases in the dollar value of U.S. exports, foreign investment, and bank assets overseas. In addition to the extensive investment by private sector corporations and financial institutions, the geopolitical actions of the United States, aimed at containing and isolating the Soviet Union, resulted in billions of dollars of foreign aid to Western European and Asian countries. The Soviet Union and its East European allies also embarked on long-term programs to rebuild their industrial plants and strengthen their economies.

By the mid-1970s, the steady improvements in the war-torn economies of many nations produced important shifts in the balance of economic power among industrialized nations. The U.S. gross national product was now less than twice the Soviet Union, less than four times Germany, and less than three times Japan. With more new players in the global economy, the U.S. rate of economic growth slowed.

The changing position of the U.S. in the world economy was viewed by many as the normal workings of a healthy national and global economy that shifts temporary advantage to different industries and countries. For example, the decline in position of the U.S. relative to other countries in the mid-1970s was attributed to a number of temporary conditions that could easily be corrected. First, the loss of competitive advantage in the auto and steel industries was seen as the failure of top management in U.S. firms to respond to foreign competition in the traditional and accepted way of seeking new markets, investing in research and development, and in more efficient technology. This view underestimated the impact of rising oil prices on consumer demand for more fuel efficient cars that were smaller and lighter because of lower steel content.

Second, the strength of organized labor resulted in increased labor costs that made U.S. products less competitive according to the standard view in the mid-1970s. Cost of living wage contracts, increased job security, and union control over work rules increased the cost of labor without offsetting gains in productivity.

A final explanation for loss of profits and market share in that time was the federal government's imposition of a wide array of regulations on U.S. firms that increased the cost of doing business. Meeting standards of the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA), for example, placed exceptional burdens on American business at a time when international competition was on the upswing.

Actually, if any, or all, of the above factors had been the only things involved in the declining position of the U.S. in the global economy, it might have been possible for the U.S. to re-establish its dominance in the world economy. But something else was going on that would make it difficult for the U.S. economy to bounce back and reestablish the old equilibrium.

Between the mid-1960s and the mid-1970s, corporate profits from the domestic economy across 12 industries declined by 46 percent. In the early 1960s the annual rate of return on investment was 15.5 percent. In the late 1960s, it was 12.7 percent. In the early 1970s, it was about 10 percent, and after 1975 it never rose above 10 percent again. During this same period, U.S. investment abroad showed continued growth, and the share of corporate profits from foreign investments increased steadily. (2)

In an effort to reestablish higher profit margins, major corporations had begun to shift capital investments to different regions within the United States, and to overseas operations. The resulting capital flight to low wage areas and corporate downsizing eliminated over 11 million jobs between 1979 and 1984 due to plant shutdowns, relocations, and layoffs. (3) In the same time period the Office of Technology Assessment study reported that some 8 million new jobs were created, 94 percent of which were in the service sector. However, in contrast to the manufacturing jobs that were permanently lost in traditional "smoke stack" industries, service workers were employed for fewer hours per week and at lower hourly wages. (4)

Public response to this massive job loss was muted. First, because of the belief that the major unemployment was concentrated in the so called "rust belt" -- the Northeast and Midwest states with large manufacturing sectors. In actuality, the problem was national in scope, with some of the hardest hit regions in the "Sun Belt," despite the belief that this region was experiencing growth and prosperity. (5)

The rate of growth of new jobs also led many to believe that displaced workers would quickly be reabsorbed into an expanding economy. For example, in Indiana there was a loss of 11,500 jobs in manufacturing between October of 1985 and October of 1986, and there was an increase of 35,000 jobs in retail trade. This appears to be an important gain in total employees and would make one discount the job loss that was occurring. However, a closer look at these figures indicates that almost all of the 11,500 jobs that were lost -- 10,000 to be exact -- were in the steel mills, where workers average pay was $11.11 per hour, and average weekly hours worked was 41.2. In contrast, the 35,000 new retail workers averaged $5.86 per hour for a 29.5 average work week. Thus, the large net gain in number of employees resulted in a net loss in gross earnings. This same pattern holds for all jobs lost and gained in Indiana in the 1985-86 period. The gain in low wage jobs obscured the loss of high wage jobs, and the consequent loss of revenue to the state's economy.

