Deindustrialization in the Granie State title image

By Marie Christine Duggan | November/December 2017
Find Part 2 here.
Find Part 3 here.

This article is from Dollars & Sense: Real World Economics, available at

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The central room is 65,000 square feet with a high ceiling. This room is noisy, with large machines emitting loud hums and whirrs. The machinists are dwarfed within the canyons between the rows of equipment. Many of the machines have plastic housings, so that each looks like a giant photocopier, a rectangular plastic box taller than a person, and perhaps the length of two or three people. There is a window on the side of each one. Inside, the drilling/lathing/milling operation is performed on the metal. However, someone peering in through the window doesn’t actually see a 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 water pushes metal debris away, as human hands or air flow did on the previous generation of machines. But water also acts as a coolant to put out sparks and to counteract the tremendous heat created by the friction of metal tool on metal part.

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, diamond 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 (employing 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.

Keene lies in the Connecticut River Valley, which in the mid-19th century witnessed the birth of the machines that make replaceable metal parts. Machinists from Hartford, C.T., to Lebanon, N.H., drove up global productivity during the industrial revolution, and since that time the machinists’ skills had been passed down from father to son (and occasionally to daughter). This chain was damaged with the layoffs and plant closings between 1980 and 1990. In those years, few fathers told their eighteen-year-old children to become machinists. As a result, there is now a shortage of computer-savvy machinists, so local firms donated funds to build a computerized machine tools laboratory at Keene State and have offered a $1,000 scholarship to train at the local community college, which shares the lab. Many of Keene State’s staff and students are from Connecticut, Vermont, and New Hampshire, and come from families with connections to machining.

The economic forces impacting the machining jobs that continue to sustain local families are hard to see using standard economic datasets. Most databases provide information only on publicly held firms—those that issue shares that are traded on the stock exchange. Ownership transitions between 1998 and 2012 shifted some of the local plants into the hands of large, publicly-held corporations. Yet some of the local manufacturing firms, including some of the most dynamic in the United States, remain smaller in scale and independently owned, and so are absent from standard databases. My students and I began conducting oral histories of owners and workers in order to learn more about the private firms that do not appear in the data.

The Elephant in the Room

In November 2016, Trump started to pick up a surprising amount of support in many parts of the nation. As it turned out, even though Clinton won the popular vote, 2,026 counties went for Trump, while 447 went for Clinton. As I began to pull together my research about deindustrialization in my new hometown, the Trump phenomenon was getting hard to ignore. It suddenly dawned on me: Keene, N.H., wasn’t the only place to have experienced an attack on its export-competitive industrial base between 2000 and 2012. Was it all of New Hampshire? Or was it just about everywhere but San Francisco, Boston, and New York City?

Manufacturing Jobs in the United States

Figure 1 is what I found in five minutes. The crushing loss of manufacturing jobs between 1980 and 1985 is a vivid memory for me, because I graduated from California’s Berkeley High School in 1981, where 90% of my peers were not going on to four-year college. When I arrived at Tufts University in Medford, Mass., I saw storefronts boarded up and watched people in line at the convenience store pay with food stamps. The baleful glares at us privileged college students only got worse as the unemployment rate reached 10.9% in November 1982. When I moved to Brooklyn in 1990, I often drove by the empty industrial buildings along the waterfront.

So, when I saw on this graph that the manufacturing job loss of 2001-2009 was triple that of 1979-1985, my jaw dropped. And why didn’t I know this? I read the New York Times, the New Yorker, the Financial Times. I hang out with heterodox economists, for goodness sake! I now suspect that industry left our intellectual centers between 1979 and 1985—out of sight, and so out of mind—but remained a powerhouse in so-called “rural” areas until 2001, only to suddenly and precipitously decline. I realized how lucky I was to be living in a place that is like a good bit of the United States.

