Economic Policy and the National Interest

GUEST: Dr. Ralph Gomory
VTR: 7/09/2004

I’m Richard Heffner, your host on The Open Mind. And I admit that it’s hard for me to believe that it was only a dozen years ago that the success of Bill Clinton’s first Presidential campaign was heralded by the Democrats famous observations, “It’s the economy, stupid, it’s the economy”.

But since history just may repeat itself … or not … it’s worthy looking at one particularly intriguing aspect of current economic concerns. That of global trade and conflicting national interests.

The title, not so incidentally, of a book written together with NYU economist William Baumol, Emeritus at Princeton as well as former President of the American Economic Association, by my Open Mind guest today … Dr. Ralph E. Gomory, noted mathematician, former IBM Research Director and present Alfred P. Sloan Foundation President.

Now Dr. Gomory knows that my eyes glaze over at the barest mention of the “dismal science”, but has nevertheless kindly promised to help guide this clearly economically impaired television host through the intricacies of globalization, outsourcing, off-shoring, comparative advantage, and so on.

As I ask him to tell us what relevant trade matters he testified to before the Senate Democratic Policy Committee some months ago. Indeed, I would first ask my guest if there is a plank for any political party – Republican or Democratic – to adopt as a national economic policy that will equally benefit our country, our citizens and our companies, no less than our country and other countries we wish to see prosper.

How about it? Is there a plank that magically would accomplish all of that for our parties and ourselves?

GOMORY: Well, I’m, I’m glad you put the word “magic” in there.

HEFFNER: It is … it would be magic …

GOMORY: Well, I think … yes … the sort of thing that, that people are looking for, which would be a quick cure, would be magic. The sort of thing that wouldn’t be magic is much slower acting. Like better education, better infrastructure in the company, better broadband communications. Things of that sort.

HEFFNER: Why do you say those things? I mean what we usually …

GOMORY: Yes.

HEFFNER: … think in terms of the … a balanced budget … we usually think in terms of no trade barriers, etc.

GOMORY: Well, I don’t, I don’t want to get into the general economics, but you mean when we’re talking about trade …

HEFFNER: Go ahead.

GOMORY: … well, I’m … I think no trade barriers are probably a good thing. But, we have that more or less now. And so that … I can’t prescribe that as a magic plank.

HEFFNER: But you do see education and repair or elaborating upon infrastructure …

GOMORY: Well, maybe … we have to understand what the problem is with the off-shoring and international trade, right. Because if there weren’t a problem, it wouldn’t’ be a political issue. And the problem is that people are losing their jobs. And when that happens, when people … call centers move from Florida to India, or the assembly of printers moves from Tennessee to China, people lose their jobs and that is what makes it a political issue and the issue that is raised is that not only bad for these people, but is that good for the country at the expense of these people?

And a lot of people, a lot of economists will tell you … “yes”, it’s local pain, but it is more widespread gain.

HEFFNER: Are you one of those economists?

GOMORY: Well, first of all, I think the answer is “no”, “no”.

HEFFNER: Why?

GOMORY: Well, I would like to ask them why they think it is good and they usually respond in terms of this mysterious thing called “comparative advantage” …

HEFFNER: You were going to explain that.

GOMORY: … you said I was going to explain it.

HEFFNER: … I …

GOMORY: I would try and say that it’s irrelevant in spite of all the people who run around saying “This is the natural effect of something called comparative advantage”. And that isn’t, that isn’t true. What’s really happening is that you have one economic equilibrium … that economic equilibrium … with the normal state of affairs where people produce stuff and it’s sold and it has a price and all that.

And then if something happens, like another country learns to do call centers or it becomes possible to do call centers because of technological change, which makes it cheap enough to answer the phone in India when you’re picking it up at this end … then you move to another equilibrium. All … the thing, whatever comparative advantage is … both of these equilibrium satisfy comparative advantage … every economic equilibrium does this … its just a kind of widespread misunderstanding.

The real question is this: when you move from where you were to the new equilibrium, is your country better off or worse off? And yet comparative advantage can’t tell you that because both before and after satisfy the condition of comparative advantage. So, that’s just one of the unfortunate misunderstandings, red herrings, or whatever it is.

HEFFNER: But I was brought up in a time …

GOMORY: Yes.

