De in du st r i al i za ti o
in t
n
he G ra n i te Sta te
s of m o n e ta r y p o licy
n tell u s a b o u t t h e role . manufacturing jobs.
a .S
What Keenea,nNd.Hf.,incancialization in the loss of U
BY MARIE CHRISTINE DUGGAN
T
››
HE CE N T R A L ROOM IS 6 5, 000 SQUA R E FE E T W IT H A H IGH CE ILIN G.
This room is noisy, with large machines emitting loud hums and whirrs. The machinists are dwarfed Kingsbury
within the canyons between the rows of equipment. Many of the machines have plastic housings, so that Machine Tool,
each looks like a giant photocopier, a rectangular plastic box taller than a person, and perhaps the length Keene, N.H., a
of two or three people. There is a window on the side of each one. Inside, the drilling/lathing/milling oper- symbol of
modernity in
ation is performed on the metal. However, someone peering in through the window doesn’t actually see a 1969.
metal tool hitting the material. The surprising sight of water gushing furiously meets the eye. The tools
themselves operate at tremendously high speeds (2,000 inches per minute, or 20,000-50,000 rpm). The Source: Keene
Chamber of
water pushes metal debris away, as human hands or air flow did on the previous generation of machines. Commerce, in the
But water also acts as a coolant to put out sparks and to counteract the tremendous heat created by the fric- local history
tion of metal tool on metal part. archive of Keene
Public Library.
This scene is not from Germany or South Korea, but rather from the southwest corner of New
Hampshire, only fifteen miles from the borders with Massachusetts and Vermont. The high-tech machine
shop described was Knappe and Koester—in 2011, before it was sold to GS Precision, which has since
expanded the operation. Manufacturing industry in Keene specializes in the production of capital-goods—
products used as parts or machines at other businesses in other production processes: ball-bearings, dia-
mond turning machines, lens producers, lubricants for machinery, and inks and date-stamp printers for
food and pharmaceutical plants around the globe. These factories are so clean and relatively small (employ-
ing about a hundred, not hundreds or thousands) that newcomers to New Hampshire, like myself, tend to
notice the cows at the dairy farms and the fresh ice cream stands, not the manufacturing plants tucked
behind real estate offices or next to hardware stores.
In an effort to repair the connection between economic theory and industrial activity, I picked up the
phone and contacted some local managing owners to ask if my undergraduates could tour the plants. The
industrialists were excited that someone at “the college” showed interest in what they did. We saw a high-
tech machine shop unloading the latest computerized five-axis machines from Japan in 2011. We watched
young computer-savvy machinists assemble diamond turning machines by hand, and saw a demonstration
of how the machines drill plastic molds for producing touchscreens in factories around the globe. ››
NOVEMBER/DECEMBER 2017 l DOLLARS & SENSE l 9
D E I N D U S T R I A L I Z AT I O N together my research about deindustrialization in
my new hometown, the Trump phenomenon was
Keene lies in the Connecticut River Valley, getting hard to ignore. It suddenly dawned on me:
which in the mid-19th century witnessed the Keene, N.H., wasn’t the only place to have experi-
birth of the machines that make replaceable metal enced an attack on its export-competitive industrial
parts. Machinists from Hartford, C.T., to base between 2000 and 2012. Was it all of New
Lebanon,
Leba N.H., drove up global Hampshire? Or was it just about everywhere but San
productivity
prod during the indus- Francisco, Boston, and New York City?
trial
tria revolution, and since that Figure 1 is what I found in five minutes. The
time the machinists’ skills had crushing loss of manufacturing jobs between
been
be passed down from father 1980 and 1985 is a vivid memory for me, because
to son (and occasionally to I graduated from California’s Berkeley High
daughter).
da This chain was dam- School in 1981, where 90% of my peers were not
aged
ag with the layoffs and plant going on to four-year college. When I arrived at
closings
cl between 1980 and Tufts University in Medford, Mass., I saw store-
1990.
19 In those years, few fronts boarded up and watched people in line at
fathers
fa told their eighteen- the convenience store pay with food stamps. The
year-old
ye children to become baleful glares at us privileged college students
machinists.
ma As a result, there is only got worse as the unemployment rate reached
now
no a shortage of computer- 10.9% in November 1982. When I moved to
savvy machinists, so local Brooklyn in 1990, I often drove by the empty
firms donated funds to build industrial buildings along the waterfront.
a computerized machine tools
laboratory at Keene State and have offered a Figure 1. Manufacturing Jobs in the U.S.
