The New Economy

By Charles P. Alexander

COVER STORY

Technology has set off a scramble for jobs, profits and global markets

Near the corner of Main and Walnut streets in the small town of Maynard, Mass., stands a massive complex of aged red-brick buildings. Within those walls, workers toiled amid clanging, churning machinery to produce carpets in the 1850s and Army blankets during two World Wars. But today the sturdy, old facade houses an entirely different enterprise. The noisy machines and grease-stained factory floor have given way to offices where engineers huddle over glowing oscilloscopes and secretaries peck quietly at word processors. The woolen mill has been reborn as the headquarters of the Digital Equipment Corp., the second largest computer manufacturer in the world.

That metamorphosis is symbolic of a sweeping transformation that is creating a New Economy. It is a two-tiered economy marked by swift change and stark contrasts. While traditional smokestack industries are reeling from foreign competition, surging high-technology companies are leading the world in innovation. Though hundreds of thousands of blue-collar assembly-line workers have lost their livelihoods, white-collar engineers have had their pick of high-paying jobs. Last year 25,346 businesses went bankrupt, the most since the Great Depression, but 566,942 new companies opened their doors. Says Delaware Governor Pierre du Pont IV: "The transformation of our jobs, the movement of our people, the improvements in our skills over the first 80 years of this century have been stunning. But it is entirely likely that those changes will be matched and exceeded during the final 20 years of the century."

The upheavals are rewriting the script of industrial winners and losers. The job market has become a shifting mosaic of dead ends and bright prospects. Alarmed and angry, more and more workers and politicians are calling for protectionism to keep foreign products out.

Heavy industries such as autos, steel, rubber and shipbuilding that were once synonymous with American industrial might have rapidly declined. Some 211,000 autoworkers, or 19% of the industry's blue-collar work force, are on indefinite layoff. In the steel industry, which is operating at only 42% of capacity, 119,000 workers are idle.

To be sure, the biggest cause of the distress is the temporary effect of the worst recession since the 1930s. In addition, though, the economic order has changed, and U.S. business will never return to its prerecession status. Says John Wilson, chief economist of the Bank of America: "This recession is unique. Always in the past, autoworkers knew they would be hired back. This time, I think, they sensed from the beginning in Detroit and St. Louis and Los Angeles that they would not all be re-employed."

Yet even as the lights are dimming in some old-line industries, technology is spawning boundless opportunities in such esoteric fields as microelectronics, lasers, fiber optics and genetic engineering. In six years Apple, a leading manufacturer of personal computers, has evolved from a two-man operation in a garage to a corporation employing more than 4,000 people. Last year it ranked 411 on the FORTUNE 500; no company had ever gone from a start-up to the Fortune list in so short a period.

Fabulous wealth is being generated almost overnight. When TeleVideo Systems, which makes computers and video-display terminals, issued its first public stock in March, its founder, K. Philip Hwang, was instantly worth about $500 million. Telerate, a company that provides securities price quotations electronically to money managers, went public last month, and a group of British investors watched the value of their 90% stake in the firm jump from $75 million to $740 million.

The winds of this economic change are swirling in different directions across the U.S. In the traditional Midwest industrial heartland, employment offices are jammed with discouraged job seekers, FOR SALE signs dot the lawns of once proud neighborhoods, and retail shops are closing because regular customers no longer have extra money to spend. Unemployment rates stand at 14.9% in Michigan and 13% in Ohio, sharply above the national level of 10.2%. Yet in many other areas the rise of high-tech companies has spawned pockets of booming growth: the Route 128 strip around Boston, California's Silicon Valley and the Research Triangle Park area in North Carolina. The uneven distribution of job opportunities is beginning to cause mass migrations reminiscent of other periods in American history. Thousands of young people are heeding the cry of the '80s: "Go West, young man, and grow up with a new industry."

