PEORIA, Ill.—-My old hometown — a pleasant city
of 113,000 along the bluffs overlooking the Illinois River, half-way
between Chicago and St. Louis — remains a model of the benefits of
globalization. The giant Caterpillar Inc., one of the nation’s largest
exporters, is headquartered here. Bradley University has long been a
pioneer in international studies. Peoria’s leading seafood
entrepreneur, Jim Dixon, puts wonderful things on dinner tables here:
salmon from Chile, tiger prawns from Thailand, crabmeat from the
Philippines — foreign delights that we never had when I grew up here
more than a half-century ago. Much more recently, Maui Jim sunglasses
picked Peoria as its world headquarters in the mid-1990s, in part because
the area’s schools have traditionally produced a talented workforce. I
came here last month to speak to the Peoria Area World Affairs Council, a
well-traveled group of business, community, and educational leaders who
have a sophisticated understanding of the global marketplace. This isn’t
Podunk, and hasn’t been for years.
But while free trade still plays in Peoria, the city’s
competitive advantages have been taking hard hits in recent years. Its
once-proud public schools are in serious decline. About 20 percent of
the city’s high school students fail to graduate. Overall, Peoria
schools are below the Illinois average in reading, writing, math, and
science. Moreover, for various reasons — including white flight to the
suburbs, lack of decent interstate highway connections to Chicago and
Kansas City, and anti-growth policies that have at times been pursued by
the city government — Peoria’s population growth has been basically
stagnant for more than a decade (while Illinois has grown by nearly nine
percent). Peoria’s Republican congressman, Rep. Ray LaHood, has
supported steel tariffs that have hurt local businesses by driving up
their costs of doing business.
Meanwhile, political support for open markets has plummeted
throughout Illinois and neighboring heartland industrial states that
also have important electoral votes. Nationally, more than 2.7 million
U.S. manufacturing jobs have disappeared in the last three years.
Illinois has lost more than 143,000 jobs since July 2000. Rockford , in
northern Illinois, has an unemployment rate of 11.3 percent. In
Galesburg, a friendly prairie town of 34,000 just forty miles from
Peoria, Ross Perot’s giant sucking sound about the dangers of Nafta is
no joke. Maytag Appliances, Galesburg’s largest manufacturer, is
closing its sprawling refrigerator plant and moving some 1,600 jobs to
Reynosa, Mexico. Galesburg’s loss has sent tremors
throughout the heartland, where people wonder how they will ever compete
with low-wage countries like Mexico, India, or China.
Politically speaking, it doesn’t matter much that the Federal
Reserve Bank of Chicago has carefully analyzed the effect of Midwest
manufacturing and trade with China, concluding that Chinese imports have
benefited the U.S. economy (for details, see the Publius column at page
two). The Fed study is solid economics — but, alas, fear is in the air
that isn’t easily dispelled with careful reason.
Moving to
Mexico
It is perfectly natural that Maytag — like its
competitors, General Electric and Whirlpool — operates in places like
Mexico
and
China
, or wherever it makes sound business sense to do so. As Timothy Appel
observed in the Wall Street Journal last month, “Maytag’s biggest
import threat is, ironically, its domestic rivals.”
But don’t try telling
anyone in
Galesburg
that. The loss of Maytag is simply devastating to this little town, and
wrenching for its workers. It
could be that the biggest source of income in
Galesburg
will soon be Social Security checks, one local resident told me. “I’d
be happy to move to
Mexico
and work for $6.50 a day,” cracked another former Maytag employee I met.
“But my Spanish isn’t all that good.”
Dave Bevard, the president of the Machinists Union Local Lodge 2063
in Galesburg, says he will join other IAM members who will participate in
a March to Miami rally later this month to protest the proposed Free Trade
Area of the Americas. “This is a simple matter of greed,” Bevard says
of Maytag’s decision to move jobs to Mexico. “We were loyal to Maytag,
but Maytag has decided to abandon American workers.” Bevard is
particularly angry when he recalls the millions of dollars that the
citizens of Galesburg have channeled from their own pockets to Maytag in
recent years, by voting to pay a 1/4 penny sales tax to subsidize the
company’s operations. The tax is set to expire in December, 2004,
ironically at the very time that Maytag will have closed its Galesburg
plant for good.
