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Summary of the chap 2 : a new economic game or the origin of the “economic war” by Lester THUROW HEAD to HEAD – Morrow – 1992

7 juin, 2018 | Commentaires fermés sur Summary of the chap 2 : a new economic game or the origin of the “economic war” by Lester THUROW HEAD to HEAD – Morrow – 1992

ThurowCoverLester C THUROW 1938 – 2016 – In his book Head to Head the famous economist L. Thurow explain why the US became aware of a new competition environnement which is conceptualize by the expression “economic war”. This concept was made explicit by the Secretary of State Warren C. Cristopher through the use of the expression “economic security” as a parallel with “national security” during the Cold War in front of the Congress in 1993 :

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Economic war may be defined by the pursuit of economic goal (wealth and jobs) through non economic means, basically political means like intelligence, disinformation, influence, etc. The chap. 2 A new economic game highlight the origin of this “economic war” concept, especially the fact that it is rooted in the individualistic view of economic activities in contrast with the communautarian view of capitalism.

In 1917, a new enemy to capitalism had risen: bolchevism. The main challenge was in the field of economy, the State was the key economic actor in charge of the organization of economic activities instead of private actors through markets. The financial market failure of 1929 and its consequence: the economic collapse of Europe and Japan reinforce the credibility of the communist path to economic development. After the Second World War, in 1949 the most populous country with the largest territory are Reds. The American answer was the Containment which entailed a set of rules of the economic game. Mainly, the first international market for the allied productions, Europe and Japan, was the US and it was opened. It would provide demand and dollars for world exchanges. The international economic stability was provided by the US through the GATT and the IMF international organization. The need for political coherence between western allies in front of the Red bear mitigate for the risk of savage economic competition.

In 1991, the collapse of the Soviet empire clear the ideological space: democracy and capitalism won, the consumption society won, the free market economy is the only path to wealth. It is not the end of History, it is a new era with a new economic game and new political rules. A new power distribution took place, unipolarity, which is de facto hard power American monopoly. It gives rise to a new set of rule: competition without limits with the help of soft power means: intelligence and influence.

Indeed, the military hegemony of the US forbid any competitor to use force to challenge Washington foreign policy goals. As a consequence, political rivalries developped within the economic field with the help of soft power tools. The former game, within the Western hemisphere was made of a superpower with its allies and an economic hegemon to support Free Trade and market mechanisms. Now, the new power distribution is based on a military hegemon with a tripolar economic competitors: US, Japan, Germany without the need for coherence in front of a radical challenger.

Actually, the set of new rules are becoming:

  • First rule = global competition on human resources will decrease the comparative advantage of being born in a rich country for the middle class
  • Second rule = process is the greatest comparative advantage upon product, you can build your technological capital by processing products cheaper than a great power focus on design
  • Third rule = financial capital are free to move instantly to any places

Hence, a new international regim must replace the GATT, the Economic Recovery Program of the 50s and the European Coal and Steel Community with its resulting organizations: GATT, OCDE, EU. In this new international economic order all countries won’t be rich with the help of the American market, they all should become democratic (the End of History) and they should accept the US military hegemony, allied or not! But the economic competition is Head to Head. In the economic playfield, Head to Head competition rest on capacities to influence decision cooperation in International Organization to favor ist own comparative advantages whatever the consequences for the other countries. This new economic self help is supported by the economic threat carried by Japan in the 1990s:

  • In the 1950 the US GNP per capita was 15 times greater than that of Japan, in the 1990 it is at parity in terms of purchasing power
  • In the 1970s 64 of the world largest industrial corporation were US vs 8 in Japan, in 1988 it is 42 US vs 15 in Japan
  • In the 1970s 19 of the world largest banks were US vs 11 in Japan, in 1988 it is 5 US vs 24 in Japan

In this competition environment, each country has the same economic goal: to insure its citizen have the highest standard of living. Competition is win/lose decision situation. The main change is the disappearance of the need to moderate economic competition to preserve military alliance to contain the USSR!

So, the US market won’t be the economic locomotive use to prevent the cycles that are inherent in market economy. More precisely, the American market is now a diplomatic lever to frame economic rivalries in favor of the American standard of living.