››
$1,000 scholarship to train at the local commu-
Keene lies in the
nity college, which shares the lab. Many of Keene 25.0
Connecticut River
Valley, which runs State’s staff and students are from Connecticut,
20.0
from Bridgeport, Vermont, and New Hampshire, and come from
Conn. to Claremont,
Millions of people
families with connections to machining. 15.0
N.H., and which
birthed replaceable The economic forces impacting the machining
metal parts and the jobs that continue to sustain local families are hard 10.0
U.S. machine tool to see using standard economic datasets. Most
sector. 5.0
databases provide information only on publicly
held firms—those that issue shares that are traded 0.0
1939
1942
1946
1949
1953
1956
1960
1963
1967
1970
1974
1977
1981
1984
1988
1991
1995
1998
2002
2005
2009
2012
on the stock exchange. Ownership transitions
between 1998 and 2012 shifted some of the local
plants into the hands of large, publicly-held corpo- Source: Federal Reserve Bank of St. Louis (Fred II)
rations. Yet some of the local manufacturing firms,
including some of the most dynamic in the United So, when I saw on this graph that the manufac-
States, remain smaller in scale and independently turing job loss of 2001-2009 was triple that of
owned, and so are absent from standard databases. 1979-1985, my jaw dropped. And why didn’t I
My students and I began conducting oral histories know this? I read the New York Times, the New
of owners and workers in order to learn more about Yorker, the Financial Times. I hang out with het-
the private firms that do not appear in the data. erodox economists, for goodness sake! I now sus-
pect that industry left our intellectual centers
The Elephant in the Room between 1979 and 1985—out of sight, and so out
In November 2016, Trump started to pick up a of mind—but remained a powerhouse in so-
surprising amount of support in many parts of the called “rural” areas until 2001, only to suddenly
nation. As it turned out, even though Clinton won and precipitously decline. I realized how lucky I
the popular vote, 2,026 counties went for Trump, was to be living in a place that is like a good bit of
while 447 went for Clinton. As I began to pull the United States.
10 l DOLLARS & SENSE l NOVEMBER/DECEMBER 2017
Many economists have been focusing on in the face of cheap labor overseas, that happened
macroeconomics—the ups and downs of the in 1982 (as in shoes and textiles). The manufac-
entire national economy, measured in “aggregate” turers who survived until 2000 were made of
data—for the past twenty-five years. The instabil- sterner stuff. Monetary policy that promoted
ity of the financial sector and rising income financial bubbles turns out to be another ingredi-
inequality could both be analyzed through ent in the decline of manufacturing jobs between
economy-wide data, so we all rightly got our 1978 and 2012. I will analyze this in a three part-
heads in that game by 2007. If one takes manufac- series by exploring three different moments in
turing jobs as a percent of total employment, there recent U.S. economic experience: 1980 to 1990,
has been a continuous decline since the late 1960s, 1990 to 2000, and 2001 to 2012. I use case stud-
and one would therefore see little new between ies from Keene to illustrate the arguments.
2001 and 2009. Some people point to China’s
accession to the WTO in 2001 as the cause of the Deindustrialization Part I:
U.S. decline in manufacturing. However, my own The Connecticut River Valley
research inside firms suggests that competition Machine Tool Sector, 1980-90
from China is not the main story. Hank Frechette purchased Kingsbury Machine
Keene’s capital goods producers do not com- Tool from his father-in-law, E.J. Kingsbury, in
pete with producers in low-wage nations, but 1963. That year, Frechette also hired the entire
rather with firms in Europe and Japan, and unit graduating class of Wentworth Tech in Boston.
labor costs have generally been higher in those “I had never heard of Keene,” relates Donegan,
places than in the United States since 1990. The an electrical engineer in that class. But it would
decline in U.S. jobs has less to do with external become his home and his life for the next forty-
forces than Americans seem to think, and more to odd years. Machinists from Vermont and New
do with the policies taken (or not taken) inside the Hampshire considered Kingsbury to be one of
United States itself. If a firm was going to collapse the most exciting places to work in New England. ››
Kingsbury in the Golden Age:
1958 to 1982
T he photo on the title page of this article shows Kingsbury
Machine Tool in its heyday, 1969. One year earlier the pro-
grammable logic controller (PLC) had been invented in
Massachusetts. At Kingsbury, the PLC replaced miles of wire in
cabinets—which electrical engineers previously had to sort
through to locate any glitch. As engineer Dennis Donegan
explained, “You’d think [the PLC] is a computer, but it’s not a
computer, it’s dedicated to just one thing.” By 1969,
Kingsbury Machine Tool had incorporated the PLC into the
rotary machine that the company supplied to General
Motors (among its many clients) to make automobile wheels.
