It’s the Economy Stupid

THE OPEN MIND
Host: Richard D. Heffner
Guest: Peter Passell
Title: “It’s the Economy, Stupid”
VTR: 1/28/1994

HEFFNER: I’m Richard Heffner, your host on THE OPEN MIND. And I must say that very few of my viewers seem simply to smile indulgently anymore but I admit that my eyes tend to glaze over when the issue of economics is at hand. Even I don’t just laugh at my own economic ignorance or…anymore, not at least I, like everyone else these days must try all the harder now to make ends meet and then some, if life’s labors are to tide one over until it’s all over and then leave something, too. So that these days I have more and more respect for those whose eyes don’t EVER glaze over, for whom economics is ever so much more now than just the dismal science. Particularly those, like my guest, New York Times economic reporter Peter Passell, insightfully report on and interpret for us the economic order of things both in America and outside our borders. He blew my mind, and other people’s too, I know, by doing a feature in The New York Times about going to the former U.S.S.R. to rend a ride in a surplus Russian MIG fighter. I knew it must be time to ask Peter to return to THE OPEN MIND, not for an examination. I knew that there was something wrong that you would do that, go to the former U.S.S.R. and fly that plane.

PASSELL: My job’s not exciting enough without it.

HEFFNER: Economics not exciting enough?

PASSELL: I’m kidding, it’s quite a field. It’s always a surprise. And luckily, very few people read what I’ve written 2 or 3 years ago because it’s usually wrong.

HEFFNER: What do you mean?

PASSELL: Oh, I’m being facetious, but economics is a lot like politics these days. It doesn’t follow rules. It doesn’t seem to follow rules. Who would have guessed, for example, the way the Soviet Union collapsed that economics would have been the core of the problem? Who would have guessed that? I wouldn’t have. I would have assumed that it ultimately would have been at their core, military, something, it would have been that.

HEFFNER: But if you were making your guesses now, what role will economics play in the rebuilding, if it will be rebuilt in the Soviet Union?

PASSELL: Well, I guess I’m a pessimist in general about the place, because it’s, it’s, there’s enormous promise to it but the economic culture doesn’t seem to be very successful. The contrasts with China are really quite striking in that way. China has started the last 10 years with a much smaller base but it’s obviously on the way. And Russia, the former Soviet Union, is in such an entirely different position that I must be a pessimist at this point.

HEFFNER: What do you see as the economic culture? It is because it is not…the soil isn’t conducive to the growth of capitalism?

PASSELL: Yes, I guess I mean that. Basically this is a country which has been run by its own mafia now for 70 years. They simply changed feudal regimes. And though I’m not a Marxist, I’m still impressed by Marx’s analysis of history, and the suggestion that this is a country that never passed out of its feudal stage.

HEFFNER: With the consequence…

PASSELL: With the consequence that, like a lot of third world countries, much of the economy consists of trying to take it away from somebody else other than build something.

HEFFNER: But if you contrast the former U.S.S.R. with China, how do you account for what you yourself indicate is the real potential for growth there and change and success in China, and not in the U.S.S.R.?

PASSELL: A couple of things. One is that there was an entrepreneurial spirit in this place that was never destroyed.

HEFFNER: In China.

PASSELL: In China. And people forget that for the last 100 years, there were signs that China was ready to pop in various ways, that it was being held back but the change was on the way. It was obscured by the incredible division of the country, by the awesomeness of the war, and also by the fact that they were so overpopulated and were so poor to start that it was very hard to get going.

HEFFNER: Peter, I wonder, could one say that perhaps the presence in China of an even more powerful totalitarian government, a more absolutist government, was the key for changes to take place in China that didn’t take place in the U.S.S.R. which was being broken up over a considerable period of time, which authority was being diminished for a generation now.

