Economic revolution throttles
By Alwyn Scott; December 17, 2004
Seattle Times business reporter; Second of two parts
PACIFIC — By the mid-1970s, Harry Rasmussen was riding about as
high as any small-business owner could.
He was worth millions, had a red Maserati sports car in the driveway of
his comfortable Fife home and owned several private airplanes to
indulge his daredevil hobby: aerobatic flying.
Despite a national bias toward big businesses, he had turned a
small startup that made better wall sockets for phones into a
profitable factory churning out phone-related switches and gizmos.
After 22 years at Pacific Northwest Bell, he had broken free of
the AT&T bureaucracy that had stifled his entrepreneurial drive.
The fact that his own small company, Crest Industries, prospered
alongside a giant monopoly only added to his glee.
But like so many mavericks, Rasmussen, who was in his 40s, couldn't
So he began work on his grandest product yet, a two-line phone
that would revolutionize the industry — and run smack into a global
economy gathering strength all around him.
A new kind of phone
Rasmussen spots a golden opportunity as the government moves to
break up AT&T.
Rasmussen had already invented a simple retrofit kit that
enabled a standard Bell phone to handle two lines, dispensing with the
bulky, expensive equipment AT&T used to do the same job.
But he wanted more. And he saw his chance in the government's
antitrust case against AT&T. Breaking the monopoly on renting
phones would allow third-party phones into the market. And his would be
the best because of his unique — and patented — two-line feature.
Feverishly, Rasmussen and his team designed a box-shaped desk
model — the now-familiar rectangular shape with the receiver on the
left and buttons on the right. He named it the Tracer and tooled up his
factory in the late 1970s to make it. The new phone carried six of the
18 patents he has received.
What Rasmussen and others didn't know was that the U.S. economy
was on the verge of a sweeping liberalization that would nearly destroy
his business and render his patents virtually worthless. As free
markets spread around the world, other countries would compete to make
products ever more cheaply. The resulting competition would spur
enormous economic growth but also hasten the decline of manufacturing
in the U.S. and speed the outsourcing of a wide range of jobs to
Shifting the economy
An economic revolution glorifies deregulation at home and free
trade throughout the world.
After decades of control by big government and stodgy
boardrooms, the U.S. economy was ripe for an overhaul. By the
mid-1970s, unemployment hovered above 8 percent. The oil shock helped
tip the U.S. into "stagflation" — stagnant growth with prices rising 13
percent a year. President Carter spoke of "malaise," and once-stalwart
Chrysler needed a bailout.
In this climate, a group of libertarian and neoconservative
thinkers saw a chance to alter the nation's economic course. They
sought to shrink government, promote markets and blast away regulations
that constrained business. Doing so, they said, would unleash economic
vitality by forcing companies, workers and products to respond to
market forces and competition.
Carter started by deregulating airlines in 1978. President
Reagan cut taxes in the '80s, saying wealth would "trickle down" to
workers in what became known as supply-side economics.
This return to the notion of laissez-faire capitalism, which
existed before the New Deal, encouraged entrepreneurs and industrial
giants alike, fertilizing the soil of the future tech boom and helping
reverse a decline in small-business employment that had persisted since
After years of dismissal, small businesses were once again seen
as a "spark plug" of the economy, generating innovations "that big
firms turned into global products," said Joe Sobota, assistant advocate
at the Small Business Administration in Washington, D.C.
At the same time, trade talks gathered steam, cutting tariffs
that had slowed global commerce since the 1930s. In 1995, the talks
created a permanent trade forum based in Geneva, Switzerland, called
the World Trade Organization.
Unions' power waned. Early in his term, Reagan fired thousands
of federal air traffic controllers who had staged an illegal strike
demanding higher pay and a shorter workweek.
"That sent a new message to American business that you really
ought to get a spine," said Lawrence Reed, an economist and president
of the free-market Mackinac Center for Public Policy in Michigan. "What
it said to the unions was, 'Don't expect to make almost any demand and
get it. We can't do that or we're going to go broke as a nation.' "
The changes helped put control of the economy back into the
"invisible hands" of the market, said Daniel Yergin, co-author of "The
Commanding Heights," an economic history. Survival of the fittest
became the new economic law. Businesses that innovated and cut costs
reaped huge profits. Failures landed on the scrap heap.
Opportunity and chaos
Foreign knockoffs of Rasmussen's new phone hit U.S. shelves.
There was perhaps no greater symbol of this new economic order
than the 1984 breakup of AT&T, with a million employees the world's
At first, slicing Ma Bell into seven regional "Baby Bells"
looked perfect for Rasmussen's ambitions. It freed the Bells to sell
the two-line phones that his company, Crest Industries, was starting to
manufacture. Sears and Radio Shack sold them, too, as customers
overcame the fear that installing their own phones was like pirating
By 1983, Rasmussen's factory in Edgewood, Pierce County, was
running two shifts, turning out 200 phones a week, recalls Paul
Bartlett, Crest's purchasing manager. Morale was high. Bell South, GTE
and others appeared ready to sign big Crest orders.