Depressed states and cities are battling back to attract new companies with tax breaks and seed money. Cleveland is launching a $5 million venture-capital fund that will give money to new local companies. Cincinnati has put together a $15 million war chest. Illinois and Chicago set up a ten-story, low-rent "incubator building" in the city for fledgling firms. Last fall, when a group of electronics companies announced plans to launch a joint computer research center that would have an annual budget of up to $100 million, 57 cities in 27 states put in bids to be the new enterprise's home. Bobby Inman, the former CIA deputy director and new head of the operation, last week revealed the winner: Austin. The state of Texas had offered, among other things, to provide Inman's company with low-cost laboratory space at the University of Texas.

The accelerating pace of technological innovation threatens jobs in old industries even as it creates work in new fields. Automobile companies have installed 2,800 robots that perform many assembly-line jobs more quickly and accurately than people can. A new computerized aluminum processing plant built by Alumax Inc. near Charleston, S.C., employs only half as many workers as a conventional factory with the same capacity.

The main catalyst for all this change has been foreign competition. No longer does the U.S. have an insulated, largely self-sufficient economy. Imported goods now account for 19% of American consumption, up from 9% in 1970. Foreign competitors, who once concentrated on simple, labor-intensive products, such as clothing and toys, have quickly climbed up the industrial ladder. The U.S. imports 28% of its cars, 18% of its steel, 55% of its consumer electronics products and 27% of its machine tools. The challenge in these industries, which was first posed by Japan, now also comes from such fast-growing countries as South Korea, Taiwan and Singapore.

Low wage rates overseas are part of the reason for the surge in imports. Average labor costs are $1.53 an hour in South Korea and $1.43 in Taiwan, in contrast to $7.53 in the U.S. But more important is the swift spread of technological know-how around the globe. While it took the U.S. decades to obtain the British steam-engine technology used in the first modern textile mills, Japanese companies in months can now analyze and copy the American microchips that drive the latest computer. In many cases, Japan has deployed advanced technology more rapidly than the U.S. Industrial robots, for example, were first developed in America. But Robotics Expert Paul Aron of Daiwa Securities America Inc. estimates that as many as 36,000 robots are being used in Japan and only 6,500 in the U.S.

If America hopes to match foreign competition, it may have to rely more heavily on automation. Professor William Abernathy of the Harvard Business School estimates, for example, that in order for the Ford Motor Co. to be as efficient as Japanese auto firms, it can afford to keep only half the 256,600 American employees it had in 1978.

Such predictions lead to troubling questions. Will foreign competition and automation generate ever greater unemployment? Can technology create as many jobs as it destroys? How difficult will it be for workers to move from the jobs of the past to the jobs of the future?

No one knows for sure, and opinions diverge wildly. At one extreme is Nobel Laureate Wassily Leontief, director of New York University's Institute for Economic Analysis, who foresees mass joblessness. Says he: "The computer and the robot are already beginning to replace the simpler mental functions of blue-and white-collar workers. Man, as a factor of production, has only two aspects: physical and mental. Both are being replaced. The only solution is to stretch out vacations, shorten work hours and share available jobs. Human workers will go the way of the horse." Responds a former French Finance Minister: "Nonsense. People can adjust, unless they're asses."

Other experts argue that warnings similar to Leontief's have surfaced regularly ever since computers began popping up in the 1950s. Says John Diebold, a New York City management consultant whose classic 1952 book, Automation, made the word a familiar term: "At various times, usually at the depth of a recession, people have said it was going to be horrible from here on because of automation. But a couple of years later, it's all forgotten. Certain types of jobs die, and others grow. That is the sign of a healthy economy."

Many workers will undoubtedly have trouble switching from the old industries to the new. Data Resources, the Lexington, Mass., economic-forecasting firm, predicts that unemployment will fall only gradually as business pulls out of the recession, from the present 10.2% to 8.5% at the end of 1985. Later in the decade, says Economics Professor George Wilson of Indiana University, the unemployment situation may ease substantially. Reason: growth in the labor force is slowing sharply as the baby-boom generation reaches middle age. Wilson estimates that the size of the work force will increase at an average annual rate of no more than 1.5% during the 1980s, after rising at a 2.7% clip in the 1970s.

