Getting over the information economy: interview with Lester Thurow - interview

One mark of the originality of economist Lester Thurow's thinking is that he has been rejected by nearly every stripe of political daddy-o who would champion an economic theory into national policy, while still gaining the respect of other economists as Dean of the Sloan School of Management at MIT His influential book The ZeroSum Society (1980) anticipated most of the economic patterns we're now seeing - a national economy headed into slow growth, with ensuing political paralysis, and an interconnected global economy that doesn't allow the lie that some can gain without others losing. He was interviewed by lames Walsh, staff writer for California Business magazine, where this appeared in a slightly different form. -Kevin Kelly Looking at the American economy today, what do you see?

THE biggest change that is facing Americans today is that the American Economy has died. There is no American economy; there's a world economy. There are several ways that people react to this kind of dramatic change. The first usually is denial. Last February, President Reagan said something that made me want to stand up in my living room and "cheer." What he said was that Americans can outproduce, outmarket and outsell any nation in the world. In 1986 we had a hundredand-sixty-billion-dollar trade deficit.

After that, you go through the "unfair" stage. Remember those ads by Motorola and Bethlehem Steel in the magazines and newspapers? They said: "All we want is a level playing field. If we have a level playing field with the foreign competition, we'll be okay," I assure you that Bethlehem Steel doesn't want a level playing field with Nippon. Nippon gets more tons of steel per person and per ton of coal used. Their steel is of higher precision and higher quality with fewer imperfections. On a level playing field, Bethlehem Steel gets beaten.

Next, the magic cure, like going to Mexico for Laetrile. That cure in the United States is the theory that we don't have to be competitive in industrial products. We can be competitive in services or something else.

The only people who believe that are those who don't look at the data. In 1986, we exported $55 million worth of services. How much in services did we import? $58 million. We had a deficit of $3 million in services.Why don't most Americans react better to these truths?

MOST Americans don't understand where the rest of the world is. We like to think that we're a sophisticated, worldly nation. But we're not. There are 240 million of us; less than 30 million have passports. And we remember a world that isn't there. Many Americans think of Korea as M A S H -a bunch of peasants in straw huts.

If you go to Korea today, you can go to the Daewoo assembly plant. You will see a brand-new assembly line full of the latest Japanese automobile equipment - something that does not exist in the United States. The floors are so clean they shine. There's a very bright, well-educated Korean workforce building cars. All the design and engineering is done by Germans from Opel. There's not an American in that facility except someone touring it. What are they making? Pontiac LeMans for sale in America.

Okay. How should we react to our large trade deficit

THE United States' trade deficit is to economics what a black hole is to physics. The farther you get into it, the harder it is to get out of. And if you get into it, all of the normal rules don't apply. If you had told me in 1964 that some country would eventually have a trade deficit of $160 billion, I would have told you that you were mad. Today, you have whole dedicated industries springing up abroad to service the American market. Look at Volvo and Saab. They sell more than 50 percent of their cars to the U.S. They're not Swedish car companies; they're American car companies that happen to manufacture in Sweden.

That's why, as the dollar drops in value, the trade deficit doesn't diminish. When the dollar went up, U.S. manufacturers were perfectly happy to abandon foreign markets. Those markets were peripheral to their survival.

When the yen goes up or the German mark goes up, Japanese and Germans are not willing to give up the American market, because it is central to their survival. They'll cut wages or do whatever is necessary to preserve their market share.

I was recently at a conference with a group of young Japanese businesspeople. They had all just had their wages cut by 15 percent to 20 percent, to cope with the high value of the yen. That's something that's inconceivable in the United States. If I went into most businesses here and slashed wages across the board by 20 percent, everyone would walk out the door. Other than cutting wages, what threats does the trade deficit make?

LAST year, one out of every four dollars lent in America was lent by foreign institutions. Now the $160 billion trade deficit represents a four-percent addition to the American standard of living. We consumed four percent more last year, and we borrowed the money to pay for it. And we're more dependent on the foreign markets than just for that four percent. Foreign banks have violated the first law of a Swiss banker, which is: never loan money to someone who is borrowing to pay interest on another loan. There's something that today is a technical economics term, but tomorrow will be on the front pages of your newspaper: adverse shift in terms of trade. If you have to balance your balance of payments by lowering the value of your currency, then for everything you sell you get less and for everything you buy you pay more. So to make a four-percent improvement in your balance of payments, you have to cut imports by more than four percent or raise exports by more than four.