Then, some of Rasmussen's customers sent his phones to Asia to
be copied. Knockoffs of Crest's $250 phone soon turned up in stores for
Global outsourcing had come calling.
Orders slowed. Before long, more than a dozen companies were
copying Rasmussen's design. The work of the factory had essentially
moved overseas, where labor was cheaper. Rasmussen realized his
reputation for top-quality products was of little use in a world that
now chased the cheapest supplier.
Rasmussen and his employees found the change hard to fathom. "We
were in denial," says John Hoskinson, who worked on the circuit boards
for the phones. "We thought, 'Naw, this can't be happening.' "
Bartlett kept buying supplies, and the factory filled its
shelves with phones. "We still had turn-around optimism," he says. "We
were going to make this a success. Everybody believed."
For a while, the Bell companies ran ads showing imported
telephones breaking down. "Then they gave up and just started buying
them," Bartlett said. Bell South and GTE backed away from their big
Crest purchases. "All of a sudden, orders just stopped."
Crest's sales, which had topped $8 million in 1983, fell to $4
million by 1987. The company that gave free gasoline and $1 lunches to
its employees suddenly had trouble paying its bills.
"It was touch and go every day," recalls Millie Shultz, Crest's
former office manager. "Harry was pretty upset. His idea he'd been
working on all those years was gone. They stole it."
Why buy American?
Rasmussen gives up an expensive, and perhaps futile, patent
This was the side effect of the nation's economic
liberalization. Instead of competing in a regulated monopoly, or even
in a more laissez-faire U.S. market, companies were competing around
the globe, in Asia, Latin America and later Eastern Europe, where wages
were lower and laws more lax. Foreign copying wasn't new, of course.
But it increased as economic growth and trade blossomed in the 1980s
On July 9, 1987, the soft-spoken Rasmussen vented his outrage at
a congressional-subcommittee hearing on a bill to help small companies
fight foreign copies. After spending years and millions of dollars
developing and patenting his switches, phones and other products,
Rasmussen fumed, a U.S. company had ordered copies from Taiwan "and
actually submitted letters to our distributors — six of them — saying,
'Why are you buying Crest when you can buy a copy for much less?' "
Like the owners of many companies, Rasmussen had filed a case
with the International Trade Commission to stop the copies. But
even though his patent had taken several years to obtain, it was poorly
written and offered little protection.
"Our first [legal] bill was $50,000," he told the committee.
"They said that this wasn't even starting. $250,000-$300,000 was the
next thing we heard. ... We dropped the case."
He predicted a dim future for innovative factories such as his
unless the laws changed. "The American manufacturer cannot afford to
spend that kind of money to develop a product and to make the
marketplace, and then have somebody walk in to our distributors and
just take the product," Rasmussen told the committee. "Their investment
is nothing. I can't keep doing that over and over and over again."
Today, after much reflection, Rasmussen regrets dropping the
But he had little choice. His company was too small to fight,
and a stronger patent "wouldn't have made much difference," he says.
"You can have the best patent in the world, but if you're a small
business you don't have the money to protect it."
By choosing not to fight, however, he "was in essence giving
away his intellectual property," said John Preston, professor at MIT's
Sloan School of Management. "He was making his patent worthless."
The bill Rasmussen testified about died. And so did Rasmussen's
phone business. He laid off 60 workers, half his factory. He realized
he would never recoup what he had invested in the phones. And gradually
he let the rest of his employees go as knockoffs whittled away sales of
all his products over the next few years.
Today, manufacturers in China, Japan and Taiwan still make
copies of his products. Phones based on Rasmussen's design sit on
display shelves at Office Depot.
"I don't walk through there anymore," Rasmussen says. He sweeps
his arm across an imaginary shelf. "I'm liable to — arrgh!"
The next new thing
Beaten but not bowed, Rasmussen turns his inventive nature to
the field of encryption.
Rasmussen was soundly beaten. He lacked the temperament to fight
a legal battle, preferring to innovate.
The irrepressible inventor already had a new idea, one that
would leapfrog him once again to the forefront of a shifting economy.
In 1990, Rasmussen, now in his 60s, was tinkering with computers
and grew intrigued by encryption.
He quickly saw that the chief element wasn't the method of
scrambling the data but the key used to unlock it. Most systems used
one key for an entire session. But the longer a key is used, the easier
it is to intercept and break.
Rasmussen found an innovative way to manage keys. He used a
virtual "one-time pad" that generated random keys from an astronomical
number of possibilities — billions more than could be stored in
computer memory — and discarded each key after only one use.
