Economics rivals

Intellectuals split on erosion of American worker's well-being.

By Louis Uchitelle
New York Times News Service

CAMBRIDGE, Mass. -- They have met only once since Paul Krugman returned last summer to the prestigious economics department at the Massachusetts Institute of Technology. It was a brief, accidental encounter among the file cabinets and secretaries' desks near Lester Thurow's office. "We exchanged pleasantries," Thurow said. "He was telling someone about a trip he had made to the far south of Argentina, and I listened politely."

The small talk left so much unsaid. For the two men are not so much colleagues as high-profile combatants in a struggle to explain the very nature of the national economy. With all the authority of their profession, they have gone public with strikingly different explanations of an economic phenomenon bedeviling not only the experts, but everyone else, too.

Why have so many Americans fallen behind in the last two decades, while an affluent minority has so visibly prospered? Why has the resulting income gap become so glaring and persistent, even with six years of steady economic growth under our belts?

What Thurow and Krugman have done is translate into vivid metaphors, riffs of sarcasm and doomsday prose the dry, technical debate of their colleagues at a time when many Americans have taken sides, telling pollsters that they think competition from the rest of the world is the big cause of their income troubles.

For Krugman, representing the majority of economists, that view is wrong. The big culprit, he argues, is new technology right here at home, requiring so many well-paid, college-trained workers, and so few of the less skilled.

But for Thurow and other challengers of this view, the rapidly evolving global economy is indeed mostly to blame, with its hundreds of millions of low-wage workers sending what they produce to the United States and pulling down the pay of average Americans.

Krugman, 43, and Thurow, 58, are not alone in this debate, of course. Policy prescriptions fill the air: Regulate trade, restrict immigration, levy higher taxes on the rich to subsidize the poor and improve educational standards in an attempt -- perhaps vain -- to make everyone highly skilled and well paid.

But Krugman, so often described as a shoo-in for a future Nobel Prize, and Thurow, who became an MIT economics professor while Krugman was still a teen-ager, have emerged as the loudest and most articulate public voices of the profession that, above others, should have answers.

As they go at it, never face-to-face, they offer very different versions of the economy, as if they were cardiologists differing over heart disease, with one citing stress as the primary cause and the other a fat-rich diet.

"The fact this debate exists means no one knows who is right," said Robert Heilbroner, an economics historian who has written books with Thurow. "The economics profession seems to have a split personality, with the Lester Thurows trying to see a larger picture, and the Paul Krugmans in the business of trying to measure hard-and-fast cause and effect."

The jockeying for the upper hand in this debate sometimes becomes personal. While serving as the defender of the mainstream viewpoint among economists, Krugman cultivates a firebrand image. He refers to "startlingly crude and uninformed" views of those he criticizes, often by name -- Robert B. Reich, the former Labor secretary, is a favorite target -- or to experts who "offer a logic no more confused than usual." He included Thurow in that last epithet.

So when Thurow was told last summer that Krugman was returning to MIT, after two years at Stanford University, he requested that Krugman refrain from disparaging his MIT colleagues -- a request that Krugman has honored so far. "He is too personal," Thurow said. "He makes it hard to have a debate."

Thurow, on the other hand, offers broad declarations that go far beyond the equations, diagrams and mathematical models that are, in Krugman's view, the essence of respectable economics. Thurow, for example, offers sweeping statements about the effect of the global economy on Americans.

"Those with Third World skills will earn Third World wages," he declares, and "anything can be made anywhere on the face of the earth and sold everywhere else on the face of the earth."

For Krugman, who declined to be photographed with Thurow, such statements are more seat-of-the-pants judgments than testable economic logic. They are, he wrote recently, expressions in a war "between the essentially literary sensibility that we expect of a card-carrying intellectual and the scientific-mathematical outlook that is arguably the true glory of our civilization."

'Enfant terrible'

Such differences enliven the buzz among their colleagues at MIT.

"Paul's style is still that of the enfant terrible, while Lester speaks more like someone on the mountaintop telling you how it is," said Richard L. Schmalensee, the deputy dean of MIT's Sloan School of Management.

Still, there is common ground. Both men see themselves as liberals, fighting not over ideology but over what constitutes good economics. They favor similar policies -- strengthening unions to give labor more bargaining power, pushing education to improve Americans' workplace skills and income redistribution via government policy to reduce inequality.

They once even taught a basic economics course together at MIT, although they lectured on alternate days. (Thurow was more fun for the students, but Krugman said he covered the curriculum.)

Both acknowledge that they shifted their attention from academia to the public arena after being shut out of top slots as advisers in Democratic administrations -- Thurow after Jimmy Carter was elected president and Krugman in the early Clinton days.

