Joanne Schembry loved the sprawling Lucent Technologies factory where she worked for 18 years. She loved the good pay, the benefits, the busy pace, the camaraderie and the idea of working for a premier telecommunications firm.
“We were on top of the world,” she said. True, she was laid off four times during slack periods in the industry, but she always thought she would get recalled, and each time she was right.
But not now. Schembry, 58, joined hundreds of other Lucent workers this year in taking a buyout at the company, one of many telecommunications companies to face a sudden slowdown after extensive overbuilding in the industry in the 1990s.
The future looks daunting. Her husband, 61, is disabled. The $58,000 buyout package won’t go far without a job. Her 401(k), once valued at $30,000, has dwindled to $3,000 because of a plunging stock market.
“At my age, where am I going to find a job?” she asked.
Washington doesn’t know the answer either. There are no quick and easy answers for halting the increase in joblessness resulting from a glut of production capacity in many industries across the United States, including the airline, automotive, semiconductor and information technology sectors.
Another tax cut won’t do much good for displaced workers like Schembry. Lower interest rates won’t help that much, either, because she doesn’t plan any major borrowing. If these remedies are tried, she can only count on the hope that they will stimulate others to buy and borrow more, leading firms like Lucent to get more orders and to start hiring again.
But nobody knows how long that will take. Some say that, in the telecommunications industry alone, it could be five years before the excess capacity is used up. During the exuberant 1990s, telephone companies laid an estimated 39 million miles of high-speed fiber-optic cable under streets, in subway tunnels and in other underground passages to serve what they thought would be a boom in Internet traffic and other digital services in the home.
Only a small fraction of the cable is being used, representing a major miscalculation in investment by the industry.
To extend the high-speed lines into homes would require large new investments the industry isn’t currently willing to make.
Matthew Szulik, chairman and chief executive of Red Hat, a Raleigh, N.C., company promoting the use of software that can be downloaded for free from the Internet, suggested government subsidies to run the high-speed lines into homes. But there is no sentiment for such an idea in Washington, and the cost likely would be prohibitive.
“No, there is really no government policy” that will do much good in dealing with business overcapacity, said Kurt Barnard, president of Barnard’s Retail Consulting Group, which specializes in studying retail trends. “Unemployment insurance tends to run out eventually, unfortunately.”
Efficiency linked to joblessness
To Barnard and to many other analysts, excess production capacity occurred because of “increased efficiency that has blanketed the entire spectrum of the American economy.” Efficiency streamlines operations and cuts costs, but when technology is fully employed, it can also create gluts.
“This does not augur very well for those who are laid off or who are yet to be laid off,” Barnard said. “They are becoming the victims of overcapacity. They are not as likely to find replacement jobs.”
A year ago, there were 1 million people who had been unemployed 26 weeks or longer. Now there are 1.7 million, an indication that the overcapacity is playing a major role in lengthening the job search of out-of-work Americans.
“It’s taking longer to find jobs,” said Ken Messina, state director for a federally and state-funded job search program operated by the Commonwealth Corp., a non-profit organization in Boston.
“We have PhDs walking into career centers,” said the organization’s spokesman, Paul Niedzwiecki. “I think we are dealing with more than the usual churning of the economy.”
To President Bush and Federal Reserve Chairman Alan Greenspan, the economic challenge is becoming increasingly clear: Working off a glut takes time and patience. Yet Bush, who faces re-election in two years, is eager to put economic growth into higher gear long before the race begins.
But the problem is not easily corrected. For that reason, the U.S. economic recovery now under way is likely to be slow-moving and vulnerable to external shocks, such as another terrorist attack or a war with Iraq that drives up oil prices, economic analysts say.
Even more unsettling is the fact that falling prices–or deflation–have taken hold in the manufacturing sector. Prices of goods have been dropping as a global excess capacity has developed. There are some indications that deflation is beginning to spill over into the services sector, in areas like retail trade, which is indirectly related to manufacturing.
The U.S. hasn’t had a generalized deflation since the Great Depression in the 1930s. In a deflationary environment, people postpone purchases in anticipation that prices could be lower in the future. Demand drops. Profits spiral downward. Jobs are lost. Retrenchment sets in.
The Federal Reserve disclosed last week that it reduced interest rates in November partly because of concerns about deflation. According to minutes of that meeting, the central bank concluded that failing to cut interest rates “would increase the odds” of widespread economic weakness accompanied by deflation.
In a speech last month, Federal Reserve Board member Ben Bernanke said the odds of deflation occurring in the U.S. were small.
If deflation should occur, he said, the central bank would pull out all the stops to squash it. Bernanke said the Federal Reserve could take short-term interest rates to zero and could pump enormous amounts of money into the economy beyond that, to the point of buying back billions of dollars of U.S. government securities.
Such an easing of monetary policy by the central bank would be unprecedented, the equivalent of turning the monetary spigots wide open.
But Bernanke said, in effect, it would be justified.
“Sustained deflation can be highly destructive to a modern economy and should be highly resisted,” he said.
Dangers of deflation
James Galbraith, economics professor at the University of Texas, said he is concerned deflationary pressures are weakening the U.S. economy.Business investment and consumer spending are weak, he noted, while state and local governments can’t increase spending because of budget problems.
He said he is worried that housing prices, after rising sharply nationwide, could now be headed down.
If so, he said, “this could put real pressure on household balance sheets and cause real retrenchment in the consumer sector.”