Thus, capital flight and disinvestment introduced major changes in the U.S. economy and its occupational structure. Industrial sectors that had once been dominated by U.S. firms, such as auto, steel, and rubber, gave way to reduced market share and increased competition from international corporations. The process of deindustrialization and permanent job loss due to restructuring of the economy accelerated the decline of union strength in the United States -- a traditional source of support for high wages and job security. From a high point of 35 percent of the labor force unionized in the mid-1950s, today the figure is about 16 percent, and only 11 percent in the private sector. As a result of actual and threatened plant closures and relocations, workers were vulnerable to a variety of corporate strategies aimed at reducing wages, benefits, and union representation. By the mid-1980s, the changing global economy, and the mobility of capital in pursuit of more favorable investment opportunities, gave corporations the upper hand in their efforts to exercise control over the labor process. What was unknown, however, was how this opportunity to control would be developed and applied.

Along with deindustrialization and rising unemployment in the 1970s came an unprecedented series of annual trade deficits. In the early 1960s, imports of foreign products played a small part in the American economy, but by 1980 imports accounted for 22 percent of all goods purchased by Americans. The significance of foreign competition was described very pointedly by Robert Reich:

"By 1980 more than 70 percent of all the goods produced in the United States were actively competing with foreign made goods . . . Beginning in the mid-1960s, foreign imports have claimed an increasing share of the American market. By 1981 America was importing almost 26 percent of its cars, 25 percent of its steel, 60 percent of its televisions, radios, tape recorders, and phonographs, 43 percent of its calculators, 27 percent of its metal-forming machine tools, 35 percent of its textile machinery, and 53 percent of its numerically controlled machine tools. Twenty years before, imports had accounted for less than 10 percent of the U.S. market for each of these products. Between 1970 and 1980 imports from developing nations increased almost tenfold, from $3.6 billion to $30 billion (in constant dollars)." (6)

The intersection of structural change in the U.S. economy, plant closings, and increased unemployment, put heavy pressure on national and state economies. Declining tax revenue leads government at all levels to search for ways to reduce spending. At the national level, the combination of increased spending for defense and reduced revenue from the Reagan-inspired tax cuts for upper income groups resulted in federal deficits that demanded cuts in the federal budget. The first target for cuts was federal assistance to the states.

During a 20-year period beginning in the mid-1950s, federal aid to the states as a percent of gross national product increased. The amount of assistance in this period rose from $5.6 billion to $49.4 billion, and the number of separate programs soared from 132 in 1960 to 492 in 1978. But beginning in 1978, during the Carter Administration, there was a steady decline in the flow of dollars from federal to state and local treasuries. The Reagan Administration accelerated this decline as it tried to reduce federal spending by cutting the total dollars to states and shifting money out of categorical grants and into block grants. Between 1980 and 1987, federal grants-in-aid to state and local governments would shrink by more than 22 percent, or $10.5 billion.

The change in relationship between the federal and state governments associated with the decline in grants-in-aid to states was more important than simply a loss of revenue to states. States were being asked to take greater responsibility for the welfare of citizens, and to do it from their own revenue. Unfortunately, all revenue streams to states and localities were down due to deindustrialization, recession, and shrinking federal assistance. But the demand for public services was on the increase, with the business community looking for new ways to stimulate growth and to help existing firms, and with the rising number of unemployed seeking assistance in job retraining and social welfare benefits. There was also the need to maintain the infrastructure of schools, roads, parks and safety so that communities would remain supportive of existing residents and attractive to new ones.

