Interview with Lester C. Thurow
Lester C. Thurow is professor of management and economics at MIT and was recently Dean of the MIT Sloan School of Management. A graduate of Williams College, Thurow received his M.A. on a Rhodes scholarship from Ballioi College (Oxford) and his PhD in economics from Harvard University. He taught at Harvard in 1964-65 following a term as staff member on President Johnson’s Council of Economic Advisers.
In addition to his academic appointment Thurow is vice president of the American Economics Association, author of the notable The Zero-Sum Society, and his latest book is Head to Head: The Coming Economic Battle Among Japan, Europe, and America.
Aczel: Let’s start with something most timely that’s happening right now. In Chapter 6 of Head to Head you mention the possibilities in the Middle East with Israel possibly supplying technological know-how to the Arab states with oil and other products. With what’s happening just right now, how do you see… Thurow: Well, it all becomes a little more optimistic, right? One of the interesting things in the Middle East is that if you’re looking forward and looking at the economy, it’s a little hard to figure our exactly what goes with what. Until the Moslems invaded Tunisia or Algeria (they had different names then), they would have been regarded as part of Europe, and were more central to Europe than countries like Norway and Sweden. You also have, of course, Turkey and Turkey can now look east to a big Turkey because if you take all the tens of millions of Moslems in the Soviet Union, everybody speaks Turkic languages and so there’s a kind of big Turkey out there. And then you get the Egypts and the Persian Gulf countries. And so I think exactly who goes with whom and what economy is up in the air. The problem is that is you don’t have peace in the Middle East, one, I think it’s very hard for anyone to be successful, but two, Israel gets left out, since it doesn’t have any natural economic allies unless there is peace. Aczel: Let’s move to other places. How do you see what’s happening with NAFTA (North American Free Trade Agreement)-how do you see that developing? Do you see us becoming – this is a strange way to put it – but do you see North America becoming a cohesive common market in the sense the Europe is already? Thurow: Well, I think it’s going to be very hard to integrate Mexico and the United States because we’ve never tried to do it between countries that have such different income levels. If you look at the income difference on a per capita basis, say between Germany and Greece, which is the biggest difference in Europe, that’s a much smaller income gap than the gap between Mexico and the United States, and Greece is of course, a relatively small country compared to the rest of Europe. Mexico has 90 million people. It’s a very big country even in comparison with the United States and so I think the question about how you make this kind of integration move work smoothly…There are going to be some losers on both sides, but so that it’s mostly winners on both sides, it’s going to take a lot of effort, a lot of management effort from government and a lot of people. Aczel: Staying in this region, what do you think of our economic problems in general? In your view, is the new (Clinton) administration on the right track? Thurow: Well, let me back up. The real problem is the world now has five years under its belt of a world growth rate of less the 1 ½ percent, some countries better. Some countries worse, but the average 1 ½ percent. And a world economy doesn’t work very well at 1 ½ percent because there’s a simple mathematical rule that determines whether you generate jobs or lose jobs. If the rate of growth of demand for goods and services is higher than rate of growth or productivity, you gain jobs. If the rate of growth of demand for goods and services is lower than the rate of growth of productivity, you lose jobs. On a worldwide basis, we’re losing jobs. And the only question is what country do they pop up in. That’s a problem that is not solvable by any one country, even if you’re as big as the United States. I think you could look at the Clinton original strategy- just the American part of the strategy opposed to the world part of the strategy- it made a lot of sense. He had about $60 billion worth of fiscal stimulus, about $100 billion worth of investment in skills and infrastructure and $500 billion worth of deficit reduction, where the tax part of the deficit reduction was based on some kind of broad-based consumption tax. The problem is the $60 billion worth of stimulus got killed by the Republican filibuster. The $100 billion worth of investment in skills and infrastructure got lost, and he got his $500 billion worth of deficit reduction, but it wasn’t based on a broad-based consumption tax. And the reason he needed a broad-based consumption tax was one, we need to get consumption down, and two, he needs a tax because he’s going to have to do deficit reduction two years from now and to pay for health care. And he raised most of the money on the tax side from raising the maximum rate on the personal income tax, but that’s now all over. He can’t do that again. So, I think the original strategy was about right but he’s got himself in a box now. Aczel: Let me ask you, since the book is on statistics, what kind of statistical methods do you use in making predictions toward the next century? Thurow: Of course, most economic predictions these days are based on very elaborate econometric models that would have hundreds of equations using the kind of statistics you would use to manipulate time series. So, if you take almost all of the forecasts people make about economics now they are based on some sort of underlying statistical relationship that people have found out. What you’re trying to do is obviously have those statistical relationships reflect economic theory. One of the things that probably should be said is that economists have learned in the last 30 years, when computers first came in and you started being able to empirically do complicated statistics, people thought that statistics were going to be much better at helping economists weed out theories that were incorrect than they’ve proved to be. One of the things that’s happening is if you believe a theory strongly enough