Trump, Trade, & Buffalo

During my days as an Econ major, one of my professors used to admonish us that even if an economic doctrine was outdated, if it had any staying power, some part of it most likely was insightful.  That is, don’t be so quick to put it up on a shelf and label as 100% toxic.  In this spirit, I am going to take a look at Donald Trump’s (And taking Trump in this spirit becomes more difficult with each passing day) ideas on trade and how it would apply to my hometown of Buffalo.  While visiting us this summer, Trump promised to bring tons of jobs back to Buffalo by renegotiating international trade treaties.  While most of Trump’s speech was a meandering stream of consciousness, this line resonated with the crowd in a city that is finally starting to turn things around after decades of manufacturing job losses.  Could such a policy bring back jobs to the working class in Buffalo?

It is said that success has many parents while failure is an orphan.  Actually, as we’ll find out, economic successes and failures both have many parents.  Both are a result of several factors coalescing together and it is unlikely a policy fixating on a single issue can change the momentum of one or the other.

In 1954, Buffalo had 152,000 manufacturing jobs.  Prior to the opening of the St. Lawrence Seaway, Great Lakes freighters unloaded in Buffalo to transfer goods into canal boats and later trains for shipment to the East Coast.  This made Buffalo a strategic spot for manufactures to locate.  In the 1800’s, grain came from the Midwest and was milled into various food products in Buffalo.  To process the large amounts of grain pouring into Buffalo Harbor, Joseph Dart invented the grain elevator.  These large structures remain a prominent feature on the city’s waterfront.

Grain elevators at foot of Main Street in 1900. These first generation wood elevators have been replaced by the modern cement cylindrical elevators. Credit: Detroit Publishing Co./Library of Congress

After the Erie Canal, trains, and grain, came electricity.  Nikola Tesla, leaving the employ of Thomas Edison, built with George Westinghouse the first hydroelectric plant in Niagara Falls.  Using alternating current which, unlike Edison’s direct current, did not require power plants every mile, this electricity could be delivered 20 miles south to Buffalo.  Buffalo became the “City of Light” and this new technology was featured prominently in the 1901 Pan-American Exposition.

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The Pan-American Expo Electric Tower, 1901. Credit: Buffalo History Museum.

At the same time of the Pan-American Exposition, land was being acquired south of Buffalo by the Lackawanna Steel Corp.  Buffalo was close to ore fields that supplied raw material and with cheap hydroelectricity along with access to Great Lakes shipping and Buffalo’s extensive rail network, this was an ideal spot for steel production.  By World War II, then known as Bethlehem Steel, the plant employed over 20,000 people.  The local steel production capabilities attracted the auto industry.  Some, like Pierce-Arrow did not last past the 1930’s, but Chevrolet and Ford became mainstays and employed thousands in several plants across the region.  In 1916, Glenn Curtiss moved his aviation production plant from Hammondsport in the Finger Lakes to Buffalo.  During the first half of the 20th Century, Buffalo was major hub for aircraft production with employment hitting 70,000 (about the same number Apple employs in the U.S.) during World War II.  Buffalo’s industrial development was a classic case of economic geographical clustering.

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Republic Steel, Mobil Oil refinery, Donner Hanna Coke, railroad network all intertwined in Buffalo’s Inner Harbor, 1958. Credit: Wiki Commons.

Geographic clustering of economic activity was addressed by Alfred Marshall in 1890 and as a theory, was dormant for another century until economists, especially Paul Krugman, gave it another look.  In particular, it was found the manufacturing sector benefits greatly from clustering while for the post-industrial economy the effects are more diffuse.  In the case of Buffalo, clustering was caused by access to transportation via canal, trains, and the Great Lakes connecting the Midwest and East Coast.  In 1950, half the population of the United States lived in a 500 mile radius from Buffalo providing a ready market for goods.  Niagara Falls presented a bottleneck that forced shipments to funnel through Buffalo  Being first also counts and the invention of the grain elevator, generation of AC current, and aviation production at the birth of the industry gave Buffalo a jump start.  Labor poured into the region both in the form of immigration and internal migration from rural areas.  The concentration of experienced labor also produces high productivity from knowledge spillovers as less experienced labor benefits from close proximity to more skilled workers.  This in turn can generate high wages when the labor market is competitive and in good bargaining position.

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Curtiss-Wright plant P-40 production in 1941. Photo: Dmitri Kessel, Life Magazine

In 1951, Fortune featured a cover story titled Made in Buffalo which described a dynamic and diverse manufacturing center.

How did it all unwind?

Again, many factors coalesced to produce Buffalo’s downward spiral.  In 1938, when the local auto industry began shifting from auto to component assembly, Bethlehem Steel would stop investing in its flat rolling capacity due to lack of demand.  After World War II, Curtiss-Wright laid off 35,000 workers and then left Buffalo for good in 1946 for Ohio.  Bell Aircraft also greatly downsized but stuck around long enough to build Chuck Yeager’s X-1 and the Apollo program’s lunar module simulator.  Eventually, Bell left for Texas in the 1960’s.  Other industries, for example, Westinghouse and Western Electric picked up the slack.  That was something Alfred Marshall would have predicted fifty years prior:

“A district which is dependent chiefly on one industry is liable to extreme depression, in case of a falling-off in the demand for its produce, or of a failure in the supply of the raw material which it uses. This evil again is in a great measure avoided by those large towns or large industrial districts in which several distinct industries are strongly developed.”

However, an infrastructure project in the 1950’s removed Buffalo strategic bottleneck location for transportation.