Many economists said they doubt deflation will grip the entire U.S. economy as it has in Japan or as it did with serious consequences in the U.S. during the 1930s. Health-care and education costs are rising sharply, they said, offsetting declining prices for manufactured goods.
As Congress comes back in January, an economic stimulus package is sure to be the first order of business. Bush is expected to try to move up to next year tax cuts scheduled to take effect in 2005 and to propose a tax reduction on dividends as a way to stimulate more investment in the stock market.
Paul Kasriel, economist at Northern Trust Co. in Chicago, said some stimulus from Washington may be warranted.
“I think we are looking at pretty weak demand in the first half of the year,” he said, referring to consumer spending. “A lot of excess capacity has to be rationalized” through consolidations or bankruptcies.
Another policy remedy favored by many industrialists, lowering the value of the dollar, does not seem to be in the cards. The administration supports the strong dollar and fears that any weakening would undermine confidence in financial markets.
At the Lucent plant in North Andover, Schembry and others who worked on the production lines bitterly blamed mismanagement for the company’s troubles. But the bursting of the telecommunications bubble proved too much for the industry to overcome. Business dried up, leaving behind the glut of capacity.
Creating jobs for Americans in this environment will be difficult. Few economists believe the employment picture will return to those happy days in the late 1990s and 2000 when joblessness hovered around 4 percent. For three months in 2000, only 3.9 percent of the workforce was jobless; the rate has jumped to 6 percent.
“We overinvested not only in technology, but also in people,” said Ed Peters, chief investment officer of PanAgora Investment Fund in Boston. “Unemployment fell to under 4 percent. That was unnatural. We created more jobs than we actually needed.”
Natural rate of unemployment
In Peters’ analysis the nation now is at “full employment,” which economists define as a situation in which the jobless rate can’t go much lower without causing inflation.
Yet, in the late 1990s, when the unemployment rate plunged, there was no inflation to speak of either. In fact, foreign competition in the form of cheap goods from low-wage countries and technological advances have largely kept inflation under control, many economists believe.
Inside American corporations these days there is a passion to keep costs under control and to employ technology in a way that reduces employment or keeps it stable. Recent readings of the economy have shown a slight rise in investment, but much of that investment has been for purchasing equipment being used to cut employment levels.
Also, many more firms are “outsourcing” their manufacturing, tapping cheaper labor overseas.
“Motorola has shifted virtually all their manufacturing overseas,” said Wallace Hopp, a professor of industrial engineering and management sciences at Northwestern University.
Here in North Andover, near the New Hampshire border, outsourcing became a major issue between Lucent Technologies and its union workers in the plant, where switches and other electrical devices are made for connections to fiber-optic cable.
Gary Nilsson, president of Local 1365 of the Communications Workers of America, said Lucent did an unusual thing in recent years–it had a major contract manufacturer, Solectron, handle some of its production inside the North Andover plant.
So union workers found themselves working with contract workers in the same plant, he said, making the same equipment. The factory floor was divided between Lucent employees and Solectron employees with masking tape stretched out on the floor.
Initially, Nilsson said, Lucent told the union that the contract manufacturer would handle only a minimal amount of production.
But, he said, Solectron’s role in manufacturing grew as time went on. He and other union members, including Schembry, said bitterly that they were misled by Lucent.
The company disagrees. Steve Sherman, vice president of manufacturing strategy for Lucent, said the company “spent a significant amount of time with representative union team members, briefing them on our strategy as it evolved over the past few years. . . . They should not have been surprised.”
Sherman said Lucent essentially decided two years ago to use contract manufacturers throughout the world to handle most of its production. It did so as a business strategy to eliminate the very overcapacity plaguing the industry, he said.
Now the company has little or no surplus capacity, he added, even though the telecommunications industry as a whole is awash in it.
Nilsson said Congress should liberalize labor laws so unions could more easily organize workers who land jobs with contract manufacturers.
“Essentially, they are temp workers,” he said, “and right now it’s hard to organize temp work.”
At Local 1365, workers said they are angry and saddened by the way Lucent slashed the workforce through buyouts and layoffs. Nilsson said Lucent changed its workforce from union to non-union while downsizing the company.
Milagros Hayden, 46, said she was “very disappointed” that work had been shifted outside the U.S. to contract workers overseas, “yet we are being destroyed here.”
Hayden also took a buyout and is going back to school. She said her boyfriend was laid off at the plant. It will be hard to make ends meet, he said.
Mike Trout, 43, began working at the plant when he was 20 years old and was two years too young to receive a buyout. Critical of the practice of outsourcing work to contract manufacturers, Trout found a job just before being laid off at Lucent–with a contract manufacturer in New Hampshire.
Lower-paying opportunities
In the communities around the plant, work is hard to come by, said Schembry, and jobs pay in the range of $9 to $10 an hour if they can be found.
When she was younger, she worked in a shoe factory and then in a textile plant before landing her job at Lucent. Schembry and other workers at the plant earned wages ranging between $17 and $23 an hour.
“You always had someplace you thought you could go to,” she said as she seeks employment in a tough market.
And now that it is the challenge for millions of unemployed workers across the country and for policymakers in Washington. With a glut in production capacity, more jobs moving overseas, and industries becoming more and more productive, opportunities are harder to come by.
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The series
SUNDAY: The economic challenge of overproduction
MONDAY: The global threat of overproduction
TUESDAY: Government’s weak hand
WEDNESDAY: The new new economy