The Kingsbury was like an assembly line at the fingertips ps of one operator. The operator
shown in the picture above would load the material to be machined into a part such as an automobile wheel. He
would simply push a button to advance the carousel around to the sixteen or so successive stations. The operator
would load a fresh piece, and at the same time take a finished piece out. For example, the first step might be to
punch holes and slots in the metal, the second to bend tabs, the third, fourth, and fifth consecutively deeper roll
forming operations, and so on. Since each of these operations had previously been done on separate machines, the
Kingsbury Machine was feared by manual machine operators as labor-displacing technology. The Kingsbury Rotary
was the cutting edge automated technology of 1970.
NOVEMBER/DECEMBER 2017 l DOLLARS & SENSE l 11
D E I N D U S T R I A L I Z AT I O N Hank Frechette made a name for himself
nationally and became a leader in the National
Their work ethic and skills, plus the innovations Association of Manufacturers. There he met
of the young electrical and mechanical engi- another rising executive, Jim Koontz, who was
neers, plus the management by Hank Frechette based in Detroit. When Frechette died suddenly
and Charlie Hanrahan—a co-owner who was in 1976, his astute widow Sally Kingsbury asked
also a member of the founding family—grew the Koontz to come to Keene and take the helm of
company threefold between 1963 and 1976, so the business. Koontz’ wife had doubts about leav-
that it employed around 1,000 people. Many ing the community of executives in Ann Arbor
machinists commented that, in those days, for remote Keene, N.H., but the couple made the
Kingsbury was like a family. Charlie Hanrahan move with their four children. Between 1978 and
1982, Kingsbury was employing three shifts of
The decline in U.S. jobs has less to do with workers to keep up with continuous orders as
external forces than Americans seem to think, Detroit auto companies tried to re-tool to com-
pete with small cars from Japan. Koontz became
and more to do with the policies taken (or not CEO in 1983.
taken) inside the United States itself. In 1984, Kingsbury had its first layoff: over 200
people. This was a shock to the community and
Erratic monetary policy turns out to be another many blamed Koontz as an outsider with no local
ingredient in the decline of manufacturing jobs ties—compared to Charlie Hanrahan, for example,
who had gone to grade school with many of the
between 1978 and 2012. men. But this wasn’t just a personality issue—there
were larger economic forces at work. In 2012, Jim
Koontz related to me that it felt in 1983 as if the
worked hard to keep it that way. He had a note- company had gone off a cliff, one minute produc-
book in which he wrote down every man’s name ing three shifts a day with paychecks chock full of
and the names of his wife and children, with overtime and bonuses—to suddenly a period of six
their ages. (Yes, all the workers at Kingsbury— months with no orders. It was only in early 2017
indeed, all the machinists in Keene—were men. that I actually saw in Figure 2 (left) that machine
That is no longer the case, but it was in those tool industry profits for the nation as a whole
days.) He trained new supervisors to make simi- dropped in 1983 from nearly $4 billion to $1.5
lar efforts to know each member of the shop per- billion—a drop which does indeed look very much
sonally. Once a man got a job at Kingsbury, he like a fall off a cliff.
was set for life—until 1984. What was causing that massive decline in indus-
try-wide profits in U.S. machine tools? One factor
Figure 2. Profits in Machine Tool Sector was a dramatic technological shift from mass pro-
of the United States in Millions of Dollars duction to flexible production, precisely in the
1980s. Jim Koontz explained it:
4500
4000
Kingsbury made machines that could produce one
million to two million parts for the Big Three auto
3500
manufacturers. After a while, volumes went down.
3000 At one point, those three auto makers produced all
2500 the autos in the world. By 1980, there were thirty
companies producing for the world, but by now
2000
[2012], there are three hundred auto companies
1500 worldwide. Each automobile has 30,000 parts, and
1000 80% of them today are produced by suppliers, so
there must be tens of thousands of suppliers, glob-
500
ally. Because of this, the volumes that auto makers
0 needed their machines to produce went down from
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
one million to 100,000. This changed the style of
the technology that the manufacturers needed.