The analysis of the Japan successes help the US to understand where their comparative advantages really coming from.

For example, the strong link between the Japan MITI and the Japanese companies in the field of semi conductor broke the dominance of American firms. The government finance VLSI R&D with patience and took advantage of the US reluctance to expand capacity during cyclical downturn. Since the Meiji era government and industry had to work together to design the national economic strategies necessary for national independence.

Hence, the nature of the economic competition is a cultural one = individualist capitalism vs communautarian capitalism. In the latest, business groups are important actors, social responsibility and teamwork management are levers for actions, firm loyalty and State support is shared values. It is producer vs consumer economics which enable communautarian capitalist countries to take over technologies and financial capital. Because of the US military hegemony, natural resources are available to any country with sufficient purchase power. There is no risk of life line interruption. They will be the offshore production facilities of multinational firms that bring their access to capital markets with them and take advantage of outsourcing bring by the logistic technology breakthrough. This trend is linked to the process technological breakthrough which enable those who can make a product cheaper to take it away from the inventor. From an American perspective everything about communautarian firm is criminally illegal. “While very different histories have led to very diferent systems, today those very different systems face off in the same word economy.”

Because of their cultural differencies especially in the practice of economic activities, Japan and Germany will force the US to alter the rules of the market economy it used to play: “yet in today’s world Americans cannot force the rest of the world to play the economic game as americans think it should be played”

So economic goal of high standard of living should be pursued by non economic means, intelligence, influence, disinformation, etc by political means, by changing and setting new norms, in the name of economic security, it is by definition “economic war”

But, the American unipolarity rest on the capacity to continualy invest in its military forces to keep the relative gap with other powers and to keep its global reach capacities. Hence, the economic wealth is a necessary condition to keep the US place on top of the military power distinction. With the American military hegemony disappearance, it would be an old game where each country had to transfer a part of its wealth to support its own security. It will diffuse a sense of mistrust with a classical prisoner dilemma decision environment.

 

to go further : Lester Thurow interview by Charlie Rose

 

Charlie Rose : Sloan School of Management, already has two bestsellers to his name. He may be well on the way to another. Senator Paul Simon plans to send copies of his new book to every member of the United States Senate. That book is Head to Head, become an economic battle among Japan, Europe, and America. Dean Thoreau joins us now with his vision of the near future and the challenge to us all. Welcome.

Lester Thoreau: My pleasure to be here.

Charlie Rose: Pleasure to have you back at a table next to me.Let me start talking first about the economy and then about the campaign and then about the future and how the world is hung together and the challenge to all of us. We’ve had a lot of economists come here and people on Wall Street who say they think the recovery has begun. How do you see the American economy?

Lester Thoreau: Well, I think the recovery probably has begun.The problem is that we normally have a quick recovery andbecause of the excesses of the ’80s, this is going to be a slowrecovery. And you know if the economy’s growing at one percent a year, economists say recovery with the average citizen’s not going to see it as a recovery. Now, I think the real problem is that the 1980s will be looked back upon by historians as something like Tulip Mania. People were willing to pay prices and put debts on assets that nobody should have been willing to do. And after that there always comes a cleaning up the mess period that you go through. The Japanese are now going through it. The British have been going through it for two years. We’re going through it. And see the interesting thing is —

Charlie Rose: Cleaning up the mess is looking at all thebankruptcies and all of the debt that could not be serviced andso the —

Lester Thoreau: Right, and, you know, and readjusting assetprices and digging out the airlines and getting the retailers back on their feet. It just takes awhile.

Charlie Rose: Despite that, although the market is not yourexpertise, why does the market continue to break through, 3,200 in 4,000?

Lester Thoreau: Well, see, I think there’s an answer. You know, the big flow of savings at the moment goes into thins like pension funds. If you run the California Pension Fund, every month you have I don’t know let’s say a billion dollars you have to invest. Where are you going to put it?

Charlie Rose: So you’re a buyer.

Lester Thoreau: Where are you going to put it? You can’t put it in real estate because prices are going down. You can’t put it in government bonds because interest rates are very low. So basically the only place you can put it is the stock market. And I think that’s probably the dominant answer.

Charlie Rose: It’s the old demand supply equilibrium.