That is good news for young people, but it may not help middle-age blue-collar workers who are not trained for anything but traditional manufacturing. The largest proportion of new jobs are being created in service industries like health care and data processing. In the past ten years, the number of workers in manufacturing has dipped 1.6%, to 18.8 million, while the total in services has jumped 55.3%, to 19 million. In 1995, according to a preliminary Labor Department report leaked last week, there will be 28.5 million people employed in services, compared with only 22 million in manufacturing.

Moreover, the fastest areas of manufacturing growth will be high-tech fields such as semiconductors and computers, while old industries will continue to suffer. A committee of academics, Congressmen, labor leaders and business executives, chaired by Senator William Roth of Delaware and Congressman Don Bonker of Washington, will soon issue a report concluding that by the 1990s, employment in such smokestack industries as steel and autos will shrink from the present 20% of the labor force to perhaps 8%.

But can the U.S. allow its basic industries to atrophy and still remain a major industrial and military power? McDonald's now employs more workers than U.S. Steel. Can such trends continue? Business leaders in the older sectors of the economy insist that they cannot. Says John Nevin, chairman of Firestone Tire & Rubber: "It's utter nonsense that we are going to become a high-tech and a service economy. The high-tech companies have more manufacturing offshore than here. The idea that we can have an economy by selling hamburgers to each other is absurd."

Of course, no one claims that all production in basic industries will wither away. Says Harvard's Robert B. Reich, author of The Next American Frontier: "The choice is not between a smokestack America, on the one hand, and high technology, on the other. That is a false choice." The real challenge confronting the U.S., he says, is how to use high technology in smokestack industries.

Those most directly affected by this economic transformation are the displaced blue-collar workers. They will be hard-pressed to find jobs that even remotely resemble the $25,000-a-year slots in which they manned assembly lines and blast furnaces. The Department of Labor projects that the largest numbers of job openings will be in such low-paying categories as secretaries, nurses' aides, janitors, sales clerks and cashiers (see table). Although the total numbers are not as large, the fastest percentage growth will come in highly technical professions like computer programming and software writing. Those are not skills that a 45-year-old steel-worker can pick up easily.

Women may have comparatively less trouble than men in finding jobs in the New Economy because they have traditionally specialized in such service fields as nursing and secretarial work. The unemployment rate among adult women is now 8.4%, in contrast with 9.8% for adult men. Since service jobs tend to be low paying, however, women earn only 65% of what men do. In the technical professions that look most lucrative for the future, women have lagged badly but are starting to catch up. Women earn about 23% of the master's degrees granted in computer science, up from 15% in 1975.

Perhaps the biggest concern among business executives, educators and government officials as they view the transformation of the U.S. economy is that too many young men and women are not being well prepared for the jobs of the 1990s. In a report last month, the National Commission on Excellence in Education noted that only 20% of all 17-year-olds can write a persuasive essay, and only one-third can solve a math problem requiring several steps. A recent study by the U.S Chamber of Commerce found that 35% of corporations surveyed had to provide remedial basic-skills training to new employees. AT&T alone spends $6 million annually to teach workers reading and math skills.

The direction of education is as much a concern as its poor quality. High school curriculums have tilted toward home economics, music and driver education at the expense of the math and science needed for jobs in the new high-tech industries. About half of all students take no math after the tenth grade, and 80% drop science. Says New York City Investment Banker Felix Rohatyn: "The more we look at tomorrow's technologies, the more we see a need for higher skills. So far, our educational system really has not been geared to producing those skills." Several companies have decided to help out the schools. Technicians from Texas Instruments, for example, are preparing to teach math to fourth-and fifth-graders.