PASSELL: I think it’s less that than the pragmatism of the people who ran the place, China. That communism wasn’t…that the authoritarian state was about power, not about…there was utterly no principle in the organization of the economy. And Tung Chao Ping said it…he said…I’m paraphrasing…he doesn’t care how the job got done, basically, he just wanted the job done…but there’s a long history of pragmatism in China, of Russia and the Soviet Union. Ideology tangled this place very badly. Also, just the fact of a centralized power complicated this place immensely. The very fact that they had the instruments for centralized power, which didn’t exist in China, is very important.

HEFFNER: Now wait a minute. You’re saying that centralized power did not play as great a role or does not play as great a role in China?

PASSELL: No, it certainly doesn’t now and probably didn’t during…for much of the period that is so obscure now from the revolution to the eighties.

HEFFNER: Then your feeling about what’s happening in China…the market economy is growing like topsy rather than ordered…

PASSELL: Oh, absolutely, it’s out of hand. One prediction about China now…there are really two Chinas…and that southern China is breaking apart from the north. Southern China is utterly out of control. The army…you can’t use the military to control that place, and it isn’t being controlled that way. And so much of what happens in southern China is simply blessed by the north, by Beijing, not ordered by Beijing.

HEFFNER: And the market economy? Present as we understand it?

PASSELL: Oh, well I think so, and it’s enormously helped by the fact that I think China can draw on this enormous overseas Chinese population for capital, for entrepreneurial insight, for experience. In fact The Economist magazine years ago said that you could predict the success of Asian countries by the degree of which they allow their Chinese subculture to run the economy. So a place like Thailand is doing very well because they are allowing the Chinese to run the place and initially, it took a long time for it to catch up because it’s oppressed the Chinese.

HEFFNER: And what do we have to look forward to in terms of economic rivalry with China?

PASSELL: I don’t like this business about rivalry in general. It’s a very…it’s very up-to-date now, it’s very in fashion to believe that now that the cold war is over now we are going to have an economic war. The analogies are very poor. I don’t understand what the competitions are in general. China’s growth in no way affects…reduces our well-being. Japan’s growth in no way reduces our well-being. Unless you define well-being as they’re living better than us.

HEFFNER: Now wait a minute, wait a minute. You say Japan’s growth has not affected our well-being. That runs counter to the seeming Japan-bashing that’s gone on in this country.

PASSELL: Oh, it certainly does. I just am disgusted by that stuff. And I don’t know why President Clinton signed on to it. I think he’s too smart a guy to do it. It’s a serious mistake. Ask any good economist “Is what’s good for Japan bad for America” and I don’t think you’ll find one in a hundred that would say “yes”.

HEFFNER: Why do we think so as a people?

PASSELL: Well, because the analogy of competition between nation states is so strong and powerful that at the notion of military threat it’s so easy to make the leap. It’s also easy to think of competitions with…among corporations in the economy and to make the analogy with competition in the economies. And it doesn’t seem appropriate. It’s quite true that what’s good for Toyota may not be good for General Motors but what’s good for Toyota may well be good for Americans.

HEFFNER: Now would you elaborate on that only because…I shouldn’t say only because, but principally because it flies in the face so completely of what I and many other people have been led to…

PASSELL: Well, let’s think about it. What is it about Japanese success that hurts us? Well, the first slice of it, of course, is that it helps us. Would you rather not use all of those great VCRs and those high quality cars…or put it another way…would General Motors even be making as good as the cars they’re making today? Now I quite agree with you. If you are a General Motors stockholder the success of Japanese cars is not in your interest. But I’m not a General Motors stockholder, and the interest of producers is not the interest of a nation necessarily.

HEFFNER: But the, the whole question of opening the markets…

PASSELL: Mm hmm…

HEFFNER: …ah, opening Japan to our product you don’t find in that conflict…that there is a conflict?

PASSELL: Yes.

HEFFNER: Trouble for us?

PASSELL: Trouble…there’s certainly political trouble, and I would certainly like to see these issues resolved. But there’s no true conflict between the countries. There’s conflict between corporations. Motorola wants to sell goods in Japan. I don’t blame them. And that’s fine. But the fact that they…that they somehow hobble from selling goods in Japan so marginally affects the well-being of Americans that it’s, that it’s absurd to build a policy around the notion of access to the Japanese market. Is that a reflection of your own economic one-worldism?