Lester Thoreau: That’s right.

Charlie Rose: And there’s more demand than there is supply.

Lester Thoreau: Yeah, money comes in every month, and it’sgot to go out somewhere.

Charlie Rose: Yeah, and so therefore it keeps contingents.When will that end, though? I mean, do you think that, that — there’s an end to that at some point?

Lester Thoreau: Well, I think it’s when these other prices seem to stabilize and the people running those kind of funds can say, look, I can now invest in real estate. I can now invest in bonds.I’m not limited just to the stock market.

Charlie Rose: Yeah. So how much do we have in terms of a structural problem with the way this economy is functioning?And the amount of money that we’re paying to service ournational debt?

Lester Thoreau: Well, the big problem is not the national debtas we know it, which is the federal government, that was — our big problem is we’ve built up in the 1980s a debt of about$1,000 billion to the rest of the world. And when we pay interest on that, let’s say $100 million, we’re going to be transferring —

Charlie Rose: But isn’t that money that the government — areyou saying the debt that foreign investors and foreigncapitalists flowed into corporate debt? Or are you saying debt that comes from debt that the United States, where foreign investors have bought American debt?

Lester Thoreau: Well, it’s all of the above. It’s all of the above.See because the foreigners own some of the federal government deficit. They own some of the corporate debt.They own some of your private personal debt. They lent the money to your bank that lent you the money for your house. Or they lent the money to the bank that lent it to you for your credit card. And so, the Japanese and the Germans, you owe some money to the Japanese and the Germans even if you don’t think so, because indirectly they’ve been lending to you.

Charlie Rose: Those banks that may have — I borrowed from have laid that money off at the —

Lester Thoreau: That’s right.

Charlie Rose: –third loans off to —

Lester Thoreau: They borrow the money from the Japanese to lend it to you.

Charlie Rose: But we also read newspaper accounts of howJapanese investors are stopping the flight of capital from Japan to the United States. So you would think that some of that money’s drying up, would you not? But, at the same time, interest rates are very low.

Lester Thoreau: Well, you got to be careful. Interest rates are very low for government bonds.

Charlie Rose: What happens when you only know a little bit about economics?

Lester Thoreau: See interest rates are very low for government bonds. But if you’re a private investor, they’ve gone downalmost not at all because in fact you’re absolutely right, the Japanese are now starting to take money back to Japan. And in the long run, that’s going to put a — push American real interest rates up. And a real interest rate is the money rate of interest minus the rate of inflation. And today, real interest rates are really quite high.

Charlie Rose: How high are they?

Lester Thoreau: Well, if you think about the inflation rate, it’s probably somewhere down three, three and a half. And if you’re talking —

Charlie Rose: Because prime is about six, isn’t it?

Lester Thoreau: Yeah. Yeah, but, you know, if you think about what private long term investors are borrowing at, it’s more up around nine or 10 if you think about your mortgage. And so, you know, that’s a very high real interest rate.

Charlie Rose: Looking at the candidates in 1992, let’s beginwith Bush and this administration’s handling of the economy and what we know that the President might do from his State of the Union Address. Do you see any real significant understanding and effort on the part of the administration to deal with it in a constructive way? I say that knowing that I think your political persuasion is Democratic.

Lester Thoreau: Yeah, well, see, I think the real problem under President Bush is he kind of had the perfect apprenticeship for being a military Cold War superpower president. But that all has gone away. And now he has to do this domestic and international economic stuff that he’s not interested in. He’s not kind of on top of it the way he was the military stuff.

Charlie Rose: But doesn’t he have people that can advise him? I mean, that Jim Baker and others who had some experience in those —

Lester Thoreau: Well, I think the answer is they’ve all focused on the military thing quite a bit. But the problem is that you have to have some intuitions yourself. And I think it’s going to take awhile for the President to do that.

Charlie Rose: But that’s an interesting point. I mean, nobody really — I mean, who do you know that’s been president that’s had any real intuition for that? I mean, clearly Jimmy Carter didn’t have any real experience in international economics.Clearly, Ronald Reagan had less.