Source: NBER-CES Industry Database, NAICS 333512
12 l DOLLARS & SENSE l NOVEMBER/DECEMBER 2017
Few businesses today need a machine that can
produce millions of identical parts, like
Kingsbury produced back in the 1970s. Instead,
they need machines that can be reprogrammed to
produce different parts. The name for such
machines is “CNC”—computer numerical con-
trol, which means that the computerized
machines are run by software. The modern
machinist enters the dimensions of the parts to
be produced, and then listens as the machine
chooses the tools and goes about making the
parts. Kingsbury had purchased such a machine
by 1987. Machinist Phil Hilliker thought it was
the finest piece of equipment he had ever worked
with. The gossip among owners of plants in and
around Keene is that Jim Koontz never adopted
CNC technology—Kingsbury never adapted to
changing technology in changing times—and
››
Financial changes were a second factor exacerbat-
this is why Kingsbury failed to make profits after ing the pressure inherent in a period of technologi- Kingsbury
1983. As one financial wizard told me, the reason cal change and low profits. It was not until 1983 machinist Phil
U.S. machine tool makers did not survive until that Jim Koontz became managing owner of the Hilliker standing
the 21st century is that they were, “Fat, lazy, and in front of a Jones
company. He did so by means of an internal lever- & Lamson
stupid.” But there is evidence that this judgement aged buyout (LBO). That is, Koontz did not have automatic turret
is far too hasty. the personal wealth necessary to purchase the com- lathe in 1987. The
Over time, a couple of reasons—more solid ATL is a computer
pany. However, Sally Kingsbury and the rest of the
numerical control
than gut instinct—emerged to challenge the con- board felt that he had demonstrated the managerial (CNC) machine
ventional argument that U.S. machine tool firms skill in 1978-1982 to take over, and they wanted the that at the time
just didn’t adapt. For one thing, Kingsbury manager of the firm to have an ownership stake to was produced in
Vermont just 15
acquired the machine tool firm Hillyer, and tie him to the community. In an LBO, a consortium miles from Keene.
Hillyer did make CNC machines. Secondly, the of banks puts the money up to purchase the com-
CNC machine Phil Hilliker stands in front of was pany. Specifically, they put the money into a fund,
made by Jones and Lamson (J&L). (One day, a and the fund purchases the company. The profits
student in my class magnified the photo above that the firm makes are then earmarked to pay off
and found the company’s name.) J&L was a the banks. Once the bank loan has been paid off, the
machine tool maker in Springfield, Vt., a town fund is owned by management. In this case, Koontz
about fifteen miles from Keene. The company was not the only one “in on” the fund. Some of the
filed for bankruptcy in 1986, so the “can’t adapt” engineers wound up being part-owners of the fund,
argument had been applied to them, too. But as did members of the Kingsbury family.
there in front of us was clear evidence that J&L The use of an “inside LBO” to transfer ownership
had produced a computerized lathe by 1986, and of Kingsbury from one generation/owner to the next
machinist Phil Hilliker said he was using it by was not new. Hank Frechette had done the same
1987, and it was the finest machine he had ever thing when he purchased Kingsbury from his father-
worked with. Thirdly, the machine shop next in-law E.J. Kingsbury. Yet it seems that something
door to J&L in Springfield was Bryant Grinding, went wrong with this second LBO. LBOs were more
and it was in decline by 1990. Yet at a recent lec- common by the 1980s, and it is likely that the lever-
ture a computer scientist told me he had applied age was higher—meaning a smaller down payment,
for a job as a computer programmer at Bryant in and a larger amount lent. Everyone who was in on
1981, and they were using what he considered a the LBO considers Jim Koontz to have been an out-
“nifty” program for machine tools. These are standing executive who did his best in difficult times.
three hints that the Connecticut River Valley The workers on the shop floor and the supervisors
machine tool sector was adapting. who were not part of the LBO, however, consider ››
NOVEMBER/DECEMBER 2017 l DOLLARS & SENSE l 13
D E I N D U S T R I A L I Z AT I O N It was his way and no other way. There was a period
of time where he managed by fear, in the sense that if
people didn’t go along with his idea he would put fear
Koontz to have been their worst nightmare. As an into them and he wanted to make them into a ‘yes’
educated guess, I would say there were two prob- person. That’s one of the ways he changed and didn’t
lems: First, paying off an LBO with profits from the listen to people. For instance, when the union was
firm would be difficult when the profits of the entire being introduced at Kingsbury’s, he’d come up to me
industry suddenly fell by 60%. That, in itself, may and he’d ask me some questions, he thought I was
being too easy on some of my employees but my phi-
have increased pressure to cut costs in 1984.
