Written by Allison Libbe
Since the end of World War Two, the United States and Germany have been economic sisters across the Atlantic. Both nations relied heavily on manufacturing and commodities to establish an economic foothold in the post-war era. President Eisenhower’s Marshall Plan, which provided reconstruction assistance across Europe, kept the United States and Germany connected, and as Western Germany allied itself with the Western Bloc the political and economic ties between these two nations have been strong. The parallels do not end in the 1950s. Whereas Pennsylvania, Michigan, and Ohio served as the heart of American manufacturing and mining, the coal and steel industries in the Ruhrgebiet (Ruhr Valley) and the Saar Basin powered Germany and its economy for the better part of the 20th century. The only difference is that much of the Rust Belt is still on life support and the Ruhrgebiet and Saar Basin are high-tech centers of industry.
As the United States transitioned to a fast-changing, technologically advanced economy, low- and medium-skilled workers have suffered in long-declining commodity sectors such as steel and mining. For those workers, wage stagnation and job loss are realities. Politicians promise a return to the “Golden Age” of manufacturing to garner support from former labor strongholds. But still, pre-pandemic unemployment in the Rust Belt was higher than the national average. The rhetoric of wanting to help regions left behind by a post-industrial economy is a strong selling point, but evidence would suggest that such efforts have either been ineffective or pure lip service.
While the Ruhrgebiet and Saar Basin closely resembled the Rust Belt in terms of industry demographics, their downturns are rooted in distinctly different sources. In Germany, an initial shift away from coal and towards first imported oil (and later clean energy) was made worse by internal economic restructuring following the 1990 reunification of East and West Germany, spelling the end for the German coal industry.1 As the industry faced decline, coal subsidies were put in place to keep coal-dependent regions afloat. These subsidies, however, could not prevent unemployment in the region from worsening. 2 It is no secret that international trade has also cost many Americans jobs. Between 2007 and 2010 alone, nearly half a million jobs, mainly in manufacturing, were lost in Wisconsin, Michigan, Ohio, and Pennsylvania as a result of trade with Mexico and China.3 Goods that used to be produced in this region— namely coal, steel, automobiles, etc—can be produced for less elsewhere where the cost of labor is cheaper. During the “Golden Age” of American manufacturing, blue-collar workers could expect steady work with good pay and benefits that could easily support a middle-class lifestyle. Today, those jobs are few and far between.
The popular rhetoric we hear in the United States blames the decline of the Rust Belt almost entirely on international trade. This evaluation without a doubt has a populist appeal, though it is not entirely accurate nor is it conducive to fixing the problem. Economists mostly cite technology, not trade, for the increased income disparities in developed nations and posit that we should compensate the economic “losers” rather than engaging in trade protectionism. Regions that have been left behind economically enjoyed well-paying jobs with good benefits for low- and medium-skilled workers for years. This type of work, however, can be done much cheaper abroad. As Chicago Council on Global Affairs Fellow, Richard C Longworth, put it, “[Globalization] is made to order for demagogues. By its nature, it exposes the vulnerable to distant and mysterious forces. It enriches a new class of global citizens but undermines a way of life for middle-class workers who can’t understand what is happening to them and don’t feel they deserve it. This is not the way life was supposed to be, and they seek someone to blame.”4
Casting trade and globalization as a villain, however, is misguided. Globalization opens markets up to products produced overseas that can be sold at a much lower price than their domestically produced counterparts, often as a result of lower resource or labor costs. This ultimately benefits consumers who can spend less on imported goods. However, this price reduction has consequences in the labor market. This is an example of derived demand.
Derived demand occurs when there is a demand for an intermediate good or factor of production resulting from demand for a final good or service.5 In this context, the decreased demand for labor in declining sectors is derived from the decreased demand for the goods manufactured in that region. For example, the demand for coal miners’ labor is entirely dependent upon the demand for coal. As the demand for American coal falls, demand for coal miners declines accordingly. Protectionist policies like high tariffs are not advisable because there are still more gains realized from trade than from an isolated economy and an open economy where goods can be imported and exported is more efficient as a whole. However, these models assume a state of perfect competition with perfect mobility, meaning workers are free to seek employment in any industry that they may like. Real-world instances like this do not occur in states of perfect competition; coal miners and factory workers cannot go work in thriving sectors for a host of reasons. Ideally, the jobs lost in the American manufacturing sector would be made up for by industries on the upswing, like tech, aerospace, or pharmaceutical industries. However, the individuals who are losing their jobs in regions dependent upon declining sectors usually lack the qualifications to enter those new booming industries which are geographically clustered and inaccessible.