HEFFNER: … and in schools where we were taught, to the degree that we were taught anything … that there was somehow … again, I’ll go back to the words …

GOMORY: Yes.

HEFFNER: … word … “a magical …” …

GOMORY: Yes.

HEFFNER: … curative …

GOMORY: Yes.

HEFFNER: … something …

GOMORY: MmmHmm.

HEFFNER: … about assuming that well, if locally, as you suggest …

GOMORY: Yes.

HEFFNER: … workers are out of work …

GOMORY: MmmHmm.

HEFFNER: … at least somewhere else many more workers are at work …

GOMORY: Yes.

HEFFNER: … and in the long run …

GOMORY: Yes.

HEFFNER: … things work out well.

GOMORY: I think that if that’s within a country, that’s correct. In other words, you can make an argument that when the Midwest was opened up for, for farming that wasn’t really good for the farmers in Vermont. Right. They found it quite difficult to compete. Right.

But the entity for which this was beneficial was the United States. Not Vermont. Okay. So you could say, “Well, that was good for the country (the United States), bad for Vermont … good for the Midwest.”

HEFFNER: Does that, does that meet … I’m sorry, go ahead.

GOMORY: … Is this a situation where it’s quite analogous. Right. You can say, “What’s happening is good for China, might be bad for the US. Good for the world.”

Well, that’s … that might be a little closer to the situation. You see the entity that contains both … China and the US isn’t the US anymore.

HEFFNER: Do you … do you reject the notion that it is time and we have to think globally.

GOMORY: That’s too … to think globally about what, you mean …

HEFFNER: Well, just what you’d say … the example you just offered.

GOMORY: Well, the question is … do we want to bring our standard of living down to the Chinese? I mean you have to be quantitative. Certainly, the best thing is they should prosper and we should prosper.

HEFFNER: MmmHmm.

GOMORY: Okay.

HEFFNER: But you seem to be saying it’s a zero sum game. You don’t do that. He prospers or we prosper.

GOMORY: Yes. And that’s a very unpleasant thought. So let me just say it … just the way you did. One of the things that we point out in our book and one of the reasons why people don’t like it is precisely this. Yes. Under the present, under normal free trade circumstances … if one country gets better and better, it’s … after a certain point, it’s at the expense of the other country.

There is conflict, that’s why the name of the book is “Conflict in International Trade” and that’s why people don’t like to hear that message.

HEFFNER: It’s interesting that hear and elsewhere you emphasize the fact that it’s okay when you have a severely undeveloped …

GOMORY: Yes.

HEFFNER: … underdeveloped …

GOMORY: Yes.

HEFFNER: … country …

GOMORY: …that’s right.

HEFFNER: … to be helpful.

GOMORY: Yes. It is.

HEFFNER: But … you don’t want to be that helpful to a country that may already be a competitor.

GOMORY: Well, I won’t try to judge for you what you what you want to do. All we try and do is point out the consequences. If you’re dealing with a very underdeveloped country, it will turn out, generally, to be in the interest of both countries … for them to actually take over some of your industries.

HEFFNER: As India, perhaps?

GOMORY: Ah, the question of exactly where India is, is a difficult one. I think they’d probably be borderline. You see, India consists of some educated people and a whole mass of other people, you know. Exactly where that leaves you is not clear.

But why don’t … if you let me give you the general statement and then we can come back to where we are …

HEFFNER: Please.

GOMORY: … in it. What we, what we try and show in the book is that if you’re dealing with a really low wage country … it’s actually to your advantage to lose some industries to it, or to off-shore some activities to it. Yours and theirs, both. As they become more developed and look more like you, it turns around. It continues to be to their advantage to take more and more off-shoring jobs, but at a certain point it turns around.

Now, what you’re asking is “Where is India?”, or “Where is China?” Are they at that point? It’s actually very hard to know because we have almost no facts on the extent of off-shoring or exactly the wage levels that are involved, and so forth. But if I had to make a guess, I would say, they’re probably approaching that point. There’s not there yet. But if you look a little bit ahead, I think you can see it happening … yes.

HEFFNER: But, you’re also saying, I gather, that any countries that are further developed …

GOMORY: Mmmmm.