PASSELL: Well, it’s certainly my own one-worldism but I think it’s from a grand tradition. I certainly am not alone in this field…

HEFFNER: No, no, I understand…I didn’t mean to imply that you were, but it sounds as if you are speaking as one who basically, essentially, no holds barred, believes in free trade.

PASSELL: I absolutely do. I would even go further than most people and argue that in unilateral free trade, truly unilateral free trade, the sense that, as Milton Freedman once said when he was talking about whether or not we should block exports of steel from Japan, he said, “Well if they want to export cheap steel and import pollution, they’re welcome”.

HEFFNER: Peter, you know, going back to my introduction…I’m not talking about the big…

PASSELL: (Laughter)

HEFFNER: …I’ll just dismiss that as a bit of insanity…thinking about what I said, and I meant it, that usually my eyes glazed over when the talk turned to economics, I can’t afford that any longer, and I’m aware of that. Everett Dennis was here a few weeks ago and we spoke about the impact of the end of the cold war on Americans turning to look at and becoming interested in and therefore the press should be concerned about what’s going on outside of America or news that was always so parochial or provincial in the past to which very little attention was paid in the printed press and the electronic press in the outside world comparatively speaking. That was going to change now. There was going to be an opportunity for us to become more interested and focused on the Soviet Union and the United States. Do you find a greater focus now out of necessity on economic factors?

PASSELL: Well, I do find it, but I must say, ironically, that I’m not sure that it’s doing anybody any good. Bad economics is bad economics. And so, going back to these analogies, so much of our view of the world is that there is a grave competition out there. And that somehow it’s a zero-sum game, what’s good for us is bad for them. It isn’t the case. And frankly, at some level, benign neglect of international economics may be our best shot. I’m not sure I want people to think about whether a strong dollar is better than a weak dollar. I’m not sure they’d arrive at the right opinion. Now, it sounds a little elitist, I think that, and I don’t mean to be elitist, I rather mean it to say that to know more is…and on some level what I want is a world economy that somehow runs itself.

HEFFNER: You’re a “hands off” Adam Smith devotee?

PASSELL: You know, I’ve come to that slowly over time. But I find, and it’s not in fashion at the moment, but I guess I’m increasingly impressed only because I’m middle aged, with the fact that when government intervenes it usually does a bad job. Now that doesn’t…now for the usual qualifications, I believe in government. We need government for lots of things. There are lots of rationales for government intervention. But I am really not impressed by the notion that 7 or 8 people in Washington really know how to make things go. They usually don’t.

HEFFNER: And does that apply to the change in our medical payment structure too?

PASSELL: Oh, oh…well, no. I believe…there has to be some intervention in medicine. There is already intervention. We just have to make choices of how to intervene. I would like to see as much attention paid to market principles as possible, so that competition is at the core of how we try to keep down costs and provide services in medicine.

HEFFNER: Wait a minute, wait a minute. Market principles…

PASSELL: Mm hmm…

HEFFNER: In the history of this century, what does the phrase “market principles” mean?

PASSELL: Well, it’s quite an abused notion, quite an abused notion. If a market principle exists simply exists to allow, to provide people in power to buy more power, then that’s not what I mean by market principles.

HEFFNER: That is…that’s the case…

PASSELL: It’s not, it’s not what classical economists thought of as market power, as allowing markets to work. In fact, in the perfect ideal world of Adam Smith, no one had any influence at all in markets, because the world was so atomized, everyone was a prisoner of the structure itself. No one could dominate it.

HEFFNER: And what happened?

PASSELL: Well, people are constantly fighting to override those principles. Look, a grand principle of why economies fail is when it becomes cheaper to buy your way out of a product of government than to make a better product. When General Motors now has to make a choice about whether or not to make a better car, or get the government to stop the import of competing cars, they find that it is literally cheaper to buy the government’s assistance than to build a better car. Now let’s say that’s a market principle, but it’s not the kind of market I’m talking about.