The challenges and upheavals facing the U.S. economy are hardly unique. All industrial nations are struggling with the onrush of technology and the painful transition from the past to the future. Western Europe is having a particularly difficult time moving toward the New Economy. In most European countries, many heavy industries like steel and coal mining are nationalized. Political pressure has made it difficult for governments to shrink these industries and move workers into new fields. In addition, European workers are much less willing than Americans to pick up and move to a new location. European governments have also made it very expensive to close down a factory by passing laws requiring large payoffs to workers left unemployed. Companies are therefore often wary about starting risky, new ventures. As a result, European economies have been developing few new jobs, and unemployment in Western Europe has gone from about 3% to 11% since 1970. In roughly the past decade the number of jobs in the European Community has risen only .5%, in contrast to 15% in the U.S. Says Pehr Gyllenhammar, president of Volvo, the Swedish car manufacturer: "Europe has grave problems--no growth, more people without jobs, little investment and sluggish productivity. Europe is not creating new resources, but is declining under the pressure of increased competition. When things are dying, we do not let them die any more. Companies do not go bankrupt the way they used to do. We try to restructure, preventing the creation of dynamic new industries."

Several governments in Europe are trying to introduce some dynamism into their economies. Prime Minister Margaret Thatcher has chopped the job rolls of Britain's nationalized steel industry by 52%. At the same time, her government has guaranteed loans totaling $465 million to 10,000 small businesses. Even the Socialist government of Francois Mitterrand has launched a new austerity program that calls for a 10% cut in the work force of France's steel industry. With a historic French search for a centralized government solution, Mitterrand is trying to move his country into high technology with a $1.8 billion government fund for loans to help companies develop new products, including microcomputers and highly fuel-efficient cars.

Japan also has its share of declining industries. Chemical-fertilizer production is down 66% from its peak, while paperboard and cement output are off 10%. But instead of resisting change in the economy, the Japanese government encourages it. That is easier to do in Japan than in the U.S. or Western Europe because much of Japanese industry is organized into large groups like Mitsubishi, with product lines ranging from beer to nuclear power plants. Workers whose jobs become superfluous in one part of the group can often find work in another branch. Large-scale retraining programs have helped channel workers into new fields like the manufacture of antipollution equipment.

These upheavals caused by the New Economy have generated intense pressure on governments around the world. No one wants to lose a job, and no politician wants to lose the votes of those who lose jobs The automatic response of many businessmen and workers when threatened by foreign competition is to demand protection: quotas, tariffs, subsidies, "voluntary" trade agreements, anything to preserve the status quo. In times of recession and high unemployment, the clamor becomes virtually irresistible. As a result, the world is suffering its worst outbreak of protectionism since the 1930s. The U.S. has moved to reduce imports of cars, motorcycles, steel, textiles and a host of other products. The European Community has persuaded Japan to limit its exports of hi-fi equipment, computer-controlled machine tools and television tubes. Japan is considering barriers against South Korean steel. The list goes on and on.

In the U.S., protectionist pleas are often pitched as dire warnings of doom. Chrysler Chairman Lee Iacocca contends that Japan is trying to "capture systematically" the American auto market. Says he: "The process is well under way, and the damage inflicted thus far is both serious and permanent. If the American auto industry succumbs, steel, textiles, rubber and machine tools will follow, and the high-tech industries, which are vulnerable to the same kinds of Japanese attack as American heavy industry, won't be far behind." Such arguments have gained wide popular support. A poll by the Opinion Research Corp. suggests that 69% of Americans support import barriers.

Some industries contend that protectionism is a matter of national survival. Says James Gray, president of the National Machine Tool Builders' Association: "The continued growth in imports will completely debilitate the American machine-tool industry. If we wish to deter aggression, America must have a strong industrial base, built upon the foundation of a strong machine-tool industry. With a weak industry, we could become subject to threats and intimidation. It is a matter of national security." But Lawrence Krause, an economist at the Brookings Institution in Washington, replies: "National defense is generally the last argument of the scoundrel, because who can argue against national defense? It is a way to close off the argument rather than debate it. The machine-tool industry could be one-twentieth of its size now and provide all of the machine tools needed for national defense."