HEFFNER: … than wherever China is … wherever …

GOMORY: Oh, yes.

HEFFNER: … India may be …

GOMORY: For instance …

HEFFNER: …business?

GOMORY: Let’s take Japan, or let’s take Europe. Okay? If, if we were off-shoring things to Japan at a great rate that’d be undoubtedly the case that we would be … losing by doing that. And they would be gaining. We would definitely be in the conflict, zero-sum, or whatever you want to call it … situation.

HEFFNER: Are we in that situation?

GOMORY: It isn’t quite zero-sum because there’s some overall gain, but not enough to compensate for the loss.

HEFFNER: Does this make you a mean, mean man? Or simply an economist or a mathematician …

GOMORY: It makes me a lovely person who is trying to, to show people what’s really happening so they won’t live in delusions.

HEFFNER: Delusion meaning that we cannot live in a world economic community assuming that what’s good for the other fellow would be good for us?

GOMORY: The notion that whatever companies do is good for their country; whatever trade occurs is good for everyone is a lovely and charming … a wonderful … I-wish-it- was-so-thought.

HEFFNER: But it’s not.

GOMORY: I would like that world better. Unfortunately, we’re in this one.

HEFFNER: Do you think most Americans, and most American politicians …

GOMORY: Mmmm.

HEFFNER: … recognize that?

GOMORY: I cannot speak for most American politicians, believe me [laughter] … the ones I know don’t think in those abstract terms very much.

HEFFNER: But … you say “abstract”? You’re in a sense … everything …

GOMORY: Most of …

HEFFNER: … about your book is just the opposite of abstract … you’re saying …

GOMORY: Well, it’s …

HEFFNER: … let’s talk about facts.

GOMORY: You talk about … if you talk with politicians, the thing that is one their minds about off-shoring is primarily … and I hate saying things … “if you talked with politicians”, as if I talked with every politician and am now giving you a statistical analysis. But my best … my own encounters … very limited and so forth …

The thing about off-shoring that has made it an issue, isn’t the long-term outlook, it’s what it’s doing to people now. People are losing their jobs. People who’ve spent their lives in steel … don’t have steel to make and they don’t have jobs to make steel. And then you come and say “Well, we’ll re-train you for something new.” That’s not very realistic.

HEFFNER: Why isn’t it very realistic? Because …

GOMORY: Well, because …

HEFFNER: … we’re not doing it?

GOMORY: First of all, where they live … steel’s the thing. Right. There’s no equivalent. Second, they’ve spent lives learning how to make steel, something else, they’re going to start over. What are they going to become … computer programmers? You know, if you’re 50 years old and you’ve worked for 30 years in steel … it’s not reasonable to think you’ll get an equivalent job in something else.

So that’s the pain and the pain does not go away and it’s real and politicians see that. Okay. So the dominant element is the real and actual pain of people being displaced. Right. And then, in the background, you hear noises from economists and others who wish it were so … “It’s really all for the good, in the best of all possible worlds”. We disagree with that. It may or may not be depending on the specific situation. And we feel it’s better to face that unpleasant reality than to pretend.

HEFFNER: Well, let me ask you this, Dr. Gomory.

GOMORY: Yeah.

HEFFNER: This, this is really where I’m puzzled …

GOMORY: Yes.

HEFFNER: … I don’t know whether you’re saying …

GOMORY: Mmmmm.

HEFFNER: … at the moment …

GOMORY: MmmHmm.

HEFFNER: … and for the moment …

GOMORY: Yeah.

HEFFNER: … and in this location, for this location … this is tough stuff …

GOMORY: Yes.

HEFFNER: … it’s a tough diet and we shouldn’t expect people to have to swallow this in terms of being a good neighbor, or being not a good neighbor … being a generous person, or letting our companies make more profits by outsourcing and the like. Are you saying that it’s more than temporary?

GOMORY: No …

HEFFNER: … or are you saying, “it’s too tough right now”.

GOMORY: Well, I’m not sure I followed the question.

HEFFNER: Well, it work itself out as we would want?

GOMORY: Will it work itself out?

HEFFNER: Yeah.

GOMORY: No. No. I mean …

HEFFNER: Naïve question?

GOMORY: … it will move to a new situation, but the new situation may be worse.

HEFFNER: What do you mean?