losophy hasn’t changed then, hasn’t changed today,
And the second problem was that the stock mar- you treat people how you like to be treated. I’m not a
ket rose continuously from 1987 to 1999. Between ‘yes’ person. So I told him how I felt. I felt like he had
1969 and 1982, an investor in the stock market really loyal employees and he thought I was treating
would not have made capital gains, but only divi- the employees—he said I had too much compassion
for my employees, ok? I had too much compassion
dends. Those ambitious for more dramatic returns
for my employees, that’s not the way management
(such as the Kingsbury family and Hank Frechette) was going to go in a sense of compassion, and I told
put their money into physical plant and talented him the truth, told him how I felt, I know it wasn’t
labor, and made profits by expanding market share the way he felt and we got in a discussion and he
through quality products. After 1982, industrial almost fired me on the spot, ok?
profits were hard to come by, while Alan Greenspan
Putting his job on the line to stand up to Jim
kept interest rates relatively low between 1987 to
Koontz for the employees in the late 1980s was a
1999, which made capital gains in the stock market
turning point in Kenny Johnson’s life, a moment
the new normal. At Kingsbury, managers “in on”
that took great courage and won him the respect of
the fund initially used to pay off the LBO received
the workers—to this day nearly thirty years later. He
profits out of production, and invested them into
had been trained by Charlie Hanrahan to know and
the rising stock market where they must have reaped
care for his employees and their families, as the way
consistent capital gains—while workers on the shop
to motivate the highest effort from the machinists.
Jim Koontz, CEO of floor lost their bonuses because the profits made
But now Koontz was pressuring him to lay off good
Kingsbury, 1983– from producing and selling machine tools were
1998, in white shirt machinists because they supported a union. Kenny
meager in the 1980s and the 1990s. At the time,
presenting an Johnson was not a fan of unions on the grounds that
award, 1987. gains made in shares of other companies on the
“you don’t need a union if you treat your people
stock market may not have seemed to come at the
Photo courtesy of right, ok?” However, Koontz was not, in Johnson’s
expense of the workers inside Kingsbury. But a
the Historical opinion, treating the shop floor right. Koontz hired
Society of Cheshire
wedge had emerged between the interests of owners
Jeff Toner as vice president, and the general view was
County, N.H. and the workers on the shop floor. Supervisor Kenny
that Toner was a hatchet man to get pro-union
Johnson described “a change in how [Jim Koontz]
››
workers fired. With considerable struggle, soul
handles his people.”
searching, difficult conversations, courage and soli-
darity, the machinists voted for a union in 1991.
What did the union get for the workers? Largely it
was access to the gains from the stock market by
means of the pension. As one retired machinist put it
recently, “I have been retired for eight years, I am get-
ting a pension from that place, and it’s going to keep
on going. I mean, the guy who set up the 401k plan
or whatever you want to call it, the guys knew what
they were doing with this thing.” The trick was to
keep your job. The industry’s profits were down, so
only half kept those jobs into the 21st century. But
that’s 300 or 400 workers gainfully employed for
forty years. Many machinists from Kingsbury still
meet for breakfast every Thursday, driving from 45
minutes away even when it is ten below and icy road
14 l DOLLARS & SENSE l NOVEMBER/DECEMBER 2017
conditions, to gather outside the restaurant at 6:45—
similar to their old commute for the 7am day shift.
The layoffs at places like Kingsbury in 1984
broke a social compact between owners and work-
ers, and from 1983 to 1991, the Connecticut
River Valley felt like a war zone. Workers lost con-
fidence in management’s intention to look out for
product quality and the labor force, and that loss
of confidence broke some unspoken taboo. The
ratio of owner compensation to worker compen-
sation at the firm was much lower in 1983 than it
is today. One form of compensation to the owner
was the respect (tinged with fear) of the commu-
nity and the workers on the shop floor. Kingsbury
was also a major philanthropic giver, cementing
the owner’s sense of responsibility for and owner- seniority
ni it rights
rights. He felt that the younger cohort
oh t to
››
ship of the entire community. which he belonged was better able than the old
When the workers at Kingsbury mobilized for a timers to learn new technology and turn the firm’s Charlie Hanrahan
(far right) with
union, they were publicly demonstrating that they prospects around. This younger man hates unions, other Kingsbury
had lost confidence in Jim Koontz. At stake was and blames Kingsbury management for acting like executives. His
really who owned the plant: the legal owners, or a unionized shop in 1984, though no union was management
the men whose skill gave the machines their repu- philosophy:
voted in until 1991. “Treat people as
tation? Machinist Phil Hilliker was one of the first The toll the decade took was not only on the you would want
to wear a union shirt. He related to my students in shop floor. Charlie Hanrahan was the managing to be treated.”
