by Art Jahnke

2010: Interview with Lester Thurow We Can Shape The Global Economy

Dec 15, 20039 mins
IT Leadership

In a discipline dominated by cautious intellectuality, Lester Thurow, the Lemelson professor of management and economics at MIT in Cambridge, Mass., enjoys an international reputation as a social and economic provocateur. He has written more than a dozen books about economics and politics, in which he challenges mainstream views about America’s ability to foster international economic cooperation and narrow the economic gap that divides us from the rest of the world. His most recent book, Fortune Favors the Bold, calls on American business and political leaders to step up and help shape the inevitable world event of globalization. In this interview with CIO, Thurow tells us how the United States routinely fails in economic negotiations and why President Bush may not be returning to the White House in 2004.

CIO: Outsourcing is on everyone’s minds these days, and it’s an issue that places CIOs in the middle of a painful conflict. The CEO wants the CIO to save money, and CIOs know that they may be able to save money by outsourcing, but their IT staffs live in fear that their jobs will be shipped overseas. What’s a CIO to do?

Lester Thurow: Well, I think they should do two things. One, they should sit back and ask, What is the long-term strategy compared with the short-term strategy? Because while you can cut costs now, you may not have the ability to do that in the future. The other thing is CIOs need help. They need governments to get the different currencies to a value that will seem rational in the long run. Right now you can move some of your work to India or China, but the value of currencies can change radically. Right now those countries are an inexpensive place to go, but when that changes you just have to move the work back.

How long will it take for the cost of labor in India or China to approach the cost of labor in the United States?

The problem is, we don’t know. I don’t think it could take another 20 years, but this [discrepancy in labor costs] has already gone on for 20 years without much change. Still, you have to consider that part of the reason the value of the dollar doesn’t change is you’ve got the Japanese government out there preventing it from changing.

What can we do about that?

We can offset it. If the Japanese government buys dollars to hold down the value of the yen, we can simply sell more dollars. For every dollar Japan buys, we will sell a dollar, and damn it, we are going to have market exchange rates, and we are not going to let the Japanese control the value of the dollar to the yen.

If we can do that, why haven’t we?

Partly for the same reason we haven’t done that with China: We want their help on North Korea. And one of the reasons why the United States is a very poor negotiator on these economic things is we have other fish to fry, and the rest of the world doesn’t care about North Korea. The rest of the world bargains about economics. India doesn’t care about North Korea. So what typically happens in the American government is the economic dimension in a negotiation is well down the importance list. So if you want China to help you on North Korea, you can’t beat up China [for keeping the yuan low in relation to] the dollar.

In fact, I don’t think we should be beating up China on the currency issue at all. The Third World should take it up. That should be the job of [U.N. Secretary-General] Kofi Annan, because what’s really happening at the moment is not that American jobs are moving to China, but that our television set manufacturing in Mexico is moving to China. So our deficit with Mexico gets smaller, and our deficit with China gets bigger, and the American trade deficit with the Third World is not going up any faster than it has in the last 10 years. China is not the source of the dollar problem, so it makes no sense for a group of people with a per capita income of $40,000 to go beat up on people with a per capita income of $1,000 and say you’re growing too fast. Tell me where the moral leverage is in that.

One of the troubling things happening now is American companies are sending foreign workers into American factories where they are learning processes and taking the work back to India. That’s why some

CIOs would like to see our legislators control visas in order to control outsourcing. Is that the right approach?

The way you have to handle this is once again to deal with the currency imbalance. If you can get the currencies balanced right, then you can get a better idea of what work is sensible to do here and what is sensible to do somewhere else.

It’s very hard to do otherwise. It’s very hard to control knowledge. And it’s very hard to have a monopoly on knowledge, because if the Indian workers can’t go to the American factory, they can go to the factory in China or in Europe, and they can figure out what the process is and then write the software to do whatever they have to do. Or someone in America is assigned the job of telling them.

Do you think there is there some xenophobia involved in Americans’ concerns about foreign workers taking their jobs?

There is some of that instinctively in every country. People blame the foreigner, but the real problem is that we’re not creating local jobs. The real problem is that when the dotcoms crashed, about 1 million IT professionals lost their jobs, and that had nothing to do with China. Today, about 800,000 of those people are still unemployed. Some of them have not gotten new jobs because of outsourcing to India, but that is not the source of their problem. The source of their problem is we need to create sustained economic opportunities to absorb those people who lost their jobs when the dotcoms crashed, and we haven’t done that.

What should we be doing to create economic growth that we’re not doing?

Well, we could orchestrate things. The Bush administration could reprioritize their economic policies, and that’s something that I’d like to see them do. I’d like to see them take those tax cuts back that are scheduled in 2006, 2007 and 2008, and put them into 2003 (retroactively) and 2004. And then we would have a path back to a balanced budget by 2007 and 2008. That would give you a lot of bang in terms of fiscal policy now. It would also allow interest rates to go down because what’s happening now is Alan Greenspan is keeping short-term interest rates down because the market is seeing these budget deficits in 2006, 2007, 2008. That’s why 10-year bond rates have gone way up. Nobody’s going to lend money for 10 years unless they think interest rates are going to be low for the entire 10 years. If you saw a budget surplus in 2008, you’d probably think interest rates are going to be low in 2008, and those 10-year bond rates would not have gone up. So you can organize an American economy that grows at 8 percent a year, and with that growth you can get these people back to employment.

But how many of them will they get back into employment at the same wage scale they left?

Well, that depends on exactly where the growth comes, and it depends on how old you are. The truth of the matter is, if you’re laid off and you’re over the age of 55, no matter what happens to the economy, you are very unlikely to get a new job that’s as good as the job you lost. Companies don’t want to hire people over 55 because of health-care problems and pensions. There is no question that the process is going to generate some long-term losers. The question is how many. On the other hand, if you’re 35, you have every reason to believe that you will get a job as good as the one you lost.

If the Bush administration does nothing, what will the economy look like in eight years?

The answer is if the Bush administration doesn’t do something, there won’t be a second Bush administration. Professional white-collar outsourcing is so scary?and so many of the people affected are Republican voters?that the issue is going to blow Bush out of the water.

You warn in your book that wages around the world will equalize. When that happens, how will Americans maintain the standard of living that they are accustomed to?

Well, what you want to happen is for the wages of other parts of the world to go up, and ours not to come down.

But can the wages of the entire rest of the world go up and our wages remain the same?

If we shape it, and if we do it at the right pace, the answer is yes. If you are basically growing our productivity, then wages are going to go up. Now the wages of IT workers might falter, but average American wages are going to go up.

Can the entire world really enjoy the standard of living that Americans are accustomed to?

Sure, because the entire world will have the American standard of productivity. You earn that standard of living by producing as much as Americans do.

The final thesis in your new book is that we can in fact shape globalization. Do we really have the power to do that?

Well, there is a whole set of things that we can do. We have to worry about these global trade surpluses and trade deficits; we have to worry about intellectual property rights, and we have to worry about education at home and abroad. We also have to get our fiscal and monetary policies right. There is no silver bullet, but there are many things that we can do to make globalization more inclusive than it would be if we just sat back and let it happen.

The fact is: Globalization is coming. You couldn’t stop it if you wanted to. Probably, if you don’t do anything, the pluses will still exceed the minuses. History shows that in the last seven years, 60 percent of the world’s GDP has occurred inside the United States. So, in that sense, we are the big winner.