Response to the Changing Global Economy

The speed with which the changing global economy was transforming the occupational structure and the spatial distribution of industry and employment across the United States sparked an active debate in political and policy circles. The highest levels of government in the 1980s remained sanguine about the underlying strength of the economy and its prospects for growth. President Reagan, in a 1985 report to Congress, stated:

"The progression of an economy such as America's from agricultural to manufacturing to services is a natural change . . . The move from an industrial society toward a post-industrial service economy has been one of the greatest changes to affect the developed world since the Industrial Revolution."( 7)

Some economic theories provided support for political leaders who viewed deindustrialization as part of the normal workings of an otherwise healthy economy. Economic dislocations such as plant closings in the auto and steel industries were viewed as examples of "creative destruction," eliminating inefficient operations and providing new economic opportunities. Those who hold more pessimistic views see the economy as permanently deindustrializing and have serious doubts about the health of the U.S. economy without a strong manufacturing sector. Certainly, there is reason to be pessimistic at least about the impact of deindustrialization on the communities that experience plant closings, and on the displaced workers who are the casualties of industrial decline. Communities are faced with sudden loss of payroll taxes, property taxes, and charitable contributions, bringing economic and social stress far beyond the closed plant. Many displaced workers, rather than being quickly reabsorbed into the economy, remain unemployed for long periods of time .(8)

While the debate over deindustrialization was engaging politicians, policy analysts, and academics at a national level, most states were quietly, and with little fanfare, going about the business of coping with deindustrialization and the changing global economy. One analyst described how states had begun to compete for outside capital, which he referred to as "regional wars." Despite the hyperbole of the military metaphor, there was a sense that something new was at work in efforts by states to ignite their economies. Traditionally, states have competed by calling attention to such things as the availability of land, labor, and transportation, and to the general quality of life in an area that is provided by climate, culture, leisure activities, and the educational system. More recently, there have been additions to these routine incentives resulting in an expanding list of economic incentives including tax abatements, job training, research incubators, and low cost loans -- sometimes involving hundreds of millions of dollars of public funds.

Thus, we arrive in the mid-1980s with the United States having lost its place as a world leader in manufacturing. Deindustrialization was the unplanned, unanticipated consequence of rational choices by hundreds of individual firms to withdraw their investment in manufacturing to reinvest in other places and products. The right, and some would say duty, of individual corporate executives to maximize profits for stockholders had the aggregate effect of eliminating millions of high wage, secure jobs that supported the belief in the American Dream. Companies that had become household names in many communities, employing entire families for 20 or 25 years, suddenly announced that they were shutting down and moving production elsewhere. The social fabric of trust and cooperation, essential for a healthy economic climate, had been torn. Experienced, productive workers, expecting to finish their active work years with the same company, were suddenly on the street. Displaced workers expressed a profound sense of alienation, and a lack of confidence in a wide range of social institutions and leaders. Community officials often felt betrayed by the "corporate citizen" they had helped with tax abatement, road improvements, and public services. Some communities, facing an abrupt shortfall in tax revenue, and a demand for services from the unemployed, went to court to challenge the right of a company to close a plant.

Communities, Corporations, and Workers

I believe that the changes of the last two decades that I have just described are transformative in nature. The institutional arrangements of laws, organizational transactions, and social values that provided the social infrastructure of economic life since the end of World War II will no longer work in the emerging social order. The old relationships between capital, labor, government and communities have been swept away by the same social forces that closed factories and eliminated millions of good jobs. New institutional arrangements will emerge to provide a foundation for capital accumulation. For the last four years, I have been studying one example of a new set of institutional arrangements that is refashioning relationships between communities, corporations, and workers.

During the 1980s, six major Japanese automobile assembly plants were built in six contiguous states in the Midwest. Many states entered into competition for the transplants, and the six winners put up over one billion dollars in incentives (land acquisition, site preparation, road and water improvements, and worker training) to attract the new business. The Japanese, in turn, invested over seven billion dollars to build the plants, and employ between 2,000 and 5,000 production workers at each plant. An additional 270 auto supplier companies have settled in the six-state region in order to serve the transplants.

The creation of a new industrial culture in the Midwest would not have been possible without the existence of an activist local state acting as an entrepreneur to stimulate economic development. Although states have a long history of involvement in stimulating economic development, Midwest governors, legislators, mayors, and city councils exhibited a new level of activism and a new set of incentives to bring the auto plants to their states.

