Cleveland Stealers: How Ohio protectionism hurts America

Cleveland is a town known for its loyalty. In the 1990s, we were noted for our loyalty to our football team, the Browns. More recently, we were loyal to LeBron James, the self-dubbed “King” our championship-bereft city. Over the past few decades, we were loyal to our breadwinner: steel.

There is a connection between LeBron James leaving and the decline of the steel industry in Cleveland. Whereby LeBron left us because we couldn’t facilitate a city that his buddies Wade and Bush would come to, Cleveland similarly experienced the exodus of the steel industry because we couldn’t make our city a place where that industry could compete at a national and international level.

Unlike many of my fellow Clevelanders, including the owner of the Cavaliers Dan Gilbert, I never made the argument that Cleveland deserved or had a special claim to LeBron. Like a business or any individual, he can leave Cleveland for any reason, just like I did. (My gripe was how he shamed his home region on national television.) Economic actors, be they companies or people, can move freely for a variety of reasons. If for some reason, their growth or success is impeded by local constraints, they can move. Individuals like Rush Limbaugh and other relatively wealthy individuals can leave New York if that state “soaks the rich” with higher taxes. Similarly, companies can leave California if their climate becomes an impediment to their future success.

Therein lies the secret to why Cleveland is regarded by many as a dying city. Our denizens wrongly thought Cleveland deserved LeBron, just like they deserved a portion of the world’s steel industry. In a market economy, either domestically or internationally, you don’t deserve anything — you have to earn it.

In the 1960’s, 1970’s, and even during President George W. Bush’s tenure in 2002, the U.S. either slapped import quotas or tariffs on steel from other countries. All of these actions were economic malarkey that ultimately harmed Cleveland, Ohio, and the United States as a whole.

For one, much of the information that allegedly justified either import quotas or tariffs was based on the reports provided by domestic companies. In many cases, the government does not do its own detailed research as to whether or not their foreign competition were really “dumping” products on our market below cost. Supposedly, domestic producers would have us believe that the foreign competition would run our industries out of business and later raise prices once they’ve achieved a monopoly.

Aside from the fact the fact that steel is made throughout the world in countries like Japan, China, Russia, Trinidad/Tobago, Venezuela, Mexico, and Brazil — the fact that most of the data that the International Trade Commission uses is often provided from the domestic industry seeking so-called “protection” makes this a total ruse.

How can the government possibly ascertain what the cost differentials are for a foreign steel company that might have weak domestic demand in their home country, where costs are higher for smaller orders, versus international demand where costs are lower as a function of economies of scale? The unfortunate fact is that our government, along with other governments, have not done their due diligence to determine whether prices for steel were/are “below cost” or just lower due to economies of scale and larger aggregate demand in foreign markets like ours.

Well, from the late 1960s to present, American steel producers have gotten their wishes fulfilled — protection. Well, what happened?

Regardless of political action, employment in domestic steel production declined from 521,000 in 1974 to 151,000 in 2000. As Cleveland natives know all too well, steel companies went under right and left.

Why couldn’t protectionism save Cleveland? Well, even after import quotas and tariffs, foreign steel was still more affordable than steel made in Cleveland and other parts of the United States. Cleveland could not compete.

Sadly, Cleveland’s protectionist nature reared its ugly head, and the failed attempts to keep our steel industry limping along had other repercussions. In 2002, when President Bush made the poor decision to levy such tariffs, The Wall Street Journal noted:

New steel tariffs would cost about eight American jobs for every one steel job protected, according to a study last year by economists Joseph Francois and Laura Baughman of Trade Partnership Worldwide.

Some of the biggest losers would be the steel-belt states that tariffs are supposed to help. Illinois would lose ?ve jobs for every one protected, Ohio three for every one and Pennsylvania and Indiana two for one. New tariffs would even hurt parts of the steel industry itself, and thus some steel-workers, too. AK Steel of Middletown, Ohio, has invested more than $1 billion to use imported steel slabs and now employs 11,600; what would Mr. Bush tell them? And all of that damage is before any foreign nation decides to retaliate against U.S. exports, as they probably will.

