TWQ: Remember the Magnequench: an Object Lesson in Globalization - Winter 2009
January 1, 2009
The Magnequench story—a company that once built industrial rare-earth magnets, whose closure of its plant in Valparaiso in 2006 due to outsourcing to China robbed 225 Indiana residents of their jobs—is rich in symbolism. In the lexicon of U.S. economic populism, the loss of manufacturing jobs in the U.S. heartland is synonymous with U.S. decline. The purchase and subsequent closure of the Valparaiso factory by Chinese interests confirms all the worst popular suspicions about China’s designs on U.S. technology and the lack of fairness with which China competes on the global stage. The hollowing out of a U.S. industry, whose products are used in military applications, to a potential rival like China raises hawkish ire in even the least alarmist members of the U.S. public. Similar to many urban legends of globalization, however, the Magnequench story contains as much fable as fact. Closer inspection shows that the many conjured bogeymen are far less real or fearsome than they first appear. Indeed, the story illustrates the cyclical nature of market economics more than some unique failure of the U.S. economy–or of political leadership.
It may seem quaint, in the wake of the current financial crisis, to note the virtues of the market economy. Yet, blaming globalization or the marketplace for the sub-prime mortgage crisis and its subsequent fallout is to excuse the market interventions and other negligent behavior of a generation of policymakers that sent a simple but radically distortive message to global markets. That message was that the U.S. Government would guarantee the rights of Americans to own homes and access credit far beyond their ability to afford those goods in the free market. That a generation of obliging bankers and inadequately skeptical investors were complicit in this assault on market economics shouldn’t surprise anyone. Neither should the fact that some firms failed while competing in Frankenstein’s financial market that resulted. Such is the rough-and-tumble nature of competition. Yet the public debate on these firms’ failure largely surrounds naming a culprit–was it greedy bankers or feckless regulators?–rather than recognizing that their failure is in large part a natural phenomenon and might have important benefits. Better allocation and exploitation of the resources that had previously been within the control of these firms would be the natural result.
The underlying message of both the bail-out and the story of Magnequench, as presented by Senator Hilary Rodham Clinton, is that economic adjustment is something terrible, necessarily the result of deliberate malfeasance (Chinese competition), recklessness (rapacious financiers), or negligence (asleep-at-the-switch regulators). The resulting witch hunt in the cause of protecting a damaged public may be politically cathartic, but burning a witch to satisfy the urges of a nervous and vengeful public may not yield the best policy result. Similarly, in the case of Magnequench, the pain of those harmed by the closure of the Valparaiso factory, the 225 Indianans who lost their jobs, is very real. Political leaders of every stripe undoubtedly share a genuine desire to correct the problems that lead to the pain of these and other similarly affected middle-class families. A national diagnosis motivated by fear and a desire to mete out blame, however, is not likely to yield ideal effective policy prescriptions, even if the politics of fear and blame play well with a scared and rancorous public. Even as a new administration struggles with putting the nation’s financial house in order, what should it diagnose and prescribe for the forgotten middle class’s economic woes? The crunch they are feeling is more than just about credit.