The emergence of the local state as entrepreneur is a significant new activity that can have far-reaching consequences. I have referred to this new pattern as corporatism -- an activist local state working with sectors of the business class to develop an industrial policy suited to the changing global economy. Corporatism blurs the boundaries of public and private rights and responsibilities to create a belief in a new partnership of business, labor, and government working together for the common purpose of building the economic well-being for state and local communities.

The second important change that I observed in the Midwest region is that the corporatist projects bringing the transplants were presented as social and cultural projects, and not simply narrow economic development. The local state and the business community worked hard to have the projects "embraced" by the community -- the churches, schools, civic groups, and cultural sector. I have called this the "process of embeddedness" -- the interweaving of business relations and sociability -- the linking of economic action into ongoing systems of social relations that are not based directly in economic interests. To be sure, some of the effort to have the corporatist project embraced by the community was normal politics since local interest groups had to be persuaded that it was a good idea to give millions of dollars of public funds to a foreign corporation. But that political reality should not obscure the broader effort to clothe an economic project in the cultural language of "community pride," of "new partnership," and of embarking on a "collective effort to improve the quality of life."

The third change of importance in the Midwest transplants is that Japanese management has chosen to implement a philosophy that puts the worker at the center of the production process. All workers are referred to as "associates." They wear a company uniform as a symbol of their equality in the plant. There are no reserved spots for managers in the plant parking lot, no special dining rooms for managers, and no private offices as symbols of status. Associates work together in small teams where jobs are rotated and teams are encouraged to be self-directed in searching for "continuous improvement." Finally, the Japanese give great emphases to quality and pride in work, and, as of this writing, appear to be honoring their commitment to job security.

These institutional changes -- in the relationship between government and business; in the relationship between business and community; and in the relationship between management and workers -- are all controversial because they are efforts to establish new institutional arrangements for economic activity. For the relationship between government, business, and community, I would say that the impact of these changes is that they represent an effort to continue and strengthen the dominance of multinational corporations. But these changes also contain contradictions, as reflected in the opposition to the corporatist projects I studied. This opposition comes from the small business community, from environmental groups, organized labor, and concerned taxpayers; and it is directed at challenging a value system that gives highest priority to the efficient production of goods and services.

Possible Positive Outcomes

There is reason to speculate, at least, on some positive outcomes that may develop from these new institutional arrangements. The first involves the question of how to have more effective control over corporations so that they are responsible "corporate citizens." Most efforts to control or limit the negative impacts of corporations have been via regulatory and legal means, and the limited effectiveness of these pathways is well-known. The legal and regulatory approaches to control or limit the actions of corporations are usually very weak, and enforcement often gets bogged down in years of litigation in federal courts. Workers or communities that are harmed by plant closings often lack the resources to engage in prolonged legal proceedings. One possible way to bolster control in the context of emerging institutional arrangements is to link such policies as plant closing legislation to the packages of incentives that communities provide to many corporations. In the case of the transplants, a state's incentive package which provides tens of millions in inducements for an auto firm to choose their site, could also specify obligations on the part of the transplant to employ a certain number of workers, to stay open for a specified period of time, or to provide pay-backs to the community if they should decide to leave or substantially reduce production. This would result in a more symmetrical relationship between the community and the transplant, with each party receiving benefits and incurring obligations. Such arrangements would also give substance to the belief that transplants provide their workers with job security, and thereby promise the community long-term commitments to its economic base.

Regardless of the particular means used, greater community control can be exercised over the transplants, and it may be more effective in achieving certain goals than what is provided by federal and state regulatory agencies. As communities become more involved in providing for the financial, cultural, and social needs of transplants, they can be expected to have greater opportunities to influence corporate decisions.

A second issue is workplace democracy. I have noted the high value placed on human resources in the transplants. Two aspects of Japanese management principles applied to the social organization of work are very important, if they are taken seriously. First, is the idea of continuous improvement of the work process, with workers playing a key role. This idea views workers as continuously learning and taking on new skills. It is contrary to a machine-centered perspective that emphasizes highly specialized, deskilled labor that can be replaced with ease. The second idea involves cooperative work teams, which shifts attention away from the isolated skills of a single worker to the collective skills of a work group.