GOMORY: If … working, working something out …

HEFFNER: Yeah.

GOMORY: … I mean “will it work itself out”, does that … does that imply … are you asking “will we be better off for it?” I’m saying, “Well, we’re not at all sure of that. And there’s no theory that says we will. Then you have to look at the particular cases. And may people say, “Yes, there’s a theory that says we’ll all be better off”. There isn’t.

HEFFNER: Then the theory is wrong.

GOMORY: No. The theory … the actually theory, if you work it out correctly, says you can have a problem.

HEFFNER: Are more and more economists coming to look, as you and your associate have looked at this problem?

GOMORY: Yes. I think … I think we’re going to see some very prominent people writing papers in that direction.

HEFFNER: What is that likely to do to our political structure?

GOMORY: Well, I think it may be kind of comforting to, to, to many politicians because they’ve been living with the pain of their constituents losing jobs and at the same time a lot of people are telling them, “Well there’s a theory that says this is really okay.” So they’re kind of caught. And I think, it’ll, it may, in fact, simplify their lives … if they realize there is no automatic guarantee that this pain is for some good purpose.

HEFFNER: Is, is there another pain that we will be imposing by this recognition? I mean let’s assume now that the … the dismal science unites and there are enough economists …

GOMORY: Yes.

HEFFNER: … who point in this direction. And you suggest more and more are.

GOMORY: Yes.

HEFFNER: What’s going to be our national policy as a reflection of this understanding?

GOMORY: Well, you see, that’s, that’s why at the beginning I was talking about, you know, better infrastructure, things better … education … those are really … if, if we’re going to keep free trade, which I think is probably a good idea to do … you just have to be able to do things better. And doing things better isn’t just people working harder … America did not become a rich country because our workers have bigger muscles, than people in Asia. We just didn’t dig the ditches with shovels, we dug them with backhoes and other machinery. Right.

So, it’s that kind of thing that enables a country to be effective and compete.

HEFFNER: In an unending flow? I mean there’s a wonderful optimism about what you say, if we put out best thinking …

GOMORY: MmmHmm.

HEFFNER: …to these problems we’ll … that’s what this … with the emphasis upon infrastructure and education seems to indicate.

GOMORY: We can do better. Yes. But, actually, I … you reminded me when you said economics, the dismal science. My own view is, is just the opposite. It’s that most economics is, is very Pollyanna. If you just leave things alone, it will always be for the best. If, if … Adam Smith says … was it the smith or the shoemaker … you know, in pursuing his own game, he enhances the general rule. I mean that’s really what free market economics says over and over again.

And we’re being dismal here by saying, “Well, in international trade there are winners and losers.” Okay. So, we’re being dismal and most economists are saying, “Well, it’s really all for the good in the best of all possible worlds.”

HEFFNER: Leave things alone.

GOMORY: That’s a very important thing, yeah.

HEFFNER: More important economic doctrine?

GOMORY: That, that is … if you … I believe in leaving things alone. But you have to have rules of the game, right. We had child labor. A lot of people said, “Leave it alone. You know, it’s very economical having all these kids working.” But we have now …

Now we compete under the rule of no-child labor. If you run a refinery, you can run the refinery cheaper and make gas cheaper if you don’t care what’s coming out of the smoke stack. But we try and run our refineries under certain other rules. Now, that is interfering with free everything, right. But we, we try and have rules that don’t dump bad outcomes outside of companies … that is, running the company for maximum profit … you dump stuff on the rest of the country. These are called “negative externalities” you throw something out that’s bad, okay.

Now, what you’re doing when you’re off-shoring in some cases is you’re having a bad effect on the country.

HEFFNER: To what extent do you believe that the joblessness …

GOMORY: Yes.

HEFFNER: … or the failure to create more jobs is a function of the outsourcing?

GOMORY: I don’t … I don’t know. It actually … in the, in the economic theory of this stuff, you make the assumption everyone gets a new job. You make an assumption they get a new job at pretty much the same price of the old one. And nevertheless when you lose an industry or do too much off-shoring with a country that is reasonably well-developed, it turns out bad for you.

That may sound a little odd, but in … look at it this way …supposing you’re making 55% of the world’s good … okay … that means that you make 55%, your partner makes 45% and you, you don’t just consume the stuff you make; you trade some of it with them, they consume some and you’re better off swapping the goods than just having your own, because they make some stuff better.