HEFFNER: Okay, let’s focus on the kind of market that you’re talking about. Don’t you inevitably find that if you start, ground zero…

PASSELL: Mm hmm.

HEFFNER: …that market principles will take you in a certain limited period of time, 5 years, 10 years, 15 years, to a situation that someone has won, and a lot of people have lost, or some people have won and a lot of people have lost. Free market. At that point, those who have won continue to use what they have won, however they have won, to foster their…to feather their own nest, right?

PASSELL: That’s a provocative statement. You know what it is, and this is not name-calling, that’s at the core of how Marx thought the world worked. And that’s the way most people think the world works.

HEFFNER: Well, you a moment ago, were embracing some Marxist thinking.

PASSELL: Yes, but not in this case thought. I think that the history of the United States…well, I’ll give you a statistic that might help. The distribution of income between those who work and those who collect rent or run businesses, the distribution of income between those two groups rally hasn’t changed very much over 150 years. Now, by your scenario, the wealth and power are to be ever more concentrated at the top. I grant you there have been cycles back and forth, but not predictable cycles. For example, after World War II, there was an enormous leveling. A far higher percentage of income went to working class people than essentially to the rich. That’s beginning to swing back in the 60s, the 70s, the 80s, but there’s some evidence that it’s going to swing back into the other direction.

HEFFNER: Is there evidence of that? Because what I’m aware of is, having taught my students that right after the War, that thanks to the War, and thanks, before then, because I was a liberal Democrat then, too…Franklin D. Roosevelt…that the concentration of power, the gap, the dichotomization between the very rich and the very poor had really moved in the other direction. Then I remember, it was in The New York Times, it was in 1962 or 3, when, ah, was it…Mueller wrote a piece in the magazine section saying that the old notion of a leveling of American economic power had really been reversed and once again we were growing into the rich getting richer. We were changing as a society and the rich were getting richer and the poor were getting poorer. You’re saying that there are some signs of that changing now in the 1990s.

PASSELL: Yes, and I’ll step back a little bit. One of the…and I would argue that much of the magnificent success of this economy over the very long periods has been the inability of groups to capture power. There’s always a tension between the fact that it’s always more seductive to achieve power through the government than through the marketplace. But in fact, over very long periods of time, it hasn’t worked. I’ll give you an example…and I don’t raise the issue of unions here that it’s so simple that they’re such terrible, terrible things. But when…but they do do some damage sometimes. When labor became very expensive in New England, industry moved south. Now you can think of that as some terrible thing that happened, some terrible thing that left people in New England without their jobs making shoes and textiles. But the fact is that the economy needed to do that to prosper, that we need escape valves that nobody’s power gets strong enough to capture what Congress called economic rent.

HEFFNER: Well, if that’s the case, and I understand the thinking that goes into that notion, but what do we say to the people who are displaced? Now this argument that Perot and the others had seemed to be settled in the direction of free trade and the movement, and gee, we have to learn to adapt. If we don’t adapt we die.

PASSELL: Mm hmm.

HEFFNER: Is that the kind of thinking that you think characterizes the economists who are influential in the Clinton Administration?

PASSELL: I think that no one strand of economic thinking dominates the Clinton Administration, that there’s a great mix of good old fashioned views about the economy with a strong…intervene, and a basically at-heart, a Marxist view that if you don’t intervene a lot, the rich will get richer and the poor will get poorer. There are other strands which are quite different, which say that whatever we thought before, this economy is too complicated and too big to intervene in in any successful way. What do I say to the dispossessed? I say that I’m really sorry. Let’s use the power of government to get you moving, to get you going. I don’t, you know, it’s not that government should leave people to starve in the street. It’s not that government should let schools go to hell. I don’t believe in that. But I guess I’m very wary of the kinds of intervention that we’ve tried which have failed, and what I don’t want to do is discredit the notion of cautious intervention.

