"Competitive pressure drives manufacturers to find ways to do more with less."
Bethlehem Steel recently announced that it was declaring bankruptcy. Bethlehem Steel? What's next, General Motors? That's the impression I got from friends who were alarmed by the announcement. When a legendary company like Bethlehem Steel goes bankrupt, the whole economic system could be at risk.
Should we be alarmed that an American icon like Bethlehem Steel has declared bankruptcy?
After all, Bethlehem Steel was founded 97 years ago. Until 1997 it was part of the Dow Jones Industrial Average and had been there ever since the average was expanded to 30 stocks in 1928.
So is Bethlehem Steel's demise the canary in the economic mine shaft? Is economic disaster just around the corner?
Maybe, but Bethlehem Steel's problems are not an indication of a deepening crisis.
A quick quiz: Who has more employees, Bethlehem Steel or my employer, Washington University in St. Louis? To help you, here's some background. Bethlehem Steel produces about 8 million tons of steel each year. Washington University educates about 8,000 students. We also have a big medical school.
The answer is Bethlehem Steel, but it's close. My university has just over 10,000 employees. Bethlehem Steel only a little more—around 13,000. If all of its employees were here in St Louis, Bethlehem would be about the fifth biggest employer in town—about the same number as Schnucks, a local grocery chain.
Bethlehem Steel's work force is less than a tenth of what it was 40 years ago. It's not alone. U.S. Steel is way down too. So are most of the traditional steel companies. Seems pretty alarming.
What caused that incredible shrinkage?
America's steel companies are likely to blame unfair foreign competition. When you fall behind the competition, there's always a temptation to label it unfair. But the real explanation lies elsewhere.
After all, NuCor, the nation's second largest steel manufacturer, uses the innovative mini-mill approach and is thriving. Rather than producing steel from scratch like Bethlehem and U.S. Steel, Nucor fashions steels from pre-existing scraps. Nucor produces more steel than Bethlehem, but their work force is barely half of Bethlehem's—about 7,000. And unlike Bethlehem Steel which has lost money every year since 1997, Nucor is profitable.
The underlying explanation for the drop in employment in the steel industry over the last half-century is an increase in productivity—the industry gets more done with fewer people. America is not the only nation with less employment in the steel industry. World steel employment is roughly a third of what it was 25 years ago. Virtually all of the steel producing nations, even the ones who allegedly dump their steel on U.S. markets, have fewer people making steel than they did 25 years ago. But world output of steel is up.
Almost two hundred years ago, Frederic Bastiat (1801-1850) was already skeptical of the claim that low-priced foreign goods are bad for the domestic economy. The following links are examples of his reasoning and his humorous writing style: Economic Sophisms,Chapter 20,Chapter 4, and Chapter 7. The last link is to Bastiat's celebrated "Petition of the Candlemakers". It's an entertaining reductio ad absurdum against those who complain about the unfairness of low-cost production by foreigners.
The same thing has been going on in many manufacturing industries. Overall, manufacturing employment is close to the same as it was 25 years ago, while output is up dramatically. The cause: higher productivity. The phenomenon holds in good times and bad. It's not an indication of an economic crisis—it's the result of innovation. Competitive pressure drives manufacturers to find ways to do more with less.
This is good for America overall. It means we get more output from fewer workers while employment expands in health care, entertainment and the other sectors of the economy where the American skills and creativity produce the best products in the world. It allows new industries to be created and others to expand. It means we remain competitive with the rest of the world, using the best techniques available for steel production. It lets us use our highly skilled labor force to focus on what we do best and on the dynamic future rather than a static past.
The source of our productivity is the human creativity that produces constant innovation. It's a tough world to do business in—too tough for Bethlehem Steel and its workers. The lesson for business is to find more effective ways to innovate.
* Russell Roberts is the John M. Olin Senior Fellow at the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University in St. Louis. He is the author of The Choice: A Fable of Free Trade and Protectionism. His newest book is The Invisible Heart: An Economic Romance (MIT Press).