Many economists have been focusing on macroeconomics—the ups and downs of the entire national economy, measured in “aggregate” data—for the past twenty-five years. The instability of the financial sector and rising income inequality could both be analyzed through economy-wide data, so we all rightly got our heads in that game by 2007. If one takes manufacturing jobs as a percent of total employment, there has been a continuous decline since the late 1960s, and one would therefore see little new between 2001 and 2009. Some people point to China’s accession to the WTO in 2001 as the cause of the U.S. decline in manufacturing. However, my own research inside firms suggests that competition from China is not the main story.

Kingsbury in the Golden Age:
1958 to 1982

The photo at the top of this article shows Kingsbury Machine Tool in its heyday, 1969. One year earlier the programmable 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 of one operator. The operator 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.

Keene’s capital goods producers do not compete with producers in low-wage nations, but rather with firms in Europe and Japan, and unit labor costs have generally been higher in those places than in the United States since 1990. The decline in U.S. jobs has less to do with external forces than Americans seem to think, and more to do with the policies taken (or not taken) inside the United States itself. If a firm was going to collapse in the face of cheap labor overseas, that happened in 1982 (as in shoes and textiles). The manufacturers who survived until 2000 were made of sterner stuff. Monetary policy that promoted financial bubbles turns out to be another ingredient in the decline of manufacturing jobs between 1978 and 2012. I will analyze this in a three part-series by exploring three different moments in recent U.S. economic experience: 1980 to 1990, 1990 to 2000, and 2001 to 2012. I use case studies from Keene to illustrate the arguments.

Deindustrialization Part I:

The Connecticut River Valley Machine Tool Sector, 1980-90 Hank Frechette purchased Kingsbury Machine Tool from his father-in-law, E.J. Kingsbury, in 1963. That year, Frechette also hired the entire graduating class of Wentworth Tech in Boston. “I had never heard of Keene,” relates Donegan, an electrical engineer in that class. But it would become his home and his life for the next forty- odd years. Machinists from Vermont and New Hampshire considered Kingsbury to be one of the most exciting places to work in New England. Their work ethic and skills, plus the innovations of the young electrical and mechanical engineers, plus the management by Hank Frechette and Charlie Hanrahan—a co-owner who was also a member of the founding family—grew the company threefold between 1963 and 1976, so that it employed around 1,000 people. Many machinists commented that, in those days, Kingsbury was like a family. Charlie Hanrahan worked hard to keep it that way. He had a notebook in which he wrote down every man’s name and the names of his wife and children, with their ages. (Yes, all the workers at Kingsbury—indeed, all the machinists in Keene—were men. That is no longer the case, but it was in those days.) He trained new supervisors to make similar efforts to know each member of the shop personally. Once a man got a job at Kingsbury, he was set for life—until 1984.

Hank Frechette made a name for himself nationally and became a leader in the National Association of Manufacturers. There he met another rising executive, Jim Koontz, who was based in Detroit. When Frechette died suddenly in 1976, his astute widow Sally Kingsbury asked Koontz to come to Keene and take the helm of the business. Koontz’ wife had doubts about leaving the community of executives in Ann Arbor for remote Keene, N.H., but the couple made the move with their four children. Between 1978 and 1982, Kingsbury was employing three shifts of workers to keep up with continuous orders as Detroit auto companies tried to re-tool to compete with small cars from Japan. Koontz became CEO in 1983.

Profits in Machine Tool Sector, United States, in Millions of Dollars

In 1984, Kingsbury had its first layoff: over 200 people. This was a shock to the community and many blamed Koontz as an outsider with no local ties—compared to Charlie Hanrahan, for example, who had gone to grade school with many of the 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 company had gone off a cliff, one minute producing three shifts a day with paychecks chock full of overtime and bonuses—to suddenly a period of six months with no orders. It was only in early 2017 that I actually saw in Figure 2 that machine tool industry profits for the nation as a whole dropped in 1983 from nearly $4 billion to $1.5 billion—a drop which does indeed look very much like a fall off a cliff. What was causing that massive decline in industry-wide profits in U.S. machine tools? One factor was a dramatic technological shift from mass production to flexible production, precisely in the 1980s. Jim Koontz explained it:

Kingsbury made machines that could produce one million to two million parts for the Big Three auto manufacturers. After a while, volumes went down. At one point, those three auto makers produced all the autos in the world. By 1980, there were thirty companies producing for the world, but by now [2012], there are three hundred auto companies worldwide. Each automobile has 30,000 parts, and 80% of them today are produced by suppliers, so there must be tens of thousands of suppliers, globally. Because of this, the volumes that auto makers needed their machines to produce went down from one million to 100,000. This changed the style of the technology that the manufacturers needed.