[Even in Reynosa, Mexico, which has snatched the Maytag
refrigeration plant away from Galesburg, there are fears of job losses
to foreigners. Workers in Reynosa
worry that their own jobs may go to China, where wages are even
lower. “While an entry-level wage in Reynosa is typically $6.50 per
day, excluding benefits, that same job could be done in China for about
$2 per day,” Chad Broughton has reported in Galesburg’s
Register-Mail. “In part, because of competition from China, the
maquiladora industry in Mexico has lost hundreds of thousands of
assembly jobs since maquilla employment peaked in October 2000.”]
Political troubles for President Bush
While it is premature to measure the various
political winds that will blow in next year’s presidential election,
President George W. Bush already has much to worry about. Any incumbent
naturally stands to take the political blame for massive job losses,
regardless of the merits. To re-frame Bill Clinton’s crude-but-effective
slogan that helped defeat the first president Bush in 1992, It’s the
Jobs Stupid. In 2000, Bush lost Illinois and its 22 electoral votes by
more than 500,000 votes. He lost Wisconsin (presently enamored of the Save
the Jobs lobby) by only 5,708 votes, and lost Iowa (where farmers are
angry that Mexico has thrown up barriers to their corn and hogs exports)
by 4,144 votes. Bush also lost Michigan by 217,000 votes, and narrowly
carried Ohio by 166,000.
The importance of these industrial heartland states is measured in
their combined 79 electoral votes — nearly
one third of those necessary to be elected president. Republican
strategists must have cringed last month when Treasury Secretary John
Snow confidently predicted that the economy will add two million jobs by
the time of the election — a prediction that Democrats hope to throw
back in the president’s face. No wonder that Bush has been emphasizing
to audiences at every opportunity that he is for “fair trade” and
“a level playing field.” And no wonder that the president and
Commerce Secretary Donald Evans have been aiming harsh rhetoric about
“unfair” foreign traders in China’s direction. Fear is in the air.
Calls for protectionism
Fearful Illinois businesses are crying for high
tariffs and subsidies aimed at curbing “unfair” low-wage competitors
like Mexico and China. A study based on a survey of businesses that was
published in August by the Illinois Manufacturing Extension Center in
Peoria (which is affiliated with Bradley and Northern Illinois
University) revealed just how deep that anti-free trade sentiment has
become. “About 38% believe that there should be tariffs or other
restrictions on imports, 24% believe that government action should be
taken to level the trade ‘playing field,’ and 21% favor tax
incentives or other actions to reduce the cost of doing business in the
U.S.,” the survey found. “Only about 4% felt there should be efforts
to ease trade restrictions and encourage free trade.”
The politicians have gotten the message. Illinois Sen. Dick Durbin,
a Democrat, is sponsoring legislation to penalize the Chinese for alleged
currency manipulation that puts U.S. manufacturers at a substantial price
disadvantage. Durbin wants to hit China with across-the-board tariffs of
27.5 percent. Durbin has been working with Chuck Schumer (D-NY) and Evan
Bayh (D-IN), along with Senate Republicans Elizabeth Dole (NC), Lindsey
Graham (SC), and Jim Bunning. The notion of helping the American economy
by punishing China with high tariffs is absurd on its face. Yet nobody is
holding these lawmakers up to ridicule.
In Rockford, Republican Rep. Don Manzullo is an even more
interesting political barometer. A generally thoughtful, persistent
lawmaker who does his homework, Manzullo chairs the Small Business
Committee. Last year, Manzullo turned in a solid performance,
documenting in a series of hearings how the president’s steel tariffs
had hurt small American businesses, many of them in Illinois. But
throughout 2003, while Manzullo still calls himself a free trader, he
has been on a tear to protect American manufacturing jobs from foreign
competition.