Now supposing you change that. Supposing they off-shore some things, lose a few industries. Now, instead of getting 55% of the world’s goods, because we make 55 and even after trading we get 55% of the total pile, now we’re getting 45% of the pile. Okay? Now the pile might have gotten bigger …

HEFFNER: Isn’t that the assumption?

GOMORY: It does probably get bigger. The question is, did it get enough bigger …

HEFFNER: Yeah.

GOMORY: … that 45% of it is better than 55% of the old pie. And the answer is “sometimes yes and sometimes no”. And we spell out when. But there’s nothing automatic about it. And there are … both cases can happen.

HEFFNER: It’s so interesting to me that in the three items of yours that I’ve read …

GOMORY: Yes.

HEFFNER: … the “sometimes yes and the sometimes no” is …

GOMORY: Well, I’m sorry about that.

HEFFNER: No, well don’t be sorry about it …

GOMORY: [Laughter]

HEFFNER: … because it’s an indication to me …

GOMORY: Yes. Yes.

HEFFNER: … of how important it is not to be doctrinaire about …

GOMORY: Mmmmm.

HEFFNER: … our economic theories. And I have the feeling that what you are protesting against …

GOMORY: Yes.

HEFFNER: … is the notion of being doctrinaire.

GOMORY: Well, I think that’s … that is, I love to hear you saying that because that’s what I say to myself, all right, and it’s just really nice to hear it from someone else. Yeah. I think we, we cannot afford to be doctrinaire. We cannot afford to be wishful thinking. You see, the way I got into this, this whole was when I was with IBM and I had to visit Japan a great deal … we had a lab in Japan and I saw the rapid growth of industry in Japan. And I had to wonder, “is this good for us or bad for us?” Okay.

HEFFNER: Us being IBM or the USA?

GOMORY: Oh, there are two “uses” I guess. There’s both of “us”. [Laughter] And that made me think, so that’s how I got started into looking at these things, you know.

HEFFNER: And your conclusion was that it’s not so good.

GOMORY: It depends … yeah … in that case it, it … that’s right. After a certain point it wasn’t so good. But there are both cases.

HEFFNER: May I just go back … we just have two minutes left …

GOMORY: Yeah.

HEFFNER: Was it not so good for IBM or was it not so good for the US of A?

GOMORY: Well, I think … it started out being good for both parties and I think it changed over at a certain point. But, the trouble is we don’t have the careful examination of the numbers and so forth that …

HEFFNER: Why? I really …

GOMORY: …Let me put it this way … the yen when I first went to Japan … 350 yen to the dollar. It’s 110 now, something like that. That reflects something.

HEFFNER: But what, is the question.

GOMORY: Well, it means you’re going to pay more.

HEFFNER: So, we’re disadvantaged.

GOMORY: No, you see there are two things you get; you get advantages and disadvantages. And you’re asking me to total them up …

HEFFNER: MmmmHmmm.

GOMORY: And I, I don’t really … I haven’t worked that one out. But I would say this, if we lose … the present day Japan is very much like the US and if we lost more automobiles to Japan … yeah … that would be a net loss.

HEFFNER: You say, and we have almost no time left … you say that where the local wages are paid …

GOMORY: MmmHmm.

HEFFNER: …that’s the primary beneficiary.

GOMORY: Yeah, where they make the stuff, that’s where the benefit is. You can repatriate a certain amount of profit, but the big money in wages and goods … where they’re made.

HEFFNER: Not for the …

GOMORY: Services, too.

HEFFNER: Not for the companies, but for the country.

GOMORY: For the country where it is, yes, that’s right. If, if you have an American owned printing assembly plant in China, okay. The company will repatriate some profit from that; but all the Chinese workers get their wages, a lot of those metal parts are made in China. So it’s a, it’s a big plus there.

HEFFNER: And it’s a big minus for American workers.

GOMORY: Yes.

HEFFNER: And I guest that’s the point at which I have to say, and we are minus the time now … but Ralph Gomory, thank you so much for joining me today on The Open Mind.

GOMORY: Thank you, Dick.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time, and if you would like a transcript 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 an 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.