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 control, 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 this is why Kingsbury failed to make profits after 1983. As one financial wizard told me, the reason U.S. machine tool makers did not survive until the 21st century is that they were, “Fat, lazy, and stupid.” But there is evidence that this judgement is far too hasty.

Over time, a couple of reasons—more solid than gut instinct—emerged to challenge the conventional argument that U.S. machine tool firms just didn’t adapt. For one thing, Kingsbury acquired the machine tool firm Hillyer, and Hillyer did make CNC machines. Secondly, the CNC machine Phil Hilliker stands in front of was made by Jones and Lamson (J&L). (One day, a student in my class magnified a photo of the machine and found the company’s name.) J&L was a machine tool maker in Springfield, Vt., a town about fifteen miles from Keene. The company filed for bankruptcy in 1986, so the “can’t adapt” argument had been applied to them, too. But there in front of us was clear evidence that J&L had produced a computerized lathe by 1986, and machinist Phil Hilliker said he was using it by 1987, and it was the finest machine he had ever worked with. Thirdly, the machine shop next door to J&L in Springfield was Bryant Grinding, and it was in decline by 1990. Yet at a recent lecture a computer scientist told me he had applied for a job as a computer programmer at Bryant in 1981, and they were using what he considered a “nifty” program for machine tools. These are three hints that the Connecticut River Valley machine tool sector was adapting. Financial changes were a second factor exacerbating the pressure inherent in a period of technological change and low profits. It was not until 1983 that Jim Koontz became managing owner of the company. He did so by means of an internal leveraged buyout (LBO). That is, Koontz did not have the personal wealth necessary to purchase the company. However, Sally Kingsbury and the rest of the board felt that he had demonstrated the managerial skill in 1978-1982 to take over, and they wanted the manager of the firm to have an ownership stake to tie him to the community. In an LBO, a consortium of banks puts the money up to purchase the company. Specifically, they put the money into a fund, and the fund purchases the company. The profits that the firm makes are then earmarked to pay off the banks. Once the bank loan has been paid off, the fund is owned by management. In this case, Koontz was not the only one “in on” the fund. Some of the engineers wound up being part-owners of the fund, as did members of the Kingsbury family.

The use of an “inside LBO” to transfer ownership of Kingsbury from one generation/owner to the next was not new. Hank Frechette had done the same thing when he purchased Kingsbury from his father-in-law E.J. Kingsbury. Yet it seems that something went wrong with this second LBO. LBOs were more common by the 1980s, and it is likely that the leverage was higher—meaning a smaller down payment, and a larger amount lent. Everyone who was in on the LBO considers Jim Koontz to have been an outstanding executive who did his best in difficult times. The workers on the shop floor and the supervisors who were not part of the LBO, however, consider Koontz to have been their worst nightmare. As an educated guess, I would say there were two problems: First, paying off an LBO with profits from the firm would be difficult when the profits of the entire industry suddenly fell by 60%. That, in itself, may have increased pressure to cut costs in 1984.

And the second problem was that the stock market rose continuously from 1987 to 1999. Between 1969 and 1982, an investor in the stock market would not have made capital gains, but only dividends. Those ambitious for more dramatic returns (such as the Kingsbury family and Hank Frechette) put their money into physical plant and talented labor, and made profits by expanding market share through quality products. After 1982, industrial profits were hard to come by, while Alan Greenspan kept interest rates relatively low between 1987 to 1999, which made capital gains in the stock market the new normal. At Kingsbury, managers “in on” the fund initially used to pay off the LBO received profits out of production, and invested them into the rising stock market where they must have reaped consistent capital gains—while workers on the shop floor lost their bonuses because the profits made from producing and selling machine tools were meager in the 1980s and the 1990s. At the time, gains made in shares of other companies on the stock market may not have seemed to come at the expense of the workers inside Kingsbury. But a wedge had emerged between the interests of owners and the workers on the shop floor. Supervisor Kenny Johnson described “a change in how [Jim Koontz] handles his people.”