you can usually find some statistical way to show that it is at least plausible. So statistics has not been so powerful as weeding out wrong theories from economics as people thought it was going to be 30 years ago. But the answer is it underlies everything people talk about empirically. Aczel: Let’s go back to economics. How do you see further economic developments is the Soviet Union? Thurow: One of the interesting things, of course, is you’ve got one big country moving from communism to capitalism, not very well, the Soviet Union and Russia, and another big country doing it very well, communist China. And I think one of the interesting questions to ask is why is China doing it so well and the Soviet Union doing so badly? I think the answer is China has three big advantages: One advantage is it has a government that works and you can’t move from communism to capitalism without a government able to make decisions, and one of the big decisions you have to make is who owns the property. Until that decision is made it is impossible to have a market economy. The Chinese government has been able to make those decisions- hand out the land, hand out the apartments, hand out the buildings, sell off enterprises, whatever. The government in Moscow, in Kiev, have not been able to make those kinds of decisions. The second big advantage is that China has been getting a Marshall Plan from the overseas Chinese: Taiwan, Hong Kong, Singapore, American Chinese, Indonesian Chinese. It involves tens of billions of dollars, but more importantly it involves management talent. You if you go to the factories in southern China, you’ll find most of the factory managers in fact come either from Taiwan or from Hong Kong. The third great advantage is that when Stalin was running the (Soviet Union), he believed in giganticism and so they built these enormous factories in Russia that nobody in capitalism knows how to make work. Chairman Mao believed in backyard steelfurnaces. In some sense it was equally crazy because Marshall Stalin had diseconomies of smallness. But now when it comes to privatizing and making them into private industry, it’s much easier to do it in China than it is in Russia. Aczel: They have to dismantle it to change it? Thurow: Physically you can’t change it. In Russia supposedly 77 percent of all the products are made in one and only one factory for the whole Soviet Union. Well now that it’s 15 countries, it means, for example, you have all the oil well equipment manufacturing in Azerbaijan and how does the rest of the Soviet Union get it’s oil well equipment? They find it difficult to trade with each other. It isn’t easy to know what to do because, physically, these facilities exist and in the short run they can’t be changed. Aczel: What will happen in China or will there be much of an effect in 1997? Thurow: Well, if you look at Hong Kong in 1997, the economic part of it has already occurred. The Hong Kong economy no longer exists. It’s part of mainland China. The political problem hasn’t been solved, and of course one of the things that happens is that the people in Beijing are very suspicious about the British because the British ran Hong Kong for a couple of hundred years and never let the Chinese vote. All of a sudden the British are going to leave it and they get interested in democracy and talk about letting the Chinese in Hong Kong vote. If you were sitting in Beijing you’d probably be a little bit skeptical about that, too, very cynical I bet. The real problem in China is politically nobody knows what happens when Deng Dau Ping dies. Aczel: Help from the West would increase when they make more headway on the political side, wouldn’t it? Thurow: That’s probably true, but I’m not sure the Chinese think they need help from the West. Aczel: But they are quite on the right track, and as you said earlier, they are actually doing a lot better than the Soviet Union? Thurow: If you were making some measure of moving toward democracy, the Soviet Union is doing much better than China, although obviously not perfect. If you’re measuring economics, then obviously China is doing a lot better than the Soviet Union. Aczel: What about other Asian countries? Can you say something more than is in your book about Japan and the Tigers and anything else in that region? Thurow: The thing to remember about (the Asian countries) (we call the economic tigers) is that they are all small in terms of population. Hong Kong is going to disappear in 1997 as a separate country, but Hong Kong and Singapore are cities, just a few million people, and Taiwan, North Korea and South Korea are both relatively small, especially Taiwan. If you think about it, being the century of Asia, leaving Japan on the side for the moment, in order for Asia to make it, one of the big countries of Asia has to do it in the developed world, and that means China, India or Indonesia. Aczel: With respect to Japan again, do you think the key to success in manufacturing as some people think is strict quality control measures or do you think it is a lot wider than that? Thurow: Well, I think it’s a lot wider than that, although they’ve certainly been leaders in using statistical quality control inside their companies. The basic answer is they put a lot of money, a lot of time and attention, a lot of talent in there. One of the things that is interesting is if you look at R&D (research and development) budgets, America and Japan spend about the same fraction of the GNP on R&D. In the United States we put 2/3 of our R&D money into inventing new products and 1/3 into improving processes. The Japanese put 2/3 into improving processes and 1/3 into inventing new products. And surprise of all surprises, we are both very good where we concentrate. When it comes to inventing new products, Americans lead the world. When it comes to improving processes and product quality, the Japanese lead the world. And so I think the answer is they’re good where they concentrate their talents. A country like the United States is also good where we concentrate our talents. The problem is that in today’s environment, there seems to be more payoff in concentrating your talents on improving processes than there is in inventing new products. It’s easy to copy a new product, reverse engineer. It’s not easy to copy and reverse engineer a new process.
