Ralph Gomory discusses a potential social-economic conflict.
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GUEST: Dr. Ralph Gomory
I’m Richard Heffner, your host on The Open Mind.
And my guest today is Ralph Gomory, a mathematics Ph.D. from Princeton, who taught there, then worked at IBM for 30 years, retiring as its Senior Vice President for Science and Technology in 1989, when he became President of the Alfred P. Sloan Foundation.
Now, Ralph Gomory first joined me here some years ago to talk of Sloan’s profound concern about terrorism – biological, chemical, nuclear and in whatever other forms minds sick with hate might conjure up to injure us. Primarily, his concern was that Americans be able to think about the unthinkable … in order to be able to do something about it.
Indeed, our last Open Mind conversation also dealt somewhat with thinking the unthinkable, about global trade and conflicting national interests, the theme of a book Dr. Gomory had written with NYU economist William Baumol, Emeritus at Princeton and former President of the American Economic Association.
Today I hope Dr. Gomory will guide us further through the intricacies of globalization, outsourcing, off-shoring, comparative advantage, and so forth. Because when it comes to global trade, American corporate interests may be coming more and more in conflict with our real national interest … for so many of our corporations are no longer really American, but rather international in their scope, and therefore in the interests they serve. Maybe it is simply time to realize that now in the 21st century corporations by and large serve essentially their own interest, not ours, and should be taxed and regulated accordingly, until company and country truly stand together.
Well, last time Dr. Gomory told me he didn’t want us to live in a delusion about off-shoring and other practices extolled by some as simply part of inevitable globalization.
To which I said, “Delusion meaning that we can’t live in a world economic community just assuming that what’s good for the other fellow would be good for us?”
And Dr. Gomory replied: “The notion that whatever companies do is good for their country, that whatever trade occurs is good for everyone is a lovely and charming — a wonderful, I-wish-it-were-so-thought. I would like that world better. Unfortunately, we’re in this one.”
And I guess my guest just doesn’t think of this world as quite as benign as all that. Am I correct?
GOMORY: I, I think you have given a beautiful summary, in fact. I wish it were that world. But it isn’t, no.
HEFFNER: Can we make it, bring it … closer? Mustn’t we?
GOMORY: Yes. I, I really think we can. And, and oddly enough that sort of minority view because even those people who think that globalization may turn out to be harmful for the US, the next line of defense is always, “Well, there’s nothing you can do about it anyway.” And I don’t agree with that at all.
HEFFNER: What’s the “there’s nothing you can do about it anyway” based upon?
GOMORY: Well, you’re asking me, of course, to tell you their thoughts …
HEFFNER: I mean their thoughts.
GOMORY: Yes. Well, I, I think they say, “Well, it’s just the inevitable workings of the market, right?” If the other chap has the same productive capability and cheaper labor, well, you lose out. That’s it. There’s nothing you can do about it.
HEFFNER: Isn’t that the basis of Adam Smith economics?
GOMORY: Well, it’s the basis of, of any economics that I know of. But what it … but it takes a static view, right. Which is that you can’t change your capabilities. In other words, if the other chap has cheap labor and he’s learned your techniques, well, that’s the end of it. But that isn’t usually the end of it. Because maybe there’s something better that you can learn to do.
HEFFNER: Like what?
GOMORY: Well, that would a specific thing. But what I’d rather say is … “Look, why do we have competition from Asia now and we didn’t 25 years ago?”
It’s because they’ve learned to change their capabilities. Right? If they were still just sitting around in the rice fields growing rice, we wouldn’t worry about importing everything from Asia, because there wouldn’t be anything to import. And I would say, “Well if they can change their capabilities, we can change our capabilities.”
But we need to be motivated properly to find that … yeah, and we’re not, no.
HEFFNER: Well, you say we’re not …
GOMORY: We’re not.
HEFFNER: But …
HEFFNER: … how could we not be …
GOMORY: All right.
HEFFNER: … given the dislocations that are taking place?
GOMORY: Well, the problem, I think with the motivation is along the following lines. Corporations now and also in the past, are not motivated to help one country or another country, they’re motivated to make profits for their stockholders.