"My epiphany came at that famous economic summit in Little Rock in 1992," Krugman said. "A lot of stuff said there was clearly silly. I had been aware that pop economics writers had a much bigger audience than good economists. But I did not take that seriously because I thought that anyone who really mattered would know the difference. That turned out not to be the case."

Thurow and Krugman also share an uncertainty, even a pessimism, about the future. Krugman is doubtful that any policy can improve much on the market's self-correcting, if sometimes fallible, ways. And Thurow worries that without a new central challenge -- something to replace the cold war -- Americans will let the economy deteriorate by failing to support government money for research and necessary public investment that business shuns because the payoff is not direct and immediate.

In his latest book, The Future of Capitalism, he even foresees, in the absence of this central challenge, a decline into a modern-day Middle Ages.

"My brother in Chicago, whom I respect very much, called me and said I had written the most depressing book he had ever read," Thurow said. "I was surprised. I thought I had laid out solutions. But maybe they stick in my mind and not in the reader's."

Krugman, the only child of an insurance company manager, achieved luminary status in less than a decade as an economist. Finishing at Yale in 1974 and receiving his doctorate from MIT in 1977, he soon plunged into teaching and research, producing path-breaking findings on the interplay of government and industry in trade. Although he worries about government interference in markets, he nevertheless has demonstrated with mathematical precision how an assist from government can give an industry a competitive advantage in, say, manufacturing and exporting commercial jets or computer chips.

With his reputation as an expert economist firmly in place by the early '90s, Krugman cut back on original research and turned his attention to a wider public, displaying a rare knack for explaining the discipline and logic of economics if not to every subway straphanger, at least to the educated layman.

"There is no question that the polemics cut into the research," Krugman said. "I like to think that like Keynes" -- John Maynard Keynes, the legendary British economist who juggled scholarship, essay writing and public service -- "I can step back and do deep thinking again, but who knows. It is one of the things I wake up and worry about."

Thurow, 15 years older than Krugman, actually blazed this trail from academia to a wider audience. The eldest of three sons of a Methodist preacher in Montana, he went east to Williams College and won a Rhodes scholarship to Oxford. He earned a Ph.D. at Harvard in 1964 and four years later, at 30, found himself at MIT, holding professorships in both the economics department and the Sloan School of Management, where he later became dean.

Pioneering work on income distribution helped get him to the top. But he, too, shifted to capturing public attention after being shut out of government. He had helped in the Carter election campaign but, like Krugman 16 years later, lost out for a top advisory position in the new Democratic administration.

"I decided that if I could not have the king's ear, I would talk to the public," Thurow said. "That's the other way to have an impact on the economic system." And he certainly has talked to the public, in best-selling books, magazine articles, television appearances and on the lecture circuit -- at $30,000 a speech, he says, nearly double Krugman's speaking fees.

Theories differ widely

But for all their similarities, and their common home base, the chasm separating their economic theories seems unbridgeable.

Thurow applauded -- and still likes -- Krugman's early research suggesting that the government can help create an export advantage for industry. That fits Thurow's preference for a market system leavened by government. But Krugman objects that his research is all too often loosely invoked as justification for an intrusive industrial policy by people "who don't understand its limits."

Thurow says that when the Mexicans or Chinese export shirts or tires to the United States, for example, less-skilled American workers are edged out or forced into lower-paying service jobs. Krugman responds that imports from low-wage countries represent only 2 percent of the national income, not enough to have much of an effect on American labor. In fact, he says, trade in its entirety is too small a percentage of the gross domestic product to greatly influence wages.

Trade is a cause of income inequality, Krugman acknowledges, but he says other factors are more important -- primarily the onslaught of new technology. Because of that, the demand for highly skilled people -- from computer programmers to top executives -- has soared, and their wages have gone up relative to the less skilled.

The Thurows of the world misunderstand another dynamic, he adds. As the Mexicans and Chinese shift into shirts and tires, American industry produces jet aircraft, cellular phones and other high-technology products to pay for the imports.

"We raise the wage of skilled people who produce planes," Krugman said, "and lower the wage of those who are unskilled."

But, he said, the unskilled will probably not suffer over the long run. Incomes will rise in Mexico and China, Krugman said, as workers there become more productive. That was Japan's experience after World War II, and South Korea's more recently. The global pie, in effect, becomes bigger.

"If you can shift machinery from the United States to Mexico, why should you think that would level American wages down rather than Mexican wages up?" Krugman asked. "If a Mexican worker's output goes from one widget to 10 widgets a day, his wage rises to that level. If you strip the story down, this is the only explanation that makes sense."

