Economics: Not a Fast Recovery

TORONTO, ONTARIO - Nearly a year ago, buried near the bottom of this post, I presented Canadian economist Hugh Mackenzie's view that recovery from the 1991 recession was slower than from the deeper 1980 recession because factories were actually dismantled in the later recession, whereas workers could simply be called back in the earlier case. He predicted that because the 2008 recession was deep and factories were being dismantled and moved to China that recovery would be even slower than during the 1991 recession.

Place that view in the context of a recent article in Chemical and Engineering News (C&EN; this article is not available on-line). In the piece entitled "Vanishing Plants," staff writer Michael McCoy describes how various sectors, from manufacturers of auto hoses to safety gloves to pond liners, are no longer able to get needed component chemicals in North America because they are no longer made here. Plants closed because of the recession have ended the production of such basic chemicals as formic acid and such specialized ones as chlorosulfonated polyethylene (CSPE).

The bottom line for the affected manufacturers is that without a local source of these chemicals, they are placed at a disadvantage to competitors located closer to remaining chemical suppliers in the Middle East, Asia, or even Europe. Rather than being able to return to business as usual as the economy recovers, their costs will rise and they will recover more slowly, if they can compete with their overseas competitors at all. In some cases, as the article points out, the burden is even heavier, as changing suppliers means re-validating products if they are produced for regulated industries such as the safety gloves.

Why are the plants closing permanently? McCoy's C&EN article presents a lot of opinions similar to this one expressed by Stephen Fitzpatrick: "U.S. managers look at a declining market as something they don't want to be involved with. They tend to turn tail an run." Change the "U.S." to "western" and "managers" to "managers of publicly-traded companies" and I couldn't agree more with this view, based on what I've observed. In some cases, the "declining market" may even still be profitable, but the profits aren't as large as other sectors and hence the decision is made to stop production to avoid exposure to any further declines.

In fact, it's not that different than what's happened in a completely different industry, radio. Rather than accepting "lackluster" profits, even before the recession the radio industry was being decimated by corporate parents that demanded double-digit growth in profits and slashed talent at their radio station to improve their margins, in many cases making their products unlistenable. If a station didn't look like it could give that kind of growth, virtually its entire local staff would be fired and it would start running a satellite-fed format with no local content. Newspapers are another classic example of an industry that in many cases was profitable, but not profitable enough to satisfy its investors, ending up in a downward spiral.

The pressure of today's capitalism is so strong that nobody can justify something that makes only a small profit anymore, or that might take some time to recover in a recession. Instead, those fundamentally riskier things just aren't done, resulting in everything from the loss of local radio to the inability to make innovative new pool liners--and jobs and quality of life go away as a result.

Fundamentally, the incentive structures are messed up here--short-term returns are trumping long-term investment and quality of life. The solutions are not unknown and can even come from relatively small interventions in the market--changing the time scale of executive compensation to force them to think in longer terms and even taxing short-term profits that aren't re-invested at higher rates are things people talk about all the time, but there just isn't enough of a groundswell to actually make these things happen politically, both in government and on boards of directors.

Meanwhile, the market realities make a recovery even tougher to occur, and Mackenzie comes off looking like an optimist.