Put all these things together and you find that about eight or nine percent of the American standard of living is dependent on foreign loans. Again, what are we to do? What can we surely say is ahead for us?

We know this can't continue forever. What we don't know is how long it will last. We are on new financial ice. The richest nation in the world has never been the largest debtor before. In all history, this has never happened. Rome didn't borrow money. Spain didn't borrow. Great Britain didn't borrow.

Suppose the world would lend us the same amount of money - relativeto GNP - that it lent Mexico. If everything were the same, the world would lend us about $650 billion. At current rates of borrowing, we would run into that wall about May of 1989. You mentioned Mexico. We've been hearing that Mike Milken's new project at Drexel Burnham [investment bankers] is to float junk bonds to Latin America to help them deal with their debt. What do you think of that idea?

THERE are all kinds of things that you can do with Latin American debt. Swaps. Assets redeployments. For a financial firm, they don't really care whether things are going up or down. They'll find ways to make money in either case. I have no doubt that Mike Milken can think up ways to make money on the Mexican debt. The problem is that that doesn't do anything to solve the Mexican debt problem. All it does is shuffle the ownership.

The banks are willing to sell off Mexican debt at a loss. Seventy percent or 60 percent of face value. But Americans still own the debt. And of course the people who buy it are just gamblers willing to take a chance that they're going to collect more than 60 percent.

The real problem in Central America is that a lot of these countries have borrowed so much money that it's very hard to figure how they'll ever be able to pay. But that doesn't mean that there isn't money to be made juggling their debt between now and whenever.

What should we do about those loans, then?

I THINK that at some point we're going to sit down and have a conference on what I call loss allocation. We're going to look at Argentina and say: How much money could they honestly service and repay, consistent with some kind of economic growth?

Let's say that number is forty billion. And they borrowed seventy. Then there's thirty billion dollars in losses. The question is: How many do we allocate to the banks? You can't allocate them all to the banks, they don't have enough money. How many can be hidden in the world bank? How many can be hidden in the IMF? And how many are going to have to be paid by the taxpayers of wealthy industrialized countries?

A third of the Latin American loans are Japanese. The Americans are not the only industrial taxpayers who will have to pay. But somewhere out there in the future, the taxpayers are going to have to pay.

You've written a lot about consumption taxes. Do you think anything is going to be done about those?

THE next president of the United States, Republican or Democrat, on January 22, is going to have a meeting about raising taxes. He may not do it, but he's going to have a meeting about it.

What the economic advisors will tell him is: Look, there's some small probability that if you don't raise taxes, the rest of the world will continue to lend us money for eight years. And as long as they continue to loan us money, there's no reason to raise taxes. But if they decide to quit lending us money, then you'll be seen as being forced by the rest of the world - essentially an IMF ultimatum - to raise taxes. And that would look very bad.

If you do it in February, you can blame Ronald Reagan. But if the lending stops three years from now, then you won't be able to blame Reagan.

So the next president will have a tremendous temptation to do what Deukmejian did in California - inherit a deficit from the previous governor, raise taxes by 110 percent of what's necessary, and then a year before you run for reelection, you lower taxes by 10 percent. That's what every governor does who inherits a deficit. And that's what the next president will be tempted to do.

If he decides to raise taxes, then it will be something like a gas tax, which is a consumption tax. Or maybe a value-added tax. He won't want to raise income taxes.

Are our current trade problems integral to our system?

THE fundamental long-run American problem is that our productivity over the last two years has been growing at 0.8 percent. Less than I percent a year. At the same time, the rest of the industrialized world has been growing at a 4 percent rate. Korea's actually been at twelve.

Raising the level of productivity is the central American challenge. And it's not a Washington, D.C. challenge. Washington, D.C. doesn't determine the American rate of growth in productivity It's a local-firm challenge, because the rate of growth in productivity is just going out to all the firms and adding up growth. Increased productivity is the name of the game at the level of the firm and it's the name of the game at the level of the economy.

So low productivity growth is the key problem? If we fix that we'll be in good shape?

Low productivity growth is a simple problem. Nobody can build a high-quality product out of low-quality components. It's impossible. And nobody can build a high-quality economy out of low-quality inputs. In order to have a world-class economy, you have to have world-class inputs.