In July, Manzullo organized a Congressional Manufacturing Caucus,
and immediately attracted more than two dozen lawmakers. “First, the
administration must get tough with China, Japan, Taiwan and Korea
concerning their continued actions to keep their currencies lower against
the U.S. dollar,” he declared. “The actions of these governments have
severely undervalued their nation’s currencies, making it more expensive
to sell American goods in their countries and cheaper for their products
to come into our country.”
Manzullo has sponsored The Job Protection Act of 2003, which would
subsidize domestic businesses with various tax incentives to remain in
America. He also has wrangled a $7.5 million Department of Defense
appropriation to support a “public-private manufacturing research and
development initiative in Rockford.” And he has fought for Buy American
provisions to be inserted into the Pentagon’s budget, alleging that this
would stem “the threat to national security posed by the loss of
American firms that build and develop critical weapons systems.”
Tariffs and subsidies aren’t the answer
If only tariff barriers and subsidies were the
answer. They aren’t.
With the exception of promoting more federal scientific research,
and the possible exception of reducing some tax burdens that tend to drive
corporations offshore, most of the ideas that Midwestern politicians are
pushing are easy to criticize. It is true that some respectable economists
believe that the Chinese currency issue is a legitimate one. But forcing Beijing
to revalue could provoke a banking meltdown in China, while sticking
U.S. consumers with an expensive tax hike in the form of higher prices. As for
the Buy American laws, they impair the ability of the Armed Services to
procure the best military equipment and components. As Defense Secretary
Don Rumsfeld has pointed out repeatedly, Buy American laws are not good
for U.S. national security.
The blunt truth is that Midwestern industrial states can’t hide
behind the protective tariff barriers that the politicians and many in the
business community are demanding. Consider only the hardships caused by
the Bush steel tariffs.
As Don Manzullo has proven beyond reasonable doubt, the Bush steel
plan with its tariffs as high as 30 percent drove up the costs and
severely impacted the bottom lines of many small Illinois manufacturers who make things out of steel.
Glenn Hubbard, President Bush’s first chairman of the Council of
Economic Advisers, has now admitted that the president’s steel plan cost
at least three manufacturing jobs for every job saved in a domestic mill.
I don’t know how many of those jobs have been lost in Peoria, but there
is evidence that they caused hardships here.
Caterpillar, Peoria’s largest employer, has complained loudly
that the tariffs drove up the price of steel needed to make its famous
yellow tractors. When I called several small metal-working companies in
the Peoria area, I heard more complaints that the Bush tariffs had
driven up their costs of buying steel that they needed to make their
widgets.
“I’m not happy in the least with those tariffs,” Pete Hanley,
of Hanley Steel, told me in a typical comment. Hanley Steel furnishes
steel for buildings. “The tariffs didn’t help us at all.” And in
nearby Galesburg, Maytag, Butler Manufacturing, and other companies have
also complained that the steel tariffs adversely impacted them as well.
But when I asked him about all this, the congressman from Peoria
who supported the Bush steel plan wouldn’t concede the point.
“On the contrary, after the steel tariffs have been put in place,
the former LTV steel plant in Hennepin — which had been completely
shuttered — has now been reopened and is providing over 130 good-paying
jobs for Central Illinois families,” LaHood said in a written response
to my questions. “I believe we have to help protect the domestic steel
industry, and the tariffs have helped us save American jobs.”
That assertion is dubious at best. The former LTV steel plant in
Hennepin, which had produced rolled steel for the auto and appliance
industries and formerly employed more than 600 workers, was bought out
from bankruptcy in February, 2002 by the International Steel Group —
before President Bush announced his steel tariffs in March. The U.S.
bankruptcy code, productivity reforms, and long-overdue union concessions
saved what is left of LTV, not protectionist tariffs (for further details,
see the item on ISG Chairman Wilbur Ross in the Players column elsewhere
in this issue).