HEFFNER: I hear what you’re saying, but, again, and I ask this question often, where do you draw the line? At what point and when whose ox is being gored does government enter the situation? Because, look, for all the emphasis we have placed in our time, whether it was President Reagan, or Dan Quayle or Bill Clinton upon family values, upon doing things the way we used to do them which was with basic concern for the community. You’re not talking about, you’re not positing a situation in which we say always, not without some government intervention to help the most downtrodden, but generally if not always, the chips have got to fall where they may. We’re free traders. And if that means that people have to move from New England to the south, and they have to reconstitute some economic activity in New England, so be it.

PASSELL: You know, it’s always been with us, whatever game we’ve talked, we’ve never successfully intervened in the economy to stop the process so far, so it’s not as though I’m talking about “let’s change regimes from a caring, thinking, feeling one to some 19th century Victorian horror”. We’ve never done a terrific job of building up the poor, or running a public sector on the Swedish style. We’ve never done it and I don’t think we can do it. I think we just pragmatically have to go step by step by step. For example, I’m delighted that President Clinton is trying to build a national health care system. I don’t know if he’ll do a good job at it, but I think it’s obviously a job that must be tackled. But again, the notion of setting up specific rules, that we don’t intervene enough or that we intervene too much is really a mistake.

HEFFNER: So that national economic policy is something you embrace when it works the way you want it to work, if it has the flexibility you want or…

PASSELL: One piece I always embrace is that the government is a good referee who, which intervenes to stop people from…for example, anti-trust. That’s a prime area. You really don’t want people to have monopolies. The government as fair and impartial judge is fine. The government as trying to correct distributions of income that fall through market forces I’m not so happy about.

HEFFNER: Suppose one agrees with you…every good reason…well we have two minutes left anyway…suppose you just say, yeah, you don’t want it to be, except in rare instances the final arbiter…you don’t want it to intervene too much. Are we in a situation in terms of the nature of our population, the nature of its training in matters economic, I don’t mean knowledge of matters of its job training…are we in a position now of not easily, but securely and safely to say “let the chips fall?”

PASSELL: Well oddly enough, very few people believe in letting the chips fall. But since they want them to fall in different ways, they tend to cancel each other out. That’s why the system works. I’ll give you an example: I abhor protectionism. I’m a free trader. I complain and whine about protectionist activity. But the truth is, we’re not a protectionist country. And the reason we’re not a protectionist country is because the protectionists don’t get together and do anything about it. They can’t. They haven’t been able to. The total losses associated with protectionism in very…and specific industries like textiles are very small as a function of national income.

HEFFNER: How can you say that when the votes end up being so close to each other when you’re really voting on protectionism?

PASSELL: Well, it’s fascinating, isn’t it? It doesn’t seem to work. One of the…the glory of this big complicated pluralistic democracy is that the bad guys tend to do to each other enough damage, that they disagree enough that you have very little centralized control.

HEFFNER: So that what you’re really saying is that’s Adam Smith’s invisible hand.

PASSELL: Yes. Yes, and it works at a political level as well as an economic level.

HEFFNER: Peter, I’m so pleased to be able to discuss these economic matters with you. At least I can express some words, whether they reflect sophisticated thinking or not, but we’ve come to the end of our program. And I haven’t even gotten to explain WHY you went to the former U.S.S.R., rented a MIG and flew it, and I’m not going to because our time is up.

PASSELL: (Laughter)

HEFFNER: Thanks very much for joining me today, Peter Passell.

PASSELL: Thank you.

HEFFNER: And thanks, too, to you in the audience. I hope you’ll join us again next time. And if you care to share your thoughts about our program today, please write to THE OPEN MIND, P.O. Box 7977, FDR Station, New York, NY 10150. For transcripts send $2.00 in check or money order. Meanwhile, as another old friend used to say, “Good night and good luck”.

Continuing production of this series has generously been made possible by grants from: The Rosalind P. Walter Foundation; The M. Weiner Foundation of New Jersey; The Carnegie Corporation of New York; The Thomas & Theresa Mullarkey Foundation; The New York Times Company Foundation; and from the corporate community, Mutual of America.