2015 the pressure he was under: He retired as CEO
owner who had gone to elementary school with in 1982.
They would send my work out to have it done some- the men and knew every man’s family members
where else. ‘I’ve got no work for you Hilly, got to lay by name. Hanrahan had been Hank Frechette’s Photo courtesy of
the Historical
you off.’ They didn’t have to lay me off, I had so right-hand man, and ran the company from 1978
Society of
many things I could do around there. I was their to 1982, teaching Jim Koontz the ropes, before Cheshire County,
whipping boy. They wanted to break me down retiring. He gave the speech of his life trying to N.H.
because I was an older one. But it couldn’t be done.
prevent the vote for a union. He had a heart
I said, If B-52s didn’t kill me during the Korean
thing, when they bombed me, you sure as hell ain’t attack during this period, and his children believe
gonna be able to do it. it was caused by his divided loyalties. He respected
Jim Koontz, and he developed close ties to the
Most of the male workers had served in war, shop-floor workers. That was his way of inspiring
either World War II, Korea, or Vietnam, so a com- people to give their best effort. Though Hanrahan
parison of the tensions on the shop floor to war passionately believed a union was the wrong way
was not made lightly. to go, every machinist I have spoken to goes out
of his way to explain the confidence, affection,
Divisions That Wore People Down and appreciation they had for him. Hanrahan
The 1980s were an intense time of technological may have been caught between a manufacturing
change, as Kingsbury began to use computerized world that viewed the workers’ skills as the source
machine tools to make products, and then also of profits (1958–1982) and the new era (1983–
acquired Hillyer Machine Tool to have their own 2012, at Kingsbury) when the source of wealth
line of computerized products. The loyalty that was capital gains on the stock market, which
supervisors like Kenny Johnson exhibited to older could be harvested best by laying workers off
workers meant the young were fired first, even from time to time.
though they might have young children to support The tragedy of the tensions in the 1980s is that
at home. One of the men laid off in 1984 had lost both managing owners and machinists cared
a finger at Kingsbury’s. Yet, as a young man, he had deeply about the future of the firm. For all the
never favored the union, because unions supported flaws that the workers saw in Koontz, he had ››
NOVEMBER/DECEMBER 2017 l DOLLARS & SENSE l 15
D E I N D U S T R I A L I Z AT I O N The Volcker Shock Makes Imports Cheap
Technological change does not seem adequate to
virtues also, especially compared with his successor. explain the number of firms that closed in the
Koontz was a man who was trained to work with Connecticut River Valley between 1980 and 1990,
machines—he did not have an MBA—and most given that they had weathered so many changes
machinists prefer working for someone who knows during the previous one-hundred years. What else
technology. He lived in Keene, rather than the dis- was going on between 1979 and 1984 that could
tant corporate ownership of a conglomerate. The explain the massive drop in U.S. machine tool
pension contributions papers demonstrate that he profits of 1983? I have taught macroeconomics
maintained the workers’ pension with utmost reg- four times a week for seventeen years, so of course,
ularity. As auto production went global, he traveled the hike in the U.S. interest rate between 1979 and
the world from South Africa to Brazil to sell 1983 came to mind. Figure 3 (left, above) is shown
Kingsbury Machine Tools. He used Kingsbury with the pink area to indicate that time period.
retained earnings to acquire Hillyer to keep up During the 1979 to 1983 time period, this base
with technological change. nominal rate of interest rose from 9 to 19%. The
Federal Funds Rate is what banks pay to borrow from
each other for overnight loans, and banks pop a
Figure 3. U.S. Federal Funds Interest Rate markup on top of that before they lend to consumers,
25.0 so the interest rate for a credit card to a person of
sound credit was probably 29% when the Federal
20.0 Funds Rate was 19%. The reason Fed Chair Paul
Volcker raised the interest rate so high was in order to
Percentage rate
15.0 kill off inflation, which was about 10% per year in the
late seventies. He did reduce inflation, but using the
10.0 interest rate to fight inflation is like using chemo to
fight cancer: it killed off a lot more than inflation.