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 into them and he wanted to make them into a ‘yes’ person. That’s one of the ways he changed and didn’t listen to people. For instance, when the union was being introduced at Kingsbury’s, he’d come up to me and he’d ask me some questions, he thought I was being too easy on some of my employees but my philosophy hasn’t changed then, hasn’t changed today, you treat people how you like to be treated. I’m not a ‘yes’ person. So I told him how I felt. I felt like he had really loyal employees and he thought I was treating the employees—he said I had too much compassion for my employees, ok? I had too much compassion for my employees, that’s not the way management was going to go in a sense of compassion, and I told him the truth, told him how I felt, I know it wasn’t the way he felt and we got in a discussion and he almost fired me on the spot, ok?

Putting his job on the line to stand up to Jim Koontz for the employees in the late 1980s was a turning point in Kenny Johnson’s life, a moment that took great courage and won him the respect of the workers—to this day nearly thirty years later. He had been trained by Charlie Hanrahan to know and care for his employees and their families, as the way to motivate the highest effort from the machinists. But now Koontz was pressuring him to lay off good machinists because they supported a union. Kenny Johnson was not a fan of unions on the grounds that “you don’t need a union if you treat your people right, ok?” However, Koontz was not, in Johnson’s opinion, treating the shop floor right. Koontz hired Jeff Toner as vice president, and the general view was that Toner was a hatchet man to get pro-union workers fired. With considerable struggle, soul searching, difficult conversations, courage and solidarity, 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 getting 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 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 workers, and from 1983 to 1991, the Connecticut River Valley felt like a war zone. Workers lost confidence 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 compensation 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 community and the workers on the shop floor. Kingsbury was also a major philanthropic giver, cementing the owner’s sense of responsibility for and ownership of the entire community.

When the workers at Kingsbury mobilized for a union, they were publicly demonstrating that they had lost confidence in Jim Koontz. At stake was really who owned the plant: the legal owners, or the men whose skill gave the machines their reputation? Machinist Phil Hilliker was one of the first to wear a union shirt. He related to my students in 2015 the pressure he was under:

They would send my work out to have it done somewhere else. ‘I’ve got no work for you Hilly, got to lay you off.’ They didn’t have to lay me off, I had so many things I could do around there. I was their whipping boy. They wanted to break me down because I was an older one. But it couldn’t be done. I said, If B-52s didn’t kill me during the Korean thing, when they bombed me, you sure as hell ain’t gonna be able to do it.

Most of the male workers had served in war, either World War II, Korea, or Vietnam, so a comparison of the tensions on the shop floor to war was not made lightly.

Divisions That Wore People Down

The 1980s were an intense time of technological change, as Kingsbury began to use computerized machine tools to make products, and then also acquired Hillyer Machine Tool to have their own line of computerized products. The loyalty that supervisors like Kenny Johnson exhibited to older workers meant the young were fired first, even though they might have young children to support at home. One of the men laid off in 1984 had lost a finger at Kingsbury’s. Yet, as a young man, he had never favored the union, because unions supported seniority rights. He felt that the younger cohort to which he belonged was better able than the old timers to learn new technology and turn the firm’s prospects around. This younger man hates unions, and blames Kingsbury management for acting like a unionized shop in 1984, though no union was voted in until 1991.