Lester Thoreau: But see, that’s the last 50 years. In the last 50 years, the important thing is how are you going to handle the Russians militarily? In the next 50 years, the important thing is going to — how are you going to handle the Germans and Japanese economics —

Charlie Rose: All right, we’re coming to that. That’s this book.And I want to get to that.

Lester Thoreau: See, that’s why the President’s got to have some very different skills in the next 50 years than he had —

Charlie Rose: And that has to do with the nature of the way our economy’s structured and the nature of the way we viewcompetition, does it not?

Lester Thoreau: Right, right.

Charlie Rose: Come to that a minute. Talk about Bill Clinton, for example, and the economic proposals he has talking about a middle class tax cut. Talk about Paul Tsongas, who’s in favor of a capital gains tax. And talk about Jerry Brown who’s in favor of a 13 percent flat income tax.

Lester Thoreau: Well, see, I think there are two issues, one is how do we design a growth policy in the United States so the economy grows faster and generates more good jobs? In some sense, Tsongas had half the answer. He was talking about that.There is this other issue of we have created a very unequalsociety in the 1980s and how do we rebalance that a little bitby changing taxes, skills, education, whatever?

Charlie Rose: Unequal in terms of what?

Lester Thoreau: The distribution of income.

Charlie Rose: Okay.

Lester Thoreau: You know, if you look at all the income gains in the 1980s, 60 percent of them have gone to the top one percent of the population, and 100 percent of them have gone to the top 20 percent of the population. So the next 20 percent is held even, and the bottom — simultaneously]

Charlie Rose: The rich got richer.

Lester Thoreau: Rich got richer. The upper middle class stayed even. And the bottom 60 percent sunk. Well, Clinton’s been addressing that question. So I think the real question for the Democrats is —

Charlie Rose: Is he really addressing it, though, with theeconomic proposals he has? I mean, does a middle class tax cut mean anything?

Lester Thoreau: Well, it seems a little bit —

Charlie Rose: Or is that simply a political bone to —

Lester Thoreau: No, it means a little bit. And he’s talking about the issue but see you got to put the two together. A middle class tax cut by itself is simply just a temporary Band-Aid. The long run answer has to be middle class skills that generate world-class wages. And that comes back to this kind of growth policy, which would be skills and education.

Charlie Rose: Brings me to this book. One of the fascinating things you say, and tell me if I’m right about this, is that if you look at Japanese economy, they spend a lot more money in terms of the education of those people who do the work. Help me out in understanding this. work.

Lester Thoreau: Yeah, basically you know if you look at theeducation system of Germany, Japan, and the United States,you can argue the American system is best for the top 20percent of the population.

Charlie Rose: And in fact they send a lot of their graduatestudents every year.

Lester Thoreau: Oh, absolutely. And if you’re talking about –Right, a lot. If you’re talking about people who graduate from high school but don’t go on to college, then the Germans have the world’s best education system because they just put a very fine system of post secondary education for the non-college bound into it. But if you’re talking about —

Charlie Rose: Give me then what kinds of skills.

Lester Thoreau: Well, machinist, tool and die makers,glassblowers, electronic technicians, computer programmers, at that level they’re absolutely world class. But where the Japanese are phenomenally good is the bottom 40 percent of the population. They get the bottom part of their workforce up to levels of skills that we can’t even imagine. And our bottom 30 percent is essentially third world. And so, it’s interesting that you know you see these one, two, three biggest economies in the world, their education systems are very good at a different point. And of course what you’d really like to do is combine the American with the German with the Japanese and be really first class across the board, and that’s going to have to be the goal.

Charlie Rose: Brings me to the book, although that’s a nice lead in to it. Talk about Head to Head and the economic battle you see. And what is the imperative for the United States? What is it we have to do? And if we wake up and smell the coffee, what should we then do?

Lester Thoreau: Well, see the real issue in the 1990s and theearly 21st century, if you take Germany and Japan and the United States, we now have all roughly equal per capita incomes, and in the next two decades we’re going to want the same industries, the same highways, jobs. And we’re going to be competing with each other in this kind of very head to headway. And see, I think the real wakeup issue is can Americans learn to benchmark? And that is we look at the rest of the world and say who is performing the best, what’s the standards of absolute excellence in the world, and then we can be interested in how they got there. But the key thing is now how they get there but how we get there, which may be different.