Now, I think it’s true that they pursue that now in a more single minded way. But to some extent that’s always been it. But, if you are in a fairly isolated country, it turns out that having them pursue their own profits … turns out to be good for everybody, right … in trying to make themselves more profitable they become more efficient, they turn out more goods. All the people they employ in making those goods more efficiently are part of your country, okay. And so, your country, as a whole, becomes more productive. I think it helps to think what is the real social function of a company from a nation’s point of view?
I think basically they enable us all to participate in the economy. One hundred and fifty years ago you didn’t need a huge organization to participate in the economy. You could have a small farm, you could be a shoemaker, right?
But today if you want to make the goods or services that people consume, like a telephone service or a car … you can’t do it alone, you have to belong to a corporation, or some similar organization.
And by belonging to that and helping it to make the car or the service … you get, in return, a slice of that revenue. And that’s your take home pay. And so you’re enabled to work in the modern world through this intermediary, the corporation.
Now as long as the corporation was confined to the country, that worked well. And if, if they could use your services more efficiently … there was more stuff made, and then that could be divided up, according to various rules of division. But, still … it was there to be divided up.
And what’s new, you see, now is that corporations have found … hey, we can make a lot of money in the following way … we’ll take our productive knowledge and take it over to Asia, we’ll put cheap labor offer in it, make the goods and import them back in.
Now, that means they’re not longer using the Americans to make the stuff. The Americans are buying the stuff, but in order to buy it, then you’d have to be part of something else. And that, if it pushes too far, is, is very bad.
In other words, the corporations have stopped doing the job of employing people in the United States. They’re doing it for the world.
HEFFNER: We used to applaud that notion. When I was going to school …
HEFFNER: … that notion was “one world”.
GOMORY: Yeah. Right. And, and I think there’s something to the “one world” notion. But I think if you look very carefully at foreign trade, which Will Baumol and I have done … as you remarked earlier, you’ll find out this kind of pattern. If you have a trading partner, and they’re very undeveloped … the way Asia was, let’s say 30 years ago … then, if they start to develop … and start to develop their productive capabilities, actually that’s not only good for them, which it is. But it’s also good for us, even if we lose industries to them.
But as that progresses and goes …they start to look more like us … it turns around. And then the things … the jobs we lose to them, or the productive capabilities we lose to them, turn out to be negative for us. So, it’s not a completely simple picture.
HEFFNER: And where are we then …
HEFFNER: … if, if this seesaw …
HEFFNER: … moves in the one direction …
HEFFNER: … where are we at the end of that first …
GOMORY: You mean “right now?”
GOMORY: I think the seesaw is tilting …
HEFFNER: Still moving in that direction?
GOMORY: Yeah, well, which direction do you mean?
HEFFNER: Well, the one that you were referring to as beneficial.
GOMORY: I don’t know. I think we’re at the turnaround point pretty much. Now, I must say … that’s … it’s a judgment call. Right.
HEFFNER: When you say, “turnaround point”, what do you mean?
GOMORY: Turn from being good to bad.
HEFFNER: And what would, what would signal that?
GOMORY: Well, if you take a theory very seriously … once their wages are … well, it depends also on the size of the country.
But I would say for a country that’s bigger than you are … if their wages exceed a fifth or a quarter of yours, it’s right around at that point it turns around.
But that’s very rough. That’s very rough. I mean you can’t take very simple models that seriously. What you should take seriously is that if they develop a lot and start to look a lot like you … it’s bad news.
HEFFNER: Bad news for us.
GOMORY: For us. It might be good for the world. Right. It’s surely good for the corporations.
HEFFNER: Now what you would like to see is that … well, I, I don’t understand …
HEFFNER: Would it be fair or unfair for me to say that you would like to see that reversed?
HEFFNER: Because you do like the notion of something being good for the world.
GOMORY: I like, especially those things that are good for the world and are good for the United States.
HEFFNER: Well, in this instance, though …
HEFFNER: … this hasn’t been so good for the United States, has it?
GOMORY: No, but I don’t think we have the right motivations in place to make it good for the United States.
HEFFNER: What do you mean?
