Logically, there are two meanings to the term declining industries. Industries can decline because their products have been replaced by new and better products, or industries can decline because what used to be most cheaply produced in country A is now most cheaply produced in country B and exported to country A. In the first case, the word processor replaces the typewriter. In the second case, steel production moves from the United States to Brazil and American needs are met with imports from Brazil.

In economic discussions the term declining industries is almost always used in conjunction with the shift of industries from one country to another. This occurs because there is little public controversy about the first type of decline and much public controversy about the second.

With a shift from one product to another it is immediately obvious to everyone that to prevent such declines is to hold one’s standard of living below where it otherwise would be. New products and the better jobs that go with them have to be held back to maintain a market for old products and old jobs. To do so is to retard progress and no one seriously proposes such actions.

It is equally true that to prevent the second type of decline is to hold one’s standard of living below where it might otherwise be, but this conclusion is not as immediately obvious. Everyone can see in the first type of decline that additional new jobs serve as a counterbalance to the loss of old jobs and that the consumer get a better product. In the second type of decline the lost jobs are politically visible at home and the new jobs are politically invisible abroad. The home gain in real income comes via lower costs for consumers who replace expensive domestic products with cheap foreign products.

Most often the producers who lose their jobs suffer large immediate reductions in their incomes but are small in number, while the consumers are large in number but reap only small gains in their real incomes. The aggregate gains exceed the aggregate loss but the losses are highly visible while the gains are so small on a per capita basis as to be almost invisible politically. Combine this with a world where producer interests almost always have more political clout than consumer interests, and you have the political ingredients for policies to protect declining industries despite the fact that a country lowers its rate of growth by so doing.

Almost all countries protect their declining industries to some extent. Steel, for example, benefits from various forms of protection in Europe, the United States and Japan since none of them is today the low cost producer for basic steel products. The more extensive the protection, however, the more harm a country does to its economic future.

The pattern of events is well known. Given protection in the home market, cheap foreign producers first drive the home industry out of its unprotected export markets. After World War II, the American steel industry first lost its export markets. Without those export markets home production falls. The home producers of unsophisticated metal products then find that they cannot compete against foreign producers who can buy cheap foreign steel while they have to buy expensive domestic steel. Products such as nails and wire start to be produced abroad and imported into the United States. Home production again falls. Eventually, foreign producers of sophisticated metal-using products such as cars find that their lower cost of materials is one of their advantages in competing against the American auto industry with its high material costs. The steel that is not exported as steel is exported as cars. As the case of steel indicates, protection can serve to slow down the rate of decline, but it is almost never possible to stop it.

To protect a declining industry is to weaken related industries and set in motion spreading waves of decline and protection. As a result, protecting declining industries is much like poking a balloon: for every successful indentation there is an equal expansion somewhere else.

While it is clear that a country should not seek to delay declines in industries where comparative advantage has shifted abroad, it is often not clear as to whether comparative advantage really has shifted. This occurs since currency values have not moved smoothly to maintain national balances between exports and imports as they should have done if they had operated as expected from textbook models. They have often in the past 15 years given very misleading signals – and very rapidly changing signals – as to where a country’s real comparative advantage lies.

Thus in February 1985 the value of the dollar was so high that foreign wheat could be sold for less in the United States than American wheat; yet it is clear that the United States still has a comparative advantage in the production of wheat. It just does not seem to be so because of the temporarily high value of the dollar and the markets, such as the Common Market, that have rules and regulations essentially closing them to American exports.

Since the transition costs of closing an industry when the value of the dollar is high and reopening the industry when the dollar falls are very large, it may not make sense to allow the market to operate as it would without government interference. The question then becomes one of whether the right solution is protection or subsidies for the affected domestic industries, or international actions to moderate the movements between major currencies and to open closed foreign markets. Given that protection once in place is difficult to remove politically, international actions to moderate currency movements and open markets would seem to be the preferable solution.

When one analyses a declining industry, one seldom finds an industry in total decline without competitively viable parts. In the steel industry, for example, there are parts – mini-steel mills using electric furnaces and low cost scrap iron, speciality high-tech alloy steels – that could be competitively operated in the United States given a value of the dollar that would balance exports and imports. To say that an industry is a declining industry is not to say that it will disappear.

A declining industry also need not lead to declining firms. While it is certainly true that modern industrial economies need less steel per unit of GNP produced, it is also true that there is a new growing high-tech industry in new materials – powdered metals, composites, pressed graphite – that is the new steel industry of tomorrow. Today’s declining steel firms could be tomorrow’s expanding new material firms. But most often they are not.

If one asks why not, it is clear that firms find it very difficult to develop new products that will destroy large old markets that they dominate. The firm has a large vested interest in the old markets and entrenched forces within the firm make it very difficult for it to move into these new areas quickly. Thus IBM, the dominant force in the office typewriter business, was slow to develop a word processor despite the fact that it was the world’s leader in computers. At General Electric, the dominant vacuum tube division sat on the transistor and prevented General Electric from becoming a leader in transistors. The classic example is of course the railroads, which saw themselves as railroads rather than as transportation companies.

While decline is the flip side of progress, real costs are involved. Most of these costs come in the form of human resources that are not easily transferred to new areas. An unemployed 55-year-old Pennsylvania steel worker is not apt to be retrained to be a California computer assembler. Such an individual faces a large cut in expected income over the remainder of his working life and society may well find itself burdened with higher social welfare costs.

Economic theory has little to say about these transition problems and costs since it assumes that mobility is easy and that transition costs either do not exist or are very marginal. With its concept of equilibrium, wage workers forced out of work in old industries quickly find jobs in new industries with closely comparable wages. In contrast, those who have actually followed workers forced out of work in declining industries in the United States find that most of them find work only with a long time lag and then only with much lower wages. The losses in real incomes are not the marginal ones assumed by economic theory.

As a result there is a real issue in how a nation manages decline. A nation cannot and should not prevent declining industries from shrinking, but it still has to face the issue of how it manages the transition of human resources from old sunset industries to new sunrise industries and what it does about those human resources that are essentially junked in the transition.

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