Charlie Rose: Well, then, stop. Answer that question. If we look for the benchmarks, what do we find?

Lester Thoreau: Well, if you look for the benchmarks ineducation, as I say, we’re very good at the top and not so goodin the middle and the bottom. If you look at investment, we’re putting about half as much money into investment as the rest of the world is in plant equipment. If you look at R & D, we have got to build a civilian R & D establishment. If you look at infrastructure, the rest of the world is building all these high-speed trains, and we’re not in the game. And so in all of these areas, you really have to benchmark and then say what is there in American history, tradition, and culture that allows us to meet that performance standard? We can’t be Japanese, but we must meet their performance standard.

Charlie Rose: You also point to the nature of how we viewcapitalism and how the Japanese and the Germans do. How is it different?

Lester Thoreau: We are kind of the absolute ruggedindividualist. We play the brand of capitalism, which I call individualistic Anglo-Saxon capitalism. The Germans and Japanese play communitarian capitalism. And there are a whole series of things we do differently, look like they focus on business groups. We make business groups illegal. They believe in national strategies like Airbus strategies. We yelled at that as cheating. Down at the level of the individual, we believe you should change between employers very frequently.They believe you join a team, and that’s the most importantdecision you’ll make in your life, and probably won’t changeyour team. Their corporations say our goal in life is to have this long run strategy, not be short-term profit maximizers so that we can pay a lot of dividends to our shareholders.

Charlie Rose: Is it that black and white in terms of the benefit to them versus the benefit for us, and in terms of what’s right for our culture and what’s right for their culture? Because there are a lot of people now beginning to indicate some real unhappiness with the — with the way their structure

Lester Thoreau: It’s not that they’re right or wrong. The issue is they set standards we have to meet. See, we couldn’t play our economic game the way the Japanese did if we wanted to. But we do have to meet those standards. And so the question is, what is their out there in American history, tradition, and culture that we can tap that gets us to those investment levels, those R & D levels, those standards perform things.

Charlie Rose: And what is it?

Lester Thoreau: I think it has to be a rebalancing of theAmerican system. See, we’ve sold a very rugged version of the individual I approach to life in the 1980s. We forget the west was settled by wagon trains, community barn raisings. We have a history of working together in teams, too. And in the business community at the moment, that’s the absolutely critical thing.How do you get Americans to work together as teams?

Charlie Rose: It’s a silly argument, idea, but I mean is what Apple and IBM are doing any — does it even proximate whatyou’re talking about? I’ll give you an example of the kinds of things you talk about in terms of working together as teams feel because in an article in Fortune magazine, you pointed out that — help me with the pronunciation. Karutzu

Lester Thoreau: Yes.

Charlie Rose: Where all of these guys get together, these CEOs take a day off in their life, they go to Tokyo, and because they all have one big fat parent, or they come together, and they talk about strategies together to take on the Americans. Can we meet that challenge without doing just that? Because I can’t imagine, General Motors, Ford, and Chrysler getting together and doing that.

Lester Thoreau: No, I don’t think we can meet that challengewithout changing the America economy. But there again, we had business groups until 1933. So House of Morgan —

Charlie Rose: Right.

Lester Thoreau: General Electric, International Harvester —

Charlie Rose: So we split the House of Morgan up because wethought they contributed to the recession, I mean to the —

Lester Thoreau: The Great Depression.

Charlie Rose: — the Great Depression.

Lester Thoreau: But see, that was wrong. No historian then or now, now thinks that JP Morgan, Jr. caused the Great Depression.

Charlie Rose: So you don’t see any reason to separatecommercial banking and investment banking?

Lester Thoreau: No. See, I argue in the book, we’re going to have to go back to creating business rules, because that’s the way the rest of the world plays soccer.

Charlie Rose: Yeah, but people come along and say thesepeople at the SEC, who support regulation will come along, andsay, you know, we’ve got enough problems with insider trading as it is, and if you give all these people all that insideinformation, then we’re in for trouble.