The Francois/Baughman report also found that:

  • The Bush proposal would protect between 4,375 steel jobs and 8,900 steel jobs at a cost to American consumers every year of $439,485 to $451,509 per steel job protected.
  • Higher prices and other inefficiencies imposed by the Bush administration’s actions would increase costs between $1.9 billion and $4.0 billion a year on consumers, and decrease U.S. national income by $500 million to $1.4 billion a year.
  • Steel-consuming industries would face greater competition from foreign manufacturers, as foreign manufacturers would have access to more competitively-priced steel inputs than U.S. steel users. The tariffs imposed on steel imports would raise the price of these inputs for U.S. steel-using manufacturers but would not raise prices for foreign manufacturers of steel-containing products. As a result, imports of finished steel products, like electric motors, construction materials, appliances and autos, would increase.

Throughout the 1990s, over 30 U.S. Steel companies went bankrupt. “Legacy costs,” which are the inflated costs incurred by industries for their retirees in industries that are heavily unionized were bogging down steel producers. GM and Chrysler experienced a similar fate, having legacy costs significantly add to the price of their products, which in turn, made them less competitive.

Even after decades of political stunts to protect American steel, in the end the market determined which entities won and lost. No thanks to our government. And, to make things worse, the quotas and tariffs harmed our economy, with little to show and net job losses.

A 1984 Federal Trade Commission study estimated that steel quotas cost the U.S. economy $25 for each additional dollar of profit of American steel producers. A negative multiplying effect of $1 : 25!

Also intriguing to point out is that, on average, the U.S. steel industry supplied no less than 70% of U.S. steel during the period of 1990-2001.

Back to LeBron. He left Cleveland because we could not facilitate a team that could win championships. As the Plain Dealer pointed out, winning regular season games doesn’t amount to squat if you cannot win in the playoffs. In a similar vein, it does not matter how much of the steel you supply at any given point if you cannot compete with other economic actors, as evidenced by the increase in imported steel depicted above. If you lose that competitive edge, your competition will gain market share, and it is up to you to cover that ground.

In my earlier post on the fallacy of buying local, I questioned why anyone would intentionally make himself poorer to keep an inefficient economic actor in business. This applies here also. But, in this instance, the government stepped in and prevented consumers from choosing whether or not to buy locally made steel. The imposition of import quotas and tariffs is a direct affront to the right of consumers to make their own decisions about from whom to purchase components. I realize that the “right” I speak of is not codified in law, but it should be.

An example of why import quotas and tariffs are unjust. There are two gas stations across the street from one another corner.

One is a locally-owned filling station that is not part of a major chain. It charges $3.00 per gallon and all of its components, like ethanol, are made in the United States. Let’s call this station “LTZ Gas.”

But, across the street is another gas station that gets its gas from abroad, does not have the government-mandated ethanol (Just let me dream) and is $2.25 per gallon. This gas station is called “Gas Importers.”

If you were in need of gas, which station would you choose? Certainly, most would pick Gas Importers because their price is lower. The imposition of import quotas and tariffs is like a police officer parked at the intersection who pulls you over before you make your choice. If you choose “LTZ Gas” the officer lets you pass. But, in an effort to be “fair” he informs you that the law will only let you buy one gallon of gas at “Gas Importers” at the lower price and then you will pay a .75 cent per gallon tariff on each additional gallon you purchase, just so LTZ won’t go out of business because their component inputs and cost of labor are higher.

Is that fair? No. But this is what happens, with tariffs and import quotas and American business are hurt by it. Consumers are forced by government decree to either buy from LTZ or pay artificially higher prices on gas from Gas Importers. Obviously, if the consumer’s business is dependent on gas, like a pizza delivery guy, he becomes less competitive because his cost of doing business goes up through higher prices, and that cost gets passed along to you in the form of more expensive pizza. As a result, the pizza delivery guy is routinely stiffed on tips, and is ultimately poorer. All because LTZ could not compete with Gas Importers.

To jump back in to steel briefly, the 2002 tariffs were estimated to raises prices on U.S. consumers between $2 and $4 billion, decreasing national income between $500 million and $1.4 billion.

Just like gas prices fluctuate, so do steel prices. What tends not to fluctuate as much, however, are the costs of labor and taxes. This is why some producers in other countries will have a comparative advantage in steel production. But, as we all know, comparative advantage isn’t just limited to countries. Some states have a comparative advantage over Ohio, which is why we lost a lot of tire manufacturing to southern states like Georgia.