The apparel industry argues that imports from low-wage nations in Latin America, among other places, are causing social problems in the U.S. Says Herman Starobin, director of research at the International Ladies' Garment Workers Union: "At some point there will be no apparel industry left in this country. Hundreds of thousands of poorly educated Americans could be cut off from the American dream of being able to improve their living standards." But protectionism aimed at Latin America could be particularly dangerous. Two of the biggest apparel exporters, Mexico and Argentina, owe U.S. banks nearly $35 billion. "If we protect our markets against their goods," says Harvard Economics Professor Richard Cooper, "Latin American countries would have an excuse to repudiate their debts." That could trigger a worldwide banking crisis.

President Reagan praises the virtues of free trade in speeches, but his Administration has been unable to resist the outcry for protection. Admits William Brock, the U.S. trade representative: "None of us is without sin." In the case of autos, the U S has politely but firmly persuaded the Japanese for three straight years to put a 1 68 million limit on the cars they export to the U.S., about 20% of the American market. Detroit is still not satisfied. Iacocca wants the Japanese to be held to 15%. The United Auto Workers are pushing in Congress a "domestic content" bill that would shut the largest Japanese auto manufacturers out of the U.S. market by decreeing that most parts of their cars be made in America. So far, the bill has the support of 148 Congressmen, 16 Senators and, among other interested onlookers, Democratic Presidential Candidate Walter Mondale.

Such a law would be an ill-advised step that could easily spark an all-out trade war. The U.S. would have more to lose than gain in the crossfire. While the country has been importing more in the past decade, it has also become more dependent on world markets. In 1972 the U S. exported only 9% of its production. It now exports about 17% and would be a tempting target for domestic-content laws in other countries.

For more than two centuries, most economists have maintained that a system of free trade benefits all countries. But supporters of protectionism contend that "free trade" has become merely an academic abstraction. Reason: governments routinely subsidize key industries to give them an advantage in international trade AFL-CIO President Lane Kirkland has made this case by proposing--in jest, but with a serious message--his Free Trade, Antiprotectionism and Antihypocrisy Act of 1983. The law would prohibit Americans from buying imports at prices that have been subsidized in any way by foreign governments or influenced by anything other than free-market forces. "For the first offense," the bill says, the perpetrator shall have his right hand severed at the wrist." This law, Kirkland implies, would quickly eliminate the U.S. import problem. He offers an added proviso: "Any person ... apprehended in the act of making a free-trade speech to the Council on Foreign Relations ... or to any other such forum shall have his tongue extracted by heated tongs."

Kirkland is right that many imports are subsidized by a foreign government, but when the U.S. retaliates, both countries lose. The steel trade is a good illustration. For well over a decade many European nations have protected their national steel industries with steady infusions of government money. Since 1969 the U.S. has used a variety of methods to protect its industry from imports of inexpensive foreign steel. The result is a standoff that hurts both sides. Hooked on government funds, most European steel companies are weak, inefficient and a drain on their national treasuries. The U.S. Commerce Department has found that government help to some European steelmakers now totals as much as 40% of the value of their products.

The U.S. steel industry has also become weak, inefficient and a drain on the American economy. Steel executives have allowed their mills to become outmoded. Observes Harald Malmgren, a trade consultant in Washington: "When you protect any sector, you are shoring up sick companies and prolonging bad management." The steel industry has not, for the most part, used the breathing space offered by protection to modernize its plants. Instead, National Steel Corp. bought some savings and loan associations, and U.S. Steel borrowed $3 billion to acquire Marathon Oil.

Because the American steel industry has been shielded from competition, companies that buy its product pay artificially high prices. That is one reason, economists point out, for the auto industry's troubles, since it is one of the heaviest steel users. Says C. Fred Bergsten, director of the Institute for International Economics in Washington: "In the long run, jobs saved by protection of one industry tend to be offset by the loss of jobs in other industries." In the short run, protectionism is a big contributor to inflation.