This problem becomes amplified regionally due to industrial clustering. Industrial clusters occur when many firms in a particular geographic area deal with the same industry.6 A classic example of this would be Michigan’s automotive cluster; all three major American car manufacturers—General Motors, Ford, and Chrysler—as well as many companies that produce intermediate goods used in auto manufacturing, are all based out of Michigan. Consequently, regions become highly dependent upon the success of these industries. If auto manufacturers are experiencing problems, related industries will experience problems, and the region as a whole will suffer, as was the case in Michigan in 2008 during the Financial Crisis.
It is becoming more and more common to see cities and regions largely dependent upon one or two industrial clusters, which can be unstable. According to the economic think tank New America, “a growing body of evidence suggests that cities’ reliance on only one or even a few industrial clusters can result in a brittle economy and a high concentration of economic risk.”7 When regions become too reliant upon a small number of clusters, they risk potential devastation when those industries falter.
In contrast to the Rustbelt, the Saar Basin and Ruhrgebiet have seen a significant recovery as new industries develop in the region. Economists advocate for education programs as long-term solutions, and Germany is a great example of why. Education and job retraining programs alleviate the burden of trying to find a new trade and allow workers to find new, well-paying jobs rather than neglecting them and their region. Additionally, development subsidies and grants revitalize regions that already have the resources or the infrastructure to give them a competitive edge in certain sectors like auto-mechanics in Michigan or agriculture technology in Iowa.8 In the Ruhrgebiet, for example, the transition away from mining and industry was aided significantly by a 25 year transition period in which research and education resources were concentrated in the region to help develop environmentally friendly technology and to expand the digital economy in the region; both of which play to the region’s historical strengths and existing infrastructure.9 This approach revitalizes the region without trying to put a dying industry on life support and bringing new economic stability to regional communities. According to John C Austin, director of the Michigan Economic Center, “We saw in specific Ruhrgebiet communities, examples of strategies for managing structural change that aim to bridge a successful past, through an uncertain present, toward a more hopeful economic future. Their broad approaches are applicable to our own efforts in the United States to rebalance economic growth and narrow yawning regional income and opportunity divides.”10
Furthermore, diversifying the number of industries present in a particular region could help provide long-term economic stability. Areas with reliance upon many industries rather than a few are typically more stable, particularly during times of economic hardship. Attracting new industries to areas can be difficult and doing it in areas that are struggling can be even harder, but it is possible. Regions being economically marginalized is undeniably painful for its inhabitants, but if handled correctly, sectors being phased out by trade and globalization can be an opportunity to modernize and develop new sectors that provide the same stability and pride.
Endnotes
1. DW staff. “The Rise and Fall of Germany’s Coal Mining Industry.” Die Welle, January 31, 2007. https://www.dw.com/en/the-rise-and-fall-of-germanys-coal-mining-industry/a-2331545.
2. Federal Statistical Office of Germany. “Population, Persons in Employment, Unemployed Persons, Economically Active Population, Economically Inactive Population: Länder, Years,” October 13, 2020. https://www-genesis.destatis.de/genesis/online?operation=abruftabelleBearbeiten&levelindex=1&levelid=1602550533426&auswahloperation=abruftabelleAuspraegungAuswaehlen&auswahlverzeichnis=ordnungsstruktur&auswahlziel=werteabruf&code=12211-0005&auswahltext=&werteabruf=Value+retrieval#abreadcrumb.
3. Public Citizen. “Trade Adjustment Assistance Database.” Public Citizen. Accessed October 14, 2020. https://www.citizen.org/article/trade-adjustment-assistance-database/.
4. Longworth, Richard C. “Disaffected Rust Belt Voters Embraced Trump. They Had No Other Hope.” The Guardian, November 21, 2016.
6. “Industry Clusters FAQ,” Oregon Business Plan, accessed February 25, 2020, https://oregonbusinessplan.org/about-the-plan/industry-clusters/industry-clusters-faq/.
7. “The Challenges of Industrial Clustering,” New America, accessed February 25, 2020, https://www.newamerica.org/weekly/97/the-challenges-of-industrial-clustering/.
8. London, Seth, and Bradley Tusk. “How to Save the Rust Belt.” Politico, September 6, 2017.
9. Austin, John. “A Tale of Two Rust Belts: German Models for Post-Industrial Prosperity Provide Lessons for the US.” The Brookings Institute. The Avenue (blog), October 22, 2018.
10. Ibid