The toll the decade took was not only on the shop floor. Charlie Hanrahan was the managing owner who had gone to elementary school with the men and knew every man’s family members by name. Hanrahan had been Hank Frechette’s right-hand man, and ran the company from 1978 to 1982, teaching Jim Koontz the ropes, before retiring. He gave the speech of his life trying to prevent the vote for a union. He had a heart attack during this period, and his children believe it was caused by his divided loyalties. He respected Jim Koontz, and he developed close ties to the shop-floor workers. That was his way of inspiring people to give their best effort. Though Hanrahan passionately believed a union was the wrong way to go, every machinist I have spoken to goes out of his way to explain the confidence, affection, and appreciation they had for him. Hanrahan may have been caught between a manufacturing world that viewed the workers’ skills as the source of profits (1958–1982) and the new era (1983–2012, at Kingsbury) when the source of wealth was capital gains on the stock market, which could be harvested best by laying workers off from time to time.

The tragedy of the tensions in the 1980s is that both managing owners and machinists cared deeply about the future of the firm. For all the flaws that the workers saw in Koontz, he had virtues also, especially compared with his successor. Koontz was a man who was trained to work with machines—he did not have an MBA—and most machinists prefer working for someone who knows technology. He lived in Keene, rather than the distant corporate ownership of a conglomerate. The pension contributions papers demonstrate that he maintained the workers’ pension with utmost regularity. As auto production went global, he traveled the world from South Africa to Brazil to sell Kingsbury Machine Tools. He used Kingsbury retained earnings to acquire Hillyer to keep up with technological change.

The Volcker Shock Makes Imports Cheap

U.S. Federal Funds Interest Rate

Technological change does not seem adequate to explain the number of firms that closed in the Connecticut River Valley between 1980 and 1990, given that they had weathered so many changes during the previous one-hundred years. What else was going on between 1979 and 1984 that could explain the massive drop in U.S. machine tool profits of 1983? I have taught macroeconomics four times a week for seventeen years, so of course, the hike in the U.S. interest rate between 1979 and 1983 came to mind. Figure 3 is shown with the pink area to indicate that time period.

During the 1979 to 1983 time period, this base 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 markup on top of that before they lend to consumers, so the interest rate for a credit card to a person of sound credit was probably 29% when the Federal Funds Rate was 19%. The reason Fed Chair Paul Volcker raised the interest rate so high was in order to kill off inflation, which was about 10% per year in the late seventies. He did reduce inflation, but using the interest rate to fight inflation is like using chemo to fight cancer: it killed off a lot more than inflation.

Everyone knew that a high rate of interest would reduce business investment in fixed capital equipment like machine tools. The logic by which high interest rates reduce new capital spending is based on the idea that such spending is financed largely 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 the hope that the interest rate would come down.

Index of Unit Labor Costs in the U.S., Germany, and Japan

Figure 4 illustrates unit labor costs—the cost of wages and benefits employers incurred in the making a hypothetical widget in various countries. While U.S. unit labor costs (the black line) had long been higher than German (light gray) or Japanese (medium gray), that gap widened precisely between 1979 and 1984. This was due to two factors:

First, U.S. manufacturers may have delayed purchasing new equipment until after interest rates came down, while their Japanese and German counterparts did not. Instead, they invested in new machinery that meant workers could produce more units in the same amount of time.

Second, what U.S. policymakers may not have realized is how much the exchange rate for the U.S. dollar would appreciate in response to the rising rate of interest. Exchange rates had been flexible only since 1971. A rising interest rate pulled wealth from around the globe into U.S. bank accounts and this drove up the value of the U.S. dollar relative to every other currency in the world. The dollar appreciated relative to the German deutsche mark and the Japanese yen, and competitors using those currencies were the ones that the machine tool sector faced. Suddenly, the prices of U.S.-made products went up when converted to deutsche marks or yen, and the prices of German and Japanese products went down when converted to dollars.

This drop in relative unit labor costs gave the 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. company for fifty years, so they stick with the U.S.-made machine, even though the Japanese or German import costs the same.

Hypthetical Competition Between U.S. and Imported Machine Tool, 1979–1984

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, which would hold steady the price that U.S. buyers pay for a Japanese machine. However, Fed Chair Volcker tries to control inflation by raising U.S. interest rates to 19% in 1981, and the high interest rate drives up the value of the dollar, and the import is now “on sale” for only $85,500. That is a $51,000 savings! Under these circumstances some firms decide to try out the import. In short, the U.S. Federal Reserve gave imports an opening into the U.S. market by creating a 38% discount on the price of an import relative to a U.S.-made machine tool in 1984.