Taken together, these two ideas have the potential for giving workers greater control over the work process, and for building bonds of solidarity among workers. Whether that potential can be converted into actual worker control over important decisions seems remote at the present time. But given present conditions of weak labor organization and the continuing threat of job loss, work team structures and expanded skills may be the only collective source of strength available to workers in transplants. The dilemma facing labor today is recognized by labor advocates who seem to be saying that participation, cooperation, and teamwork is the only game in town. While I am not particularly optimistic about the likelihood that greater workplace democracy will develop from skill expansion and work teams, if such forms of work organization are combined with attempts at community control of the transplants, then it is possible that something new and important may be developing.

The final possibility for significant change in corporate-community relations is in creating a regional focus for economic restructuring. This is an intermediate form of restructuring that lies between the ambitious call for a national industrial policy orchestrated from Washington, D.C., and the competitive, spatially anchored efforts to spur growth in a particular city or state. It is also an effort to bridge the economy-community gap by referring to a social economy rather than a market economy. A social economy looks at a community as a place to work and live, and thereby attempts to balance the requirements of economic growth with the requirements of the total community for clean air and water, good schools, supportive social services, and affordable homes. A social economy is concerned with developing human resources that can serve the needs of a region and not simply a particular company.

Consideration of the development of a social economy introduces questions of purpose and values in assessing economic activity. It makes a difference whether a factory makes bombs or bicycles. It makes a difference if land development and growth bring jobs, but makes a community a less desirable place to live. It makes a difference if the jobs created by growth do not provide security or opportunities to use and develop new skills. A social economy is an organic economy that includes a community's social, political, and economic institutions. It emphasizes interdependence, cooperation, and community-centered values while trying to balance the needs of people as producers and consumers. A social economy directly confronts the abuses of capitalism by emphasizing democratic principles in decision-making and putting the needs of people and community before profits. Opportunities for thinking about a social economy are provided by recent changes such as employee ownership, greater worker participation in management, the growth of non-profit organizations, and trade associations that allow for competition and self-regulation. Similar opportunities are provided by an emphasis on "qualitative growth" as an alternative way of organizing an economy.

I believe that the corporatist project embodied in the transplants in the Midwest region provides a similar opportunity to think about a social economy, but at a more modest, regional level. The corporatist project has, in an unintended way, started a process of "re-embedding" capitalism within the social institutions of the community. In the process of getting the project "embraced" by the community, some advocates spoke not simply of economic benefits, but of the promise to preserve "a way of life," "the Bluegrass Community," or "the virtues of small town America." If this promise is taken seriously by the community, and used as an evaluative standard for the corporatist project, it may be possible to combine economic and community needs when discussing development and growth. The full impact of the corporatist project on the lives of people in the Midwest is uncertain. It is my fear that it will be another case of corporate dominance and limited gains for the communities that support such projects. It is my hope that it will provide a revitalized regional economy with greater opportunities for improving the quality of life in our communities.


(1) Major segments of this paper have been drawn from Robert Perrucci, Japanese Auto TransPlants in the Heartland: Corporatism and Community. (New York: Aldine de Gruyter, 1994).

(2) Barry Bluestone and Bennett Harrison, The Deindustrialization of America. (New York: Basic Books, 1982).

(3)Office of Technology Assessment, Technology And Structural Unemployment: Reemploying Displaced Adults. (Washington, D.C.: Congress of the United States, 1986).

(4) Bennett Harrison and Barry Bluestone, The Great U-Turn: Corporate Restructuring and the Polarization of America. (New York: Basic Books, 1988).

(5) Michael Wallace and Joyce Rothschild, Research in Politics and Society, Vol. 3, Deindustrialization and the Restructuring of American Industry. (Greenwich, Conn.: JAI Press, 1988).

(6) Robert B. Reich, The Next American Frontier. (New York: Times Books, 1983), pp. 121-122.

(7) Quoted in John Miller and Ramon Castellblanch, "Does Manufacturing Matter?," Dollars and Sense, (October, 1988): 6-8.

(8) Carolyn C. Perrucci, Robert Perrucci, Dena B. Targ, and Harry R. Targ, Plant Closings: International Context and Social Costs. (New York: Aldine De Gruyter, 1988).