The completion of the St. Lawrence Seaway enabled shipping to bypass Buffalo and head directly to the East Coast or overseas.  Grain shipments dropped dramatically and many of the waterfront elevators were abandoned.  Still, the steel and auto industries were going strong.  Buffalo continued to grow and prosper along with the rest of the nation into the 1960’s, but the reduced diversity of the economy left the region increasingly vulnerable to economic shocks.

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Buffalo’s winter grain fleet anchored in outer harbor during winter to supply wheat for milling. This annual sight vanished in the early 1970’s. Credit: https://www.wnyheritagepress.org/content/lake_ice_and_lake_commerce/index.html

The energy crisis during the 1970’s sparked a demand for smaller cars which Japanese auto-makers specialized in.  This reduced demand for products made in Buffalo’s auto plants and in turn, its steel mills.  Bethlehem Steel poured investments into its Indiana plant which was closer to the expanding population westward.  Poor labor relations, outdated production methods, and questionable management practices dropped Bethlehem’s employment from 22,000 in 1969 to 5,000 when finally closed in 1983.  Republic Steel, once home to 5,000 employees followed suit in 1984.  In 1985, Trico moved 1,000 jobs from Buffalo to Mexico where workers made less than $1 an hour.  As manufacturing de-clustered from Buffalo, the region became less and less attractive to locate.

And what is the point of this history?

This all happened before NAFTA went into effect in 1994.  Renegotiating NAFTA will not undo all the factors that drove manufacturing jobs from Buffalo.  This isn’t to say the matter should not be open to debate.  Personally, I do not believe nations with widespread child labor and lax environmental regulation should have unfettered access to American markets.  But a reworking of NAFTA will not magically bring jobs back to Buffalo.  In fact, it would likely hamper access to the 9 million Toronto-Niagara Peninsula market just across the border.  Given that Canada is America’s top trading partner in terms of exports, renegotiating NAFTA would definitely cost jobs in Buffalo while the benefits are at best, uncertain.

Allied Chemical discharging dyes into Buffalo River. Buffalo’s manufacturing legacy did not come without a price. Credit: New York Department of Environmental Conservation.

And this brings up the greatest flaw in the Trump plan, fixating on a single issue as an economic cure.  Typically, you’ll see this with taxes, most recently in Kansas.  Gov. Sam Brownback’s tax cuts were intended to entice business into the state.  Whatever enticement the tax cuts were to bring business in the state have been offset by cuts to education and infrastructure spending.  The latter reduces incentive for business to locate to Kansas.  Or take a look at New York City where residents have had to pay a city income tax in addition to state taxes since 1966.  During this period New York City has experienced a decade (1970’s) where it lost 800,000 residents but also has gained 1.1 million residents since 1990.  Taxes should be considered as a factor in economic policy, but it is not a sole determinant of economic growth.  And neither is trade.

Conversely, economic models tend to smooth over the rocky transition from employment in one economic sector to another.  What is happening to manufacturing in America is to some extent the same thing that happened to farming in the first half of the 20th Century.  In 1920, farmers were 30% of the American population.  Today, that figure is two percent.  Mechanization of farming has reduced the need for labor.  The same is true of manufacturing.  The days when a steel mill required tens of thousands of employees are over, leading to a migration of labor to low paying service sector jobs.  In academia or policy think tanks, this transition is often reduced to a mathematical abstraction.  Hopefully, the work of Angus Deaton, whose research has revealed a decline in life expectancy of working class white Americans, will provide some “ground truth” for economic models.

The cause of that decline in life expectancy is mostly related to alcohol and drug abuse.  For those of us on the ground level have certainly seen this in the struggle of economic transition.  Other parts of the equation are foreclosures, divorce, social isolation, and in the worst case scenario, suicide.  So what is the proper policy response?  You have to try a lot of things across several fronts.  And going into this, an understanding this will be a trial and error process.  Not everything tried will succeed.  Like any sort of forecasting, we are looking at probabilities of success.

On a national level, a fiscal/monetary policy goal of driving unemployment down to 4% should have highest priority.  This will make local efforts more manageable.  Pragmatism should have a priority over ideology in policy making.  The private and public sector are like air and gas in an auto engine.  An optimal mixture provides best performance.  On a state level, stop the starvation of public funding for state universities.  For those who do not go to college, open up access to skilled trade/technical training.  While the labor market has improved significantly since 2008, those who were ejected from the workforce have had difficulty with re-entry and unemployment duration remains at post-war highs.  Individuals who have lost jobs due to a financial crisis not of their making should not be treated as pariahs in the job market.  This will not remove from the political process the more unseemly aspects of the Trump campaign, but will ideally push it off to the sidelines where it belongs.

Over the past few years, Buffalo has undergone something of a renaissance.  The University of Buffalo’s new medical campus is spurring development in the city.  Immigrants and refugees are infusing new life to old neighborhoods while Elon Musk’s SolarCity is building the Western Hemisphere’s largest solar panel plant on the site where Republic Steel once resided.  Hopefully, this can give the region a jump start in an emergent industry and begin a clustering effect anew.  Although manufacturing has declined to 50,000 jobs in the area, ghosts of Buffalo’s past can still be seen.  The steel mills are gone but Chevy and Ford still employ thousands, if you hang out in Canalside long enough, eventually you’ll see a 700-foot lake freighter making a visit to one of the grain elevators still in operation, no longer the second largest rail center in the nation, on a quiet weekend morning I can still hear train activity in the Frontier Yard.  Powerful reminders of Buffalo’s past, but as an individuals, we need to look towards the future.  To quote an old Clint Eastwood character:

You improvise, you adapt, you overcome.”

It’s as good advice as any.

*Photo atop post is 2010 aerial view of Buffalo.  Credit:  Doc Searls/Wiki Commons.

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