By 1986, Volcker had realized his mistake and did depreciate the dollar by around 38%, so that the Japanese import would cost the same as the American machine. By then 400 people had already been laid off from Kingsbury in Keene, N.H., and Jones & Lamson in Springfield, Vt., sold out in 1986.

Financial Engineers Finished the Job

By 1988, the Goldman Industrial Group had purchased J&L out of bankruptcy, and began applying “financial engineering” techniques to extract value from the firm. “Financial engineering” is used to make profits from dying companies by taking them apart. Of course, many times it’s not clear that the firm was going to die if the financial predator had not attacked. By 1990, Goldman had purchased another once-fine firm, next door to J&L, Bryant Grinding. And in 1998, Goldman protégé Iris Mitropoulis purchased Keene’s Kingsbury from Jim Koontz, where Phil Hilliker still had his job. Mitropoulis owned Ventura Industries, a separate company which owned only one thing, Kingsbury Machine Tool. By 2001, it was clear that she was not investing the retained earnings she had acquired along with the plant into new equipment. “Ah, she took the retained earnings!” erupted one retired executive in sadness and frustration.

By 2007, half of the pension fund was missing as well. Indeed in 1983, the IRS had ruled that a firm facing bankruptcy had the right to use the workers’ pensions to try to keep the company open. In 2016, I submitted a Freedom of Information Act (FOIA) request to the Federal Pension Benefit Guarantee Corporation, and there was a very fat file on Kingsbury. Up to 1998, Jim Koontz ran the company and the accountant Tom Cookson filed nice neat forms verifying the financial health of the workers’ pension fund. He made it through ups and downs of the stock market with only a few bumps, so that $45 million dollars was in the fund by 1998 when Koontz sold it. Mitropoulis, on the other hand, filed messy and incomplete pension documents, and by 2007, the fund had only $26 million in it. Maybe it was all the 2001 decline in the stock market, but maybe not. In addition, she went out tirelessly asking the federal government to lend the company money earmarked for woman-owned businesses. It appears that all the money that was ever granted to Kingsbury by its previous owners, its employees, or lenders was transferred to Ventura Industries, so that Kingsbury declared bankruptcy in 2012. Financial engineering should not be legal. But it is.

When Keene looks at Mitropoulis’ actions 1999-2012, the reign of Jim Koontz at Kingsbury appears in a more nuanced light. Mitropoulis was 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 production. Koontz and people of his era stumbled upon those capital gains, while financial engineers such as Mitropoulis actively extracted value from industry to shift the wealth into other assets. Class struggle was nothing new to factories, but between 1980 and 1990, unstable monetary policy was a new pressure hard for either owners or workers to see. They wound up turning on each other. Indeed, the influence of changing monetary policy has been hard for left economists to see, and we are only now, thirty-five years later, beginning to understand what a sea change in the institutional context for industry was taking place.

is a professor of economics at Keene State College in Keene, N.H. You can follow her and her students’ work on these issues at:

  • On the machine tool firms of the Connecticut River Valley, see Robert Forrant, Metal Fatigue: The Rise and Precipitous Decline of the Connecticut River Valley Industrial Corridor, Baywood Publishers, 2009.
  • On financial engineering, see Eileen Applebaum and Rosemary Batt, Private Equity at Work, Russell Sage (2014).
  • On how an independent firm is affected by rise of stock market, see John Hacket, Race to the Bottom. Author House, 2004. This is a novel, but the author was a PhD economist and chief financial officer at Cummins Engine for decades, so his insights are worth reading.
  • On pensions, the following is still a good overview: Theresa Ghilarducci, Labor’s Capital, MIT Press (1992).
  • Part II of this series will take a closer look at how U.S. industry was damaged by monetary policy in the 1990s.

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