The newest prescription for curing America's economic ills is something called national industrial policy. Its advocates include labor unions, numerous Democratic politicians, a few economists and even some prominent members of the business community, including Felix Rohatyn and Du Pont Chairman Edward Jefferson. The idea comes in different forms and goes by various names. Democratic Presidential Contender Alan Cranston backs Rohatyn's proposal for a new Reconstruction Finance Corporation, patterned on the agency set up during the Depression, to loan money to needy industries. A group of five Democratic Congressmen led by Stanley Lundine of New York introduced a bill this month that would, among other things, launch a national industrial development bank to provide capital to help companies become competitive internationally. Says Lundine: "In today's context, we are simply not able to generate the kind of patient capital necessary to foster innovative, emerging enterprises. We are not able to finance the huge reinvestments necessary to restore a world-class steel industry."

The Reagan Administration is decidedly cool toward industrial policy. Edwin Harper, a White House aide for domestic issues, calls it "backdoor protectionism.' Trade Representative Brock is fearful that too much Government aid would go to established industries with political clout and not enough to fledgling companies. Says he: "We run the risk of freezing ourselves as we are and losing the opportunity of being what we can become."

M.I.T. Economist Lester Thurow argues that most of the industrial-policy schemes under discussion would amount to a prop-up-the-losers approach that he calls "lemon socialism." As an alternative, Thurow suggests that the U.S. emulate to some degree the successful Japanese brand of industrial policy. Competition is fierce in Japan, and the government allows weak companies to die. But at the same time, Japan's Ministry of International Trade and Industry picks out promising new firms and targets them for special government aid.

Such a strategy, however, is unlikely to work as well in the U.S. An economic program can work only within the confines of the history and traditions of a society. While the Japanese government has long been involved in the economy, there is no such heritage in the U.S. The roots of American economic success have been in individualism and entrepreneurship. The dream of making a fortune by launching a new company runs deep in American society and has been the source of great business strength. In addition, the U.S. has by far the largest pool of private venture capital available to back risky new businesses. Both that individualistic business culture and the strong venture-capital market should be fostered, but the Government is not the source of help. It is unlikely that Washington bureaucrats would have taken a chance on many of the upstart, start-up companies formed in the Silicon Valley during the past few years. They would have put money into safe, established firms. But venture capitalists did invest and began many corporate success stories. That combination of entrepreneurship and venture capital can continue to make the U.S. economy the most innovative in the world.

The Government may have a role to play in the massive retraining that will be required to give workers the skills needed in a changing economy. Trade Negotiator Brock predicts that people will now be changing jobs four times during their working careers. That will make retraining a permanent part of American business and society. Economists call that retraining "investing in human capital." The programs set up during the 1970s under the Comprehensive Employment and Training Act were roundly, and correctly, criticized because they often steered people toward make-work public service jobs rather than real employment in the private sector. Under the Jobs Training Partnership Act passed last year, new programs will aim at preparing people for jobs with private companies, and business executives will play a major role in shaping the training. The proposed budget for the first year is $3.5 billion. A report soon to be released by 32 House Republicans known as the Wednesday Group will call for more action in the training area. One of the recommendations is that companies be given tax credits for expenses in teaching new skills to their workers. Unfortunately, many employees laid off in declining industries, especially older people, will find it difficult to learn new skills. They may wind up in low-paying jobs or in limbo.

While education is primarily the responsibility of state and local governments, sentiment is growing that Uncle Sam should chip in more. The Reagan Administration wants new spending to be targeted narrowly at strengthening math and science instruction, and proposes new funds of only $75 million. Walter Mondale thinks that much more broad-based support is justified and suggests an educational aid program of $11 billion, most of which would be given to communities to use as they see fit.

The only drawback to such spending is that it would raise the federal budget deficit, which is already projected to reach an intolerable $210 billion for the current fiscal year. The most important single thing that the Government can do to help industry prepare itself for the changes it must face in the New Economy would be to bring that deficit down so that long-term interest rates, now hovering around 12%, can fall. If rates do not drop, the recovery may stall. That puts Congress in a bind. To provide much needed funds for education and training, it will have to cut other spending or raise taxes or both.