GOMORY: Well, supposing corporations were motivated to invest and invent new ways of doing work in the United States, that made the United States even more productive. And, in fact, that there was almost no alternative to doing that. Rather than using their capital and knowledge to, to build up … to build factories in China and India … or … yeah … or to do both, for that matter.
HEFFNER: But they wouldn’t want to do that, would they if they thought it were more profitable for them …
HEFFNER: … to continue on the …
GOMORY: The present.
HEFFNER: … paths they’ve been following.
GOMORY: No. That’s a very good point, Dick. If it’s more … if it’s easier and more profitable, and sometimes it’s hard to tell the difference … to just do your standard production but to do it with cheap labor in China, then you don’t have an incentive to find a more productive way of doing it in the United States.
HEFFNER: Unless …
GOMORY: Unless …
HEFFNER: … the national … our national interests were at stake, too.
GOMORY: But it isn’t part of the corporation’s job as it is currently structured to take our national interest into account. We would have to add something to the motivation. And I believe we could and we’re not doing it.
HEFFNER: What would you add?
GOMORY: I would say that we have a tremendous lever … over corporations in the form of the corporate income tax. Because basically … when, when we say casually that corporations need profits, they really need after tax profits because that’s what they give to their shareholders.
So, a corporation could run up a very large pre-tax profit and then if they had to pay a very hefty income tax it wouldn’t be very good for them.
And so if we made the income tax dependent on their behavior, on whether or not they were creating high value, adding jobs in the United Stats by investing along side their workers, that sort of thing. Then we could get the kind of behavior that we want. And I suggest that we should do that. We should incent our corporations to find new ways to work in America that are more productive per worker hour. And if they are low at that, then they should pay a very high income tax. And they should … that would motivate them to find new ways to work.
HEFFNER: Does that make us … would that make us something of a mercantilist nation?
GOMORY: I’m vague on what a mercantilist is.
HEFFNER: Well, I, I think of …
HEFFNER: … when I used to teach …
HEFFNER: … the first year of American history, and I would …
HEFFNER: … get all wrapped up in the notion that we were being mistreated …
HEFFNER: … by the Mother country because we were being used by her …
HEFFNER: … for her purposes and you seem to be saying we used taxes to make certain that our corporations treat us …
HEFFNER: … we’re in the catbird seat …
HEFFNER: … and, uh, what’s the opposition … it seems so sensible?
GOMORY: I agree with you. It seems very sensible to me, and to a few other people.
HEFFNER: And the opposition? Comes from the corporations themselves, of course.
GOMORY: Well, not necessarily. I talked to quite a few CEO’s who say, “that’s not such a bad idea.” Ahh, I know … you know I’m on some Boards and things … and, and I notice that the Directors are worried. They’re not worried so much about the company.
I’m on the Board of a company that does R&D in the Philippines and assembles the product in China, right. But they think, “what going to happen to my grandchildren?” That’s usually when … with corporate Directors … that’s … they’re passed the worry about the children’s fate.
And so I, I think a lot of them would be … are looking for something that might help align the corporate interests with the country’s interests. And, ah, I don’t think this would be bad for the world at all. Because what we would be doing would be pioneering new ways to work, which could be copied later. And if the whole word became more productive that would be good for the whole world.
But right now, you’ve got a way of producing and you’ve got cheap labor to do it, that’s what you do. Because you’re not incented to find a better way to work.
HEFFNER: Won’t you be accused of standing in the way of opposing free trade … that wonderful shibboleth?
GOMORY: No, I don’t think … I think you’d have free trade under these circumstances. Why not have free trade? This is not a trade policy, this is an internal tax policy.
HEFFNER: Designed to affect …
HEFFNER: … the relationship between countries, right?
GOMORY: Not really. It’s really designed to incent our companies to produce more out of each American worker. That’s the thing.
HEFFNER: What’s your “bet” as to the … you talk about the response among those corporate leaders who, as you say so nicely …
GOMORY: Well, it …
HEFFNER: … are concerned about their grandchildren.
GOMORY: They are. I mean … one thing you have to realize … sometimes in political discourse … they talk about corporations selling out America, or, you know, Directors not giving a damn about the country and all that sort of stuff.