Lester Thoreau: Well, see the way I would handle the insidertrading program is suggest there, what you simply say issomebody has a controlling interest in a company, they can’t buy or sell a share for a day without publicly announcing it ahead of time. And so if you — if somebody says, look, I’m going to sell my shares in company X and they tell you a day ahead of time, you’re going to sell first. And so they can’t trade on inside information if they have to give you 24 hours advance notice.

Charlie Rose: Let me look eastward to Europe. Are the Europeans going to get it together? We know that EC comes along in what, ’93?

Lester Thoreau: Yep.

Charlie Rose: Are they going to be doing it? Because if you talk about the productive powe of Germany, the design power of Italy and France, you talk about the London market, you talk about, you know, some of the scientific skills in the Soviet Union, and in eastern European, I guess you’re talking about a powerful economic machine that neither the United States or Japan can match. I got that that from this.

Lester Thoreau: Right. Well see, the important thing is I think the Europeans understand in both eastern and western Europe, they will change. They’re in a world that 20 years from now is going to be very different. Eastern Europe knows that they’re going to convert to a different system, not practice communism. Western Europe knows that they’re going to do the common market, so the British, French, Italians, Germans, they all know the world is going to be different, and they’re planning for it. See, that’s their tremendous advantage. They understand that they will change much and both Japan and the United States, we can still — hey, we can play the old American game where the Japanese can play the old Japanese game, and still win. And I think we’re going to have to overcome inertia while the Europeans are already beyond that point. And I would that’s their strongest advantage.

Charlie Rose: Back to the United States. I mean you and every other smart guy I know comes on this broadcast and other broadcasts and says, with great passion, the problem with us is we consume too damn much and we don’t save enough. I don’t see a whole lot of incentive, or at least a lot ofgovernment initiative to change that.

Lester Thoreau: No, I think that’s right. It’s easy to design a program where you would save more. You shift the tax system, change the consumer credit system. But, see, I argue it’s like dieting. Dieting is not a technical problem, it’s a psychologicalproblem. How do you lack — you just don’t eat to diet, but you’ve got to lock the refrigerator.

Charlie Rose: Or eat less.

Lester Thoreau: And, see, that’s exactly the problem we have to understand. We have to start to move. Now, see, suppose you said look, I’m going to run the American economy so that every year, consumption grows one percent slower than GNP.So if GNP grows to four, consumption at three. And that doesn’t devastate anybody’s standard of living. Standards of living get to go up. But you need some social discipline for a decade. If you did that for 10 years, in another 10 years we would be investing at German levels. If you did it for 15 years, at the end of 15 years, we’d be investing at Japanese levels. No great difficulty, no harm done, no blood, sweat and tears, but discipline.

Charlie Rose: All right. Now here. You’ve got a room full of people out here who are really depressed by everything that you have said and everything they read, and they’re fearful, because they understand the Japanese penetration of our automobile market, they know that the VCR they have is made in Japan. They know that the United States invented the VCR, and that their process has made it the market winner in terms of market share, in terms of consumer purchasing their kinds of products. What do you say to Americans who are saying, Jesus, Christ. Tell us something that will make us believe in the American destiny.

Lester Thoreau: Well, see, I think the answer is with a modicum of discipline, like we did in the man in the moon program in the 1960s, the United States can be fully competitive across the board —

Charlie Rose: A modicum of discipline.

Lester Thoreau: Modicum of discipline.

Charlie Rose: And a modicum of leadership that knows how toset the right goals an rally through political leadership.

Lester Thoreau: You need the leadership to get the discipline.

Charlie Rose: And you need the leadership that can encourage people to — I guess, and this is what Paul Simon, a lot of people said Paul Simon — I mean Paul Tsongas, Paul Simon endorsed you, but Paul Tsongas really made some inroads with the American voter electorate because they thought he was telling the truth, and therefore, they were buying into his economic message that growth was necessary, and that they believed that because he was preaching discipline, and what was necessary, they said here is a guy that we’re willing to give a chance. Do you think there is some merit to that argument?

Lester Thoreau: Yeah. See, I think you’ve got to be the world’s great salesman, and maybe Paul wasn’t the world’s great salesman. But I think that message can be sold to the American public as long as the American public understands that we’re all in this together. Everybody is going to be doing this at the same time. There aren’t a group of people who are going to be making it on the sly while everybody else is sacrificing.

 

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