5.0 Everyone knew that a high rate of interest would
reduce business investment in fixed capital equip-
0.0 ment like machine tools. The logic by which high
1969
1970
1972
1974
1976
1977
1979
1981
1983
1984
1986
1988
1990
1991
1993
1995
1997
1998
2000
2002
2004
interest rates reduce new capital spending is based
on the idea that such spending is financed largely
Source: Federal Reserve Bank of St. Louis (FRED II).
by debt. When interest rates are high, the cost of
borrowing rises. U.S. firms probably made the
rational decision to delay new capital spending in
Figure 4. Index of Unit Labor Costs the hope that the interest rate would come down.
in the U.S., Germany, and Japan Figure 4 (left, below) illustrates unit labor
180.0
costs—the cost of wages and benefits employers
160.0 incurred in the making a hypothetical widget in
140.0 various countries. While U.S. unit labor costs (the
120.0 black line) had long been higher than German
Dollars
100.0 (light gray) or Japanese (medium gray), that gap
80.0 widened precisely between 1979 and 1984. This
60.0
was due to two factors:
First, U.S. manufacturers may have delayed
40.0
purchasing new equipment until after interest rates
20.0
came down, while their Japanese and German
0.0 counterparts did not. Instead, they invested in new
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
machinery that meant workers could produce
United States Germany Japan
more units in the same amount of time.
Source: The Conference Board (conference-board.org). ULC is labor cost per unit of output. Labor cost is evalu- Second, what U.S. policymakers may not have
ated using nominal exchange rates, and output is evaluated using purchasing power parity exchange rates. realized is how much the exchange rate for the U.S.
16 l DOLLARS & SENSE l NOVEMBER/DECEMBER 2017
dollar would appreciate in response to the rising Figure 5. Hypothetical Competition Between U.S. and
rate of interest. Exchange rates had been flexible Imported Machine Tool, 1979-84
only since 1971. A rising interest rate pulled wealth $160
from around the globe into U.S. bank accounts $140
and this drove up the value of the U.S. dollar rela- $120
Thousands of dollars
tive to every other currency in the world. The dol- $100
lar appreciated relative to the German deutsche $80
mark and the Japanese yen, and competitors using $60
those currencies were the ones that the machine $40
tool sector faced. Suddenly, the prices of U.S.-
$20
made products went up when converted to
$0
deutsche marks or yen, and the prices of German
1979
1980
1980
1980
1980
1981
1981
1981
1981
1982
1982
1982
1982
1983
1983
1983
1983
1984
1984
1984
1984
and Japanese products went down when converted
to dollars. Japanese (imported) machine U.S.-made machine
This drop in relative unit labor costs gave the Source: Bureau of Labor Statistics (bls.gov), the Bank of Japan, and author’s calculations.
Germans and the newly industrializing Japanese
an opening they needed into the U.S. market for
machine tools. To see how this worked, consider a
hypothetical tool such a CNC lathe, produced by
a U.S. company. It is 1979, and the tool costs, say,
$100,000 in the United States. Let’s say that in
1979, a customer is considering buying a CNC
lathe. They have been buying from the U.S. com-
pany for fifty years, so they stick with the U.S.-
made machine, even though the Japanese or
German import costs the same.
However, by December 1984, U.S. machine
tools experience inflation of 36%, so the US
machine costs $136,000. Meanwhile back in
Japan, rising productivity reduces costs by 12%. If
productivity rises more slowly in United States
than Japan, then the U.S. dollar should depreciate, Financial Engineers Finished the Job
›››
which would hold steady the price that U.S. buyers By 1988, the Goldman Industrial Group had pur-
Kingsbury’s
pay for a Japanese machine. However, Fed Chair chased J&L out of bankruptcy, and began applying inline
Volcker tries to control inflation by raising U.S. “financial engineering” techniques to extract value machine was
interest rates to 19% in 1981, and the high interest from the firm. “Financial engineering” is used to produced by
1998 for
rate drives up the value of the dollar, and the make profits from dying companies by taking export to
import is now “on sale” for only $85,500. That is a them apart. Of course, many times it’s not clear mass
$51,000 savings! Under these circumstances some that the firm was going to die if the financial pred- producers
around the
firms decide to try out the import. In short, the ator had not attacked. By 1990, Goldman had pur-
world.