Government can improve the climate for industrial growth, but the success or failure of individual firms will be determined in executive suites and on factory floors by managers and workers. To survive in the New Economy, companies will have to be flexible and efficient. Says William Thurston, president of GenRad, a Concord, Mass., electronics firm: "The first thing managers have to do is to take responsibility for their own destiny. They should stop complaining and get busy. They should keep up to date in technology and be responsive to the marketplace."

Every industrialized country is looking to high technology for its salvation. But competitiveness, high productivity, innovation -- or their lack -- will be even more decisive in the New Economy than in the old; an inefficient chip-maker will suffer just as much as an inefficient steelmaker. And the pitfalls will be just as deep for high-tech managers as for those in old-line industries. High tech is no passport to business success. Digital Equipment Corp. is a leader in the minicomputer business, but it is now having to run to catch up in micro computers. Xerox pioneered office copy machines, but it has had trouble finding a niche in the office automation market. Southern Biotech was a promising firm in the surging field of genetic engineering, but it filed for bankruptcy after three years in business and a failed research program.

American companies over whelmed by imports excuse their failures by blaming foreign industrial policies. In truth, U.S. managers are often outmanaged by foreign competitors. While RCA complained in 1979 that it did not have the $200 million needed to develop a videocassette recorder, it did scrape together $1.3 billion to buy a finance company. In the meantime, RCA ceded the highly lucrative video-cassette-recorder market to the Japanese. RCA has also suffered from revolving-door management: four chief executives in six years. Bureaucracy, territorial feuds and narrow careerism afflict many large U.S. corporations.

Japanese managers have often been much quicker to provide workers with the most advanced equipment. Moreover, the Japanese people have a tradition of discipline and an unsurpassed work ethic. As a result, worker productivity has gone up 80% in Japanese manufacturing since 1972, far more than the 15% gain recorded in the U.S. American quality contro has lagged along with productivity. A survey by Pollster Daniel Yankelovich found that 26% of U.S. manufacturing-workers are "ashamed" of the quality of the products they make.

American managers must cultivate a closer relationship with labor to replace the often antagonistic "we-they" approach. Many U.S. companies are successfully copying the Japanese practice of using so-called quality circles, which are teams of workers that meet regularly on company time to discuss production snafus and bottlenecks. In 1979 Dover Elevator Co. formed quality circles at its Horn Lake, Miss., plant. Says Robert Scott, Dover's quality-circle coordinator: "It has done so many good things you can't even count them. I suppose if it were to be put in dollar terms, we have had a $12 to $15 payback on each dollar invested in the program." One quality circle suggested a way to install elevators in shafts more economically; the improvement will save Dover $2.5 million over the next five years. Westinghouse Electric Corp., with more than 2,000 quality circles, estimates that they helped boost the company's productivity by 4.5% last year.

Organized labor, in turn, will have to be more flexible on wages and be willing to give up rigid work rules that lead to overmanning and inefficiency. The recession may have been a turning point for unions. After rancorous negotiations, workers in both the auto and steel industries agreed to an unprecedented combination of pay cuts, changes in work rules and givebacks of benefits. But wages are still comparatively high. In the U.S., autoworkers at the Big Three companies now average $21.50 an hour in wages and benefits, compared with $12.60 an hour in Japan. Now that the recession is over, the talk in union halls is of catch-up instead of giveback. If executives and labor forget the harsh lessons administered by the recession and foreign competition, their companies will continue to weaken.

Smokestack industries need not die in the New Economy, but they must be leaner, more productive and better managed. Workers will lose jobs and go through very hard times, but with the help of retraining, there can be second acts in American working lives. An eclectic and energetic band of U.S. entrepreneurs is likely to keep creating openings in fields now barely explored. One thing is certain: protectionism cannot stop or even slow the advance of technology. The U.S. can either continue to ride the crest of the New Economy wave or follow in the trough behind. --By Charles P. Alexander.

Reported by Gisela Bolte /Washington and Adam Zagorin/New York, with other bureaus

With reporting by Gisela Bolt, Adam Zagorin This file is automatically generated by a robot program, so viewer discretion is required.