I don’t think that’s it. I think it’s a system problem. The system drives them to do those things because if they don’t … I mean for instance, if we did not assemble our product … the one I’m talking about … in China … our competitors are doing that. We’d be out of business. That’s all. Right. So, we’ve got to change the system. It’s not a question of lecturing corporations about their duty to America. They feel that it is their duty to, to work for their shareholders. And we have to take that impetus and that desire and transmute it through the corporate tax. Because we’ve got a tremendous lever there. They make profits, but they don’t get to keep them. Because the corporate … use that lever.
HEFFNER: It’s such an interesting formulation. You say you’re not talking about bad men …
HEFFNER: … you’re talking about a system that leads in a certain direction …
HEFFNER: … inevitably.
GOMORY: That’s right. You see the system … as long as you’re primarily in one unit … the United States … the system led inevitably to, you know, rapid development and, and all that sort of thing.
But even within the Untied States, the system would impact one region at the expense of another. For example, you … when you and I were both young … which is at least the year before last …
HEFFNER: (Laughter) Right.
GOMORY: … a lot of the textile mills discovered that they could produce more cheaply in the South than in New England. And they migrated. Right. And no one talked about free trade or anything else because they assumed there was free trade between Vermont and North Carolina, right?
And, so in that case that damaged the people in Vermont and it helped the economy of North Carolina. So, even within our unit you can have unequal impacts as … And now the world is the unit, and you can have unequal impacts on countries of that kind of shift.
Just as we had a bad impact on New England and a good impact on North Carolina.
HEFFNER: How does it …
GOMORY: But I want to add one other thing …
GOMORY: … one of the remarkable things about the new development is there’s no central government. You see … in the US we went through the period of the robber barons and everything and eventually … they, they had a great productive impact, but they also did some pretty ruthless things. And they developed some pretty formidable monopolies.
And the central US government, a lot of it due to Teddy Roosevelt … got involved in the situation and then we had anti-Trust, which is a very important thing to have … right … came out of that … because there was a central government.
Once you get beyond the United States, once your multi-nationals, or as they now call themselves more global corporations are out there, there’s no one … there’s no Teddy Roosevelt. There’s no world government that restrains them. So that’s a whole new game. That’s a whole new world.
HEFFNER: So then you have to do what you do here, in terms of national legislation.
GOMORY: That’s right. We have to, we have to find a way to deal with it ourselves.
HEFFNER: How does that … how does it … how does it relate …
HEFFNER: … to a traditional American “don’t fence us in, don’t touch us, don’t regulate us, don’t monkey with ‘natural’ law, the natural process”?
GOMORY: I don’t think … I don’t think there’s anything really very different about this.
HEFFNER: Than what we’ve done in the past?
GOMORY: Well, let’s take it at a personal level, all right? There’s enough of a consensus in Congress that home ownership is good for the country, that we have, in our personal income tax, structures that incent home ownership.
You can deduct interest on a home mortgage, I guess, but you can’t deduct your rent. And that’s because of a widespread belief that doing that is good for the country in the long run. I don’t know if that’s right or wrong, but we’ve done this kind of thing … this is exactly the same thing.
Only it’s at the corporate level which is … we shape the corporate tax to try and have the corporations act in the national interests. Just as we shape the personal income tax to try and have people own homes rather than rent.
HEFFNER: And which are the lobbies
HEFFNER: … that will work in the direction … for the direction you want us to take?
GOMORY: Well, now, I think you’re putting … you’re … finger on a difficult thing. I don’t, I don’t think most corporations lobby for it. I’m not sure they would kill themselves to fight it either. But they’re not going to … I mean they’re doing fine right now … all right … and you’re pretty wise if you’re doing well to not tinker. Right.
On the other hand, people are feeling the impact. They aren’t going through this theoretical analysis that Will and I go through or these proposals that I have made. But they just see bad things happening to them.
HEFFNER: The unemployment, for instance.
GOMORY: The unemployment …the devastation of certain areas … near Pittsburgh, for example, where so many of the steel mills have disappeared. And they say, “Well, that doesn’t seem good. These companies are not acting in my interest, that’s for sure.” So I think you get a certain … I think the lobby for this thing will be the people. And, and some people can read into the recent election results, that people who ran on that sort of thing, did well.