Back to steel, the tariffs President George W. Bush imposed allegedly would protect between 4,375 and 8,900 jobs — at the expense of an estimated 35,000 to 71,200 jobs. Now, if you were one of those 35,000+ workers who lost their jobs, you might not realize the connection between tariffs or import quotas and why you lost your job. Similarly, you might not realize that because of these protectionist actions, your golf clubs, new car, or house now costs more. Sadly, President Obama is headed down the same road, but at a faster pace.

What it boils down to is thievery, thus the title of this post. Forcing consumers to pay higher prices is akin to the direct taking of your wealth, depriving you of the decision to buy items at lower prices or forcing you to pay a tax to equalize competition between two unequal competitors.

Everyone reads with shame the stories of progressive communities structuring soccer games where nobody loses. It’s pathetic, I know. But on a smaller scale, forcing St. Dominic’s to accept a goal for every goal they score on Gesu is no different than taxing the products of more efficient economic actors to make things “fair” for the poor souls at Gesu who suck at soccer.

I commented on the Cleveland.com article about “buying local.” It should be no surprise that advocates of “buy local” would also support these tariffs. Heck, if they had it their way, you’d be forced to “buy local” which is often the effect of tariffs and import quotas. One commenter decried imports and said “import buying will lead to a very weak recovery in this area.” As if Cleveland has ever really experienced a recovery. Since generally accepted rate of “full employment” is 5.0%, you can see that Cleveland has rarely been at or near full employment for more than a few years.

(Click to expand.)

Cleveland’s problem is that we are overly dependent on too few industries. Just like nobody would expect you to invest all of your savings for retirement in a single stock, Cleveland expects that economic growth will magically appear if they do this. Obviously, this has not been the case. Cities should not rely on one industry, hoping they’ll somehow gain a comparative advantage. We can ask those in Flint, Michigan how well that experiment worked out for them.

To succeed, Cleveland needs to diversify. Given the area’s government corruption and stagnant political atmosphere with near complete Democratic control, it seems very unlikely that things will turn around. Taxes are too high, the government is way too involved with zoning, and education is  just plain horrible. Unions in schools, the public and private sector all play a very large part in this, too. However, Cleveland’s elected officials are clueless when it comes to finding answers.

ReasonTV did a recent feature entitled “Reason Saves Cleveland.” They interviewed a local official whose perspective is indicative of the backwards economic thinking of Cleveland:

Cimperman went on to explain that the city council’s role was to help business owners and residents “thread the needle” of endless regulations and mandates and edicts. (Cleveland has more than 20 zoning designations alone.) He boasted of helping a linen company—the last one of its kind within city limits—that had been trying for the better part of a decade to get variances allowing it to expand. With Cimperman’s help, the company managed to navigate the paperwork in a mere 18 months. When I talked with him about Houston’s less restrictive land use policies and wide-open approach to new businesses, he scoffed: “Houston is a joke.” If that’s true, the painful punch line is that during the last 50 years, Houston became the country’s fourth-largest city while Cleveland was sliding down to 41st.

Councilman Cimperman, who ran against Rep. Kucinich views the role of city council member as a facilitator for businesses to thread the needle of our archaic laws. That approach is backwards and wrong. Cimperman obviously doesn’t realize that it is he, as a member of the City Council who writes the laws. If it takes 18 months for a business to expand, what business is going to stay in Cleveland? Rather than have business be forced to “thread the needle” why not just get rid of the needle all together? This climate needs to change if Cleveland wants to diversify and attract jobs.

We’ve had two Republican mayors since World War Two. Cleveland Democrats won’t take on unions, because they represent the power base that gets them elected in what remains of Cleveland. What Cleveland needs is a Michelle Rhee to take on the Cleveland Teachers Union, paired with a Chris Christie as mayor. However, even with the formation of the new Cuyahoga County Council, I doubt much will change and Cleveland will slip further into the economic oblivion, if we let it.

FURTHER READING:

Protectionist Welfare for Steel

The Ailing Steel Industry Needs Less Government Intervention, Not More

LeBron James, Loyalty and the Economic Future of Cleveland

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