U.S. Federal Reserve gave imports an opening into chased another once-fine firm, next door to J&L,
the U.S. market by creating a 38% discount on the Bryant Grinding. And in 1998, Goldman protégé
price of an import relative to a U.S.-made machine Iris Mitropoulis purchased Keene’s Kingsbury
tool in 1984. from Jim Koontz, where Phil Hilliker still had his
By 1986, Volcker had realized his mistake and job. Mitropoulis owned Ventura Industries, a sepa-
did depreciate the dollar by around 38%, so that rate company which owned only one thing,
the Japanese import would cost the same as the Kingsbury Machine Tool. By 2001, it was clear
American machine. By then 400 people had that she was not investing the retained earnings she
already been laid off from Kingsbury in Keene, had acquired along with the plant into new equip-
N.H., and Jones & Lamson in Springfield, Vt., ment. “Ah, she took the retained earnings!” erupted
sold out in 1986. one retired executive in sadness and frustration. ››
NOVEMBER/DECEMBER 2017 l DOLLARS & SENSE l 17
D E I N D U S T R I A L I Z AT I O N earmarked for woman-owned businesses. It
appears that all the money that was ever granted
By 2007, half of the pension fund was miss- to Kingsbury by its previous owners, its employ-
Retired ing as well. Indeed in 1983, the IRS had ruled ees, or lenders was transferred to Ventura
Kingsbury that a firm facing bankruptcy had the right to Industries, so that Kingsbury declared bank-
machinist use the workers’ pensions to try to keep the com- ruptcy in 2012. Financial engineering should
Phil Hilliker
with his wife pany open. In 2016, I submitted a Freedom of not be legal. But it is.
Caterina Information Act (FOIA) request to the Federal When Keene looks at Mitropoulis’ actions
Hilliker in Pension Benefit Guarantee Corporation, and 1999-2012, the reign of Jim Koontz at Kingsbury
2015.
there was a very fat file on Kingsbury. Up to appears in a more nuanced light. Mitropoulis was
››
1998, Jim Koontz ran the company and the easy to get along with, and so friendly to the union
men, that she disarmed them while she probably
transferred value to Ventura Industries. She never
traveled overseas to find any customers, she did not
invest the retained earnings in the company, half
the pension fund vanished on her watch, and she
borrowed money at subsidized interest rates and
then declared bankruptcy so she wouldn’t have to
pay it back.
If we step back to see what Kingsbury’s story
tells us about U.S. deindustrialization, it’s not
only that Volcker’s high interest rates tilted the
scale toward imports. There is a second more
insidious aspect: it appears that the easy money
provided by new Fed Chair Alan Greenspan after
1987 created a rising stock market that rewarded
people who took value out of industrial produc-
tion. Koontz and people of his era stumbled
Not only did Volcker’s high interest rates tilt upon those capital gains, while financial engi-
neers such as Mitropoulis actively extracted value
the scale toward imports. It appears that the from industry to shift the wealth into other
easy money provided by new Fed Chair Alan assets. Class struggle was nothing new to facto-
ries, but between 1980 and 1990, unstable mon-
Greenspan after 1987 created a rising stock etary policy was a new pressure hard for either
market that rewarded people who took value owners or workers to see. They wound up turn-
ing on each other. Indeed, the influence of chang-
out of industrial production. ing monetary policy has been hard for left econo-
mists to see, and we are only now, thirty-five
years later, beginning to understand what a sea
accountant Tom Cookson filed nice neat forms change in the institutional context for industry
verifying the financial health of the workers’ was taking place. D&S
pension fund. He made it through ups and
downs of the stock market with only a few M A R I E D U G G A N is a professor of economics at
bumps, so that $45 million dollars was in the Keene State College in Keene, N.H. You can follow her
fund by 1998 when Koontz sold it. Mitropoulis, and her students’ work on these issues at: industrialsur-
on the other hand, filed messy and incomplete vival.wordpress.com.
pension documents, and by 2007, the fund had
only $26 million in it. Maybe it was all the 2001 S O U R C E S : Available at dollarsandsense.org.
decline in the stock market, but maybe not. In N O T E : Part II of this series will take a closer look at how U.S. industry
addition, she went out tirelessly asking the fed- was damaged by monetary policy in the 1990s.
eral government to lend the company money
18 l DOLLARS & SENSE l NOVEMBER/DECEMBER 2017