Moreover, in Peoria, the troubled Keystone Steel & Wire Co., another supporter of the
Bush steel plan, remains in deep economic troubles, despite the tariffs.
Last month, the company shut down its rod mill operation and laid off 200
hourly workers, saying it hoped the move would be only temporary. Then
Keystone, saying that it needed to cut costs even further, sought more
concessions from the Independent Steelworkers Alliance.
Last year, Keystone — which has some equipment in its mill more
than 50 years old, and has been trying to modernize by buying equipment
from Europe — received a $10 million soft loan from the state of
Illinois (no payments necessary for five years, and no interest). At the
time, I tended to sympathize with the deal, even though it was an obvious
slush fund. Keystone and its union were obviously trying very hard to
adjust. And I remembered how much that this company has always meant to
the community. Even if Keystone never pays back a penny of that $10
million, Peoria would still be ahead, I figured.
It’s the schools, stupid
But on my trip here last month, I realized that the
troubled Peoria public school system was facing a budget deficit in 2002 of approximately
$10 million. A community that gives soft loans to uncompetitive
businesses, while neglecting the education of its own children, is headed
for trouble.
Usually, publications that specialize in foreign affairs don’t
have much to say about the quality of public education in cities like
Peoria. But there is a connection, and one that is illustrated best with a
modicum of local reporting.
As an outsider, I’m not in a position to explain all the reasons
why the Peoria schools are in trouble, except to note that they clearly
are — and that it is far from clear that the situation is going to get
much better. In July, 2002, Peoria hired a new superintendent of schools,
Kay Royster. Her assignment: whip the schools into shape.
What I like best about Royster is that she is a strong-willed black
female who has landed in a position of responsibility in the community.
In my day, an old-boy white network ran Peoria. In those days,
minorities, including Jews, were not allowed in Peoria’s country club.
That, I learned to my dismay decades later, after reading feminist
author Betty Friedan (another Peoria native). I remember with shame how
my favorite second-grade teacher in the early 1950s retired some twenty
years later when the school accepted its first black child. Happily,
Peoria is today a much more diverse city.
Will Royster succeed? Alas, the initial indications after her first
year on the job are mixed at best.
On the plus side, Royster has been credited for cutting the budget
deficit in half. Test scores are said to be improving, even if only a
little. At least one troubled grade school has been taken off the academic
watch list. If she can turn things around, Royster’s salary of $175,000,
plus perks, will be a bargain.
But Royster also has drawn heat for her management style which,
Dayna Brown of the Peoria Journal Star has reported, is questioned by some
as “harsh and dictatorial.” Royster apparently doesn’t take
criticisms well; she has stormed out of a school board meeting when
questioned about the contract of two consultants, and recently slammed the
door on a television crew asking awkward questions about another contract.
In Letters to the Editor that have been printed in the Journal Star,
teachers and parents have complained about the present condition of the
schools, some of them directly challenging Royster’s leadership
abilities.
I called Royster’s office to ask about complaints from Peoria
teachers that the local schools no longer offer vocational education
courses like auto shop, metal shop, wood shop, and home economics. I said
that I would like to know if the superintendent supported “social
promotions” to higher grades for problem students who had failed. And
most of all, I said, I would like to hear Royster’s explanation for the
weak-kneed policy that exempts high school seniors who have at least a C
average and no truancy or disciplinary problems from semester exams.
She wouldn’t take the call.
What’s all this have to do with international trade? That’s
simple. When you have a congressman who supports tariffs that hurts his
own constituents, when you have a superintendent of schools who won’t
take tough-but-reasonable questions regarding deteriorating schools —
don’t blame foreigners for fears of the loss of jobs.
The lesson for those in central Illinois who spend their time
worrying about the loss of jobs to “unfair” foreigners, or fretting
about whether China’s currency is undervalued or overvalued, is:
First, fix your own schools. No foreigner can be blamed when cities like
Peoria — and it appears that there are too many of them in today’s
America — don’t repair their own declining educational
infrastructure.
While free trade plays in Peoria, Peorians are playing
with fire.