Now what are the inputs in any economy? The quantity and quality of its workforce. The quantity and quality of its capital stock. The level of research and development in technology. And the quality of its management. Those are the four fundamental inputs. All you have to do is take those four points, and compare them to the inputs in any of our competitors. Japan, Germany, Korea. Where we are deficient, we have to raise the level of that input, up to and hopefully above world levels. But you'll find you come back to a very simple problem: there aren't many areas where we measure up to world levels.

Take the workforce: according to the last census, 13 percent of our workforce is functionally illiterate. What fraction of the Japanese workforce is functionally illiterate? One-half of one percent. Only 72 percent of American young people graduate from high school. What fraction do you think graduates in Germany? 92 percent. If you give eighteen-year-olds a math exam, the average American knows half as much as the average Swede. How can you operate in a computerized, mathematized system knowing half the mathematics of your competitors? You can't.

But how can we effectively upgrade education in the U.S.? State and federal governments have been throwing money at that for years.

THE answer is fairly simple. Out kids go to school an average of 180 days a year. And the average kid is absent 22 days a year. So he's actually in school 152 days a year. The average European kid goes to school 220 days. The average Japanese kid goes to school 240 days. And the Koreans think the Japanese are lazy about education.

It's a form of American chutzpah to think we can learn in 158 days what it takes a Japanese 240 days to learn. If you're not willing to do the easy thing - lengthen the school year - how in the world are you going to do the hard thing - make what goes on in there better?

180 days, when it began, was the longest school year in the world. Now it's the shortest. -We haven't gotten worse. They've gotten better.

That takes care of the workforce. Where do we stand in terms of the other three inputs?

WE can talk about capital. We save 4 percent of our income; the Japanese save 21 percent of theirs. How do you plan to outperform an economy that saves five times as much as you do?

Research and development? We put 1.8 percent of our GNP in civilian R&D. The Germans put 2.8 percent of theirs in civilian R&D.

I have what I call Thurow's Axiom #I. Most of the time, a German engineer with money is better than an American engineer without money. Not all the time, but most of the time.

Let's come to management. Between 1978 and 1986, the number of blue-collar workers in America fell by 1.5 million. That's a 5-percent cut. And in the same period of time, after correcting for inflation, private real output was up 18 percent. They're producing 18 percent more with 5 percent less; that's a 23-percent gain in productivity.

Over that same eight-year period, American firm added 10.5 million white-collar workers to their payrolls. A 23-percent increase in employment. Again, there was an 18-percent increase in output. So white-collar productivity fell by 5 percent. The decline in white-collar productivity offset the gain in blue-collar. We have over 60 million whitecollar workers, and only 30 million blue-collar. There are two people in the office in most U.S. firms for every one in the plant. If I went to downtown San Francisco and blew up all those office buildings, I would be raising American productivity growth! Gains in productivity in America will have to happen in the office. That's where all the people are.

The dawn of the information age hasn't improved management efficiency?

IN America, everything is management by numbers. So many times, I've walked into a CEO's office. There he's got a big pile of computer printouts on the daily inventories of the Singapore plant. But he never looks at them. And if he did look at them, what would he do? But it makes him feel good that they're there. It's security. Even though the numbers may be very expensive to generate.

The same thing with office automation. You've got to redesign the structure - who reports to whom and how. Giving a word processor to your secretary is a waste. What pays off is if you do the word processing and don't have a secretary.

What do you think of everyone's fascination with the Pacific Rim?

I THINK the talk about the Pacific Rim is basically talk about the past. Because all of the data on the Pacific Rim is dominated by the success of Japan. And we know that Japan is not going to be as successful in the next twenty years as they were in the last. Now they are a world leader and they can't grow as fast as they used to.

China's not going to boom for twenty or thirty years. It's a country with a per-capita income a $200. It takes you twenty or thirty years to ge your feet on the ground so you can start. Th Koreans are a good example of that.

Once you get past Japan and China, you're the talking Asian countries with very small populations. And there are other things. We don't count Latin America, but they're also Pacific Rim. They are basket cases. The Phillipines is a basket case Indonesia is a basket case. What country has the longest Pacific coastline of any country?. The Soviet Union.

Put all this together, and to say that the Pacific Rim will boom and carry the rest of the world with it is extrapolating trends from the past 30 years that can't be extrapolated into the future.

COPYRIGHT 1988 Point Foundation
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