His random generator also threw random text into a message,
scrambling each character in a transmission and making it impossible
for code crackers to find patterns.
This time, the economy appeared to be on his side again. The
tech boom created demand for secure chatter across the Internet, as
well as stronger protections for patents and intellectual property.
Even so, Rasmussen was obsessed with protecting his new
invention. He put the encryption software on a computer chip and molded
the chip in an indestructible plastic block. Anyone who melted or cut
the block to extract his software code would destroy the chip trying.
He geared up to make the device, but government restrictions on
exporting such a strong encryption system forced him to weaken it, and
Taking aim at the growing Internet market, Rasmussen then
designed his encryption to work with Microsoft Internet Messenger, one
of the leading programs that allow users to send messages in real time
around the globe.
For Rasmussen, this new software product contained a crucial
difference: He didn't need a factory. He simply hired a few programmers
to write code. He even did a little outsourcing of his own, hiring
Validio Software, a Bellevue company, to help write portions of his
interface with Internet Messenger. Founded by a Russian immigrant in
1994, Validio often ships work to programmers in Ukraine.
The fall of communism in 1989 had opened up a new world of
highly educated workers in Eastern Europe who could write code for a
fraction of what U.S. workers earned. Like workers in other poor
countries, East Europeans had joined the global economy. Their skills
and the spread of open economies further allowed production to move
The trade-off from trade
Some question whether long-term benefits outweigh the costs to
The rise of the global economy over the past 20 years has raised
questions about trade's benefit that are resonating deeply in the U.S.
Most economists think countries gain by trading, as the theory of
comparative advantage suggests: Countries do best by making what
they're good at and buying the products that are difficult for them to
Imported goods provide wider selection at lower cost, and global
companies enjoy wider profit margins that cheaper production allows.
More open economies coincided with higher economic growth. Since
1980, the U.S. has churned out 50 percent more goods and services than
it did in the previous 35 years, when economies were more closed. The
U.S. stock market has made the longest bull run in its history — a gain
shared by a growing pool of middle-class stockholders.
The growing world economy also helped the U.S. eliminate in the
1990s the budget deficit caused by Reagan's "trickle-down economics,"
which in turn brought down interest rates and further spurred business.
But labor unions, environmentalists, activists and some
economists argue that the open-market policies may not serve the U.S.
well in the long run.
Recently, Nobel laureate Paul Samuelson, a towering figure in
American economics and author of a widely used economics textbook, said
the belief that the gains of free trade always outweigh the losses is
"only an innuendo." The theory, he said, "is dead wrong about the
necessary surplus of winnings over losings."
When an innovation is copied abroad and the resulting goods are
imported, the loss of jobs can be more substantial than the gain from
that trade, he said. And he expects the loss of U.S. jobs to continue.
"I'm just trying to be realistic about what has been happening to
American society and what is going to continue to happen," Samuelson
said in an interview.
Even so, countries keep joining the world trade game. And to
participate, countries that once ignored U.S. patents and copyrights
are signing WTO agreements for such protection. Japan is setting up a
court to handle patent cases, a far cry from swiping Rasmussen's
designs 20 years ago.
But these changes have not stopped phone copies — or pirated
software. As Rasmussen makes plans to sell his software over the
Internet, he is once again risking that his invention, the fruit of 14
years' work, could show up in a sidewalk stall or Internet file-sharing
As Rasmussen turns to new possibilities, he lets go of pieces of
It's midmorning, and the little blue screen lights up on
Rasmussen's cellphone. It's the University of Texas calling to ask
about buying rights to the encryption software. "They say it's a
billion-dollar product," he says.
Having lost his fortune on Crest phones, he's enthusiastic about
his new company, CresTech, which consists of him, Bartlett and a Web
His ambition is undiminished. And he's also keenly aware that
his retirement will be uncomfortable unless he can sell this latest
invention. He figures it can be bigger than Crest ever was: 1,000 sales
a day at $25 would bring in $750,000 a month.
He doesn't need a factory to make his new invention. He can sell
a million copies and carry the factory in his briefcase.
He snaps the phone shut and climbs back into the cab of his forklift.
Revving the pedal, he inches forward through the scent of propane
exhaust, slipping the forklift's twin prongs under a machine that once
made him wealthy, and that he built his life on.
He pulls a lever and the machine rises, perfectly balanced on
the fork. Rasmussen gently sets it down on a trailer and backs the
He's finally ready to let go of his old beloved machines.
They'll be torn down and the parts sold or scrapped.
And he has his eye on a new toy: a small, hand-built jet that
can go 520 miles an hour.
"Oh, yeah," he says with a twinkle. "When I make my first
Alwyn Scott 206-464-3329 or email@example.com