HEFFNER: There are those …
GOMORY: I’m not an expert on those things.
HEFFNER: There are those who say that, after all, the numbers involved haven’t been so great … yet.
HEFFNER: You’re … I think … assuming that the numbers of people who are affected will grow and grow and grow.
GOMORY: I think it will. Definitely.
HEFFNER: And, and the ameliorative efforts being made don’t seem to …
GOMORY: Well, I’m not sure I know what ameliorative efforts you’re thinking of.
HEFFNER: Educate someone for another job. I know, I know how you feel about this …
GOMORY: Yeah, well …
HEFFNER: … you take a 50 year old man who’s worked 30 years in a steel mill …
GOMORY: No. I think that stuff is … that’s very hard to do. I think that’s pretty unrealistic. I mean it’s better to try than not to try, but hell, if you, you’ve been working in one field for 50 years you know a lot of things. You know a lot of people, you know how to do things, how to get along. And the idea that you’re going to start over at the bottom of some other ladder, it’s really unrealistic. I mean it’s better than nothing. But why, why should we go through that? I don’t …
HEFFNER: Well, the answer to that question of “why should we”… I’m not talking about “should” …
HEFFNER: I’m talking about the powers that will ally themselves against making the kind … you’ll forgive me … to me seemingly very wise and very natural …
GOMORY: Well, I think, I think it is fairly natural. And I’ve had the experience of discussing this with people … and they sort of … “well, that seems pretty strange.” But then after they’ve had a chance to think it over, they say very much what you just said … it seems fairly natural to do that. Which doesn’t mean it will happen, you know. But that, that’s something else.
HEFFNER: Dr. Gomory, have we in the past, as a nation …
HEFFNER: … moved this rationally, this realistically … I, I’m serious about that. In terms of …
GOMORY: Well …
HEFFNER: … our chances to do so now.
GOMORY: I don’t know how much of that sort of history there is. But we didn’t have to deal with foreign countries. In other words, we grew up between the two great oceans. I mean when I, when I was growing up … if you wanted to go Europe by the fastest method … it took you five and a half days. And cost a hell of a lot. (Laughter)
HEFFNER: So we …
GOMORY: And talking to someone in Europe … that was really new and exciting and cost an arm and a leg on the phone. They just weren’t there. I mean there was … there was trade … trade has become much, much larger. So we really lived in an American isolation, economically.
That’s no longer the case. So we’re facing these problems for the first time. And also we’re facing other countries that, that are, are playing by different rules. In other words, one great weakness in what I’ve said is the following. Supposing we have this tax structure and no one else has it … right. Who’ll come here? What companies … or should they just leave. Supposing they all leave and say, “what the hell I don’t have to play with this game. Right. We’ll go to China, we’ll make our stuff there and ship it in.”
Now you can’t actually do that if you have balanced trade. Because you’re limited in how much you can import and by, roughly speaking, how much you can export. So that’s a natural barrier. In other words, if the present companies all migrated to Asia, and started shipping their stuff here, if we had balanced trade, we would have to …American companies would have to spring to life under those rules and ship stuff out, or we couldn’t ship stuff in. and they couldn’t ship stuff in, they wouldn’t have access to the market. Not because we would deny it to them, but because there wouldn’t be any way to balance … nothing to ship in the opposite direction. But the problem is that the trade isn’t balanced and we would have to balance it. But that’s all part of economic theory … it usually assumes that trade is balanced because if one country develops a lot, their wage goes up and so on. But the wages in Asia don’t go up because that’s a deliberate policy.
HEFFNER: Clearly there are a lot of things to consider in this …
GOMORY: There are. But, by the way, these are all fixable things. And I hope to tell you later how.
HEFFNER: But not this time because …
HEFFNER: … I’m getting the signal our time is up.
GOMORY: Oh, that’s terrible.
HEFFNER: Ralph Gomory, thank you so much for joining me again today.
HEFFNER: And thanks, too, to you in the audience. I hope you’ll join us again next time. For transcripts of today’s program, please send $4.00 in check or money order to The Open Mind, P. O. Box 7977, FDR Station, New York, New York 10150.
Meanwhile, as another old friend used to say, “Good night and good luck.”
N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.