Thurow offers an entirely different tale. With capital so mobile and transportation and communications improving constantly, companies can place their operations almost anywhere, he says. Even their high-technology operations are vulnerable as educated Russians and Eastern Europeans, for example, bid for work.

Adding salt to this sore, low-wage countries focus their exports more than ever on the United States. In addition, the influx of immigrants is very similar to shifting production abroad, bringing the low-wage labor here instead of sending the work there. As a result, wages are driven down in areas like Southern California or Texas or Florida where there are many immigrants. And everywhere in the country, there is downward wage pressure simply from the threat of American companies' relocating or producing abroad.

"Russia has 800,000 scientists and engineers," Thurow declared in an MIT lecture last month. "Why pay an American physicist $75,000 a year when you can get a Russian for $100 a month?" Moments later he invoked the image of a dress manufacturer with 18 factories around the world, linked by "high-definition television to control quality." This manufacturer, Thurow said, "tells customers: 'Don't worry whether the dress is made in Bangladesh or New York. It's the same item, same quality, same delivery time.'"

Still, Thurow would not intervene in the global economy by restricting trade or impeding the flows of people and investment across borders. Nor would Krugman. They are both free traders. The best solution, they also agree, is more economic growth both here and abroad. But they are worlds apart on how to achieve that growth, or whether it is even possible.

How to lift productivity

The divide is over productivity, or output per worker, which has not been rising all that much lately in the United States and the rest of the industrial world. Ultimately, the only way to generate more growth, or national income, is to put more people to work or to find some way for each worker to produce more each hour.

Thurow would try to lift productivity in stages. He would start by stimulating the economy, perhaps through government spending or lower interest rates, a Keynesian approach that is now considered by mainstream economists as more likely to produce inflation than real growth. For Thurow, however, the stimulus would open up opportunity, and the opportunity would pull up productivity.

A machine shop, for example, might open to serve a growing demand for auto parts. A waiter in a nearby diner, seizing an opportunity, takes a job as a grinder. Grinding auto parts produces more income than the same time spent waiting on tables. So the worker's output, measured in cash, rises. The diner raises its output per worker, too, by putting in a buffet. The customers, in effect, serve themselves, a form of automation.

"Productivity comes out of an economy that is pushed," Thurow said. "It is the result of what people do in response to the opportunities that growth makes possible, not the cause of growth."

Krugman calls this "wishful thinking." He, and most mainstream economists, say they do not know why the annual rise in productivity, or potential output, has slowed so much since the early 1970s. Nor do they claim to know how to reverse this poor performance. The math and the evidence, Krugman says, are inexorable. Whenever America's economic growth rate goes much above 2 percent -- its long-term ceiling -- the unemployment rate invariably falls. Workers are added to increase output, until the unemployment rate gets too low and the labor supply is exhausted -- simply bidding up wages without substantially increasing the nation's potential growth rate.

"All this seems pretty ironclad," Krugman writes in an article recently submitted to the Harvard Business Review.

Styles differ

The back-and-forth between Thurow and Krugman extends to their writing styles. In writing about economics for the public, both resort to metaphors or tales to make their point. But Thurow gets no peace here from Krugman, who says he misused the two key metaphors in The Future of Capitalism. One was plate tectonics, comparing global economic forces to the earth's steadily moving plates. The other was punctuated equilibrium, drawn from evolutionary biology and used by Thurow to illustrate rapid and fundamental economic change punctuating the normally slow evolutionary process.

"I happen to know a fair amount about plate tectonics and a lot about punctuated equilibrium," Krugman said. "The latter is not taken seriously by good biologists. And if he is going to use plate tectonics, he must take into account that small events can unleash huge consequences. I am amazed he did not use plate tectonics in that sense."

Krugman, whose most recent popular books were Peddling Prosperity (W.W. Norton, 1994) and Pop Internationalism (MIT Press, 1996), employs simple stories to illustrate economic theory -- a favorite being a baby-sitting cooperative with payments made in Popsicle sticks. But sarcasm is also a hallmark of the Krugman style. He pleads guilty, at least in part. "If I am trying to get across an idea that people find hard to wrap their minds around," Krugman said, "one way to do it is to find an influential person who is saying something quite silly because he does not grasp the idea."

MIT welcomed Krugman back last summer like a lost son. In 1994, he had gone off to a Stanford professorship with the woman he would soon marry, Robin Wells, an MIT economist who had also landed a job there. By last spring, both wanted to return.

"I convened the faculty and notified the administration," said Paul Joskow, chairman of the MIT economics department. "Within a few weeks, we put an offer together. Paul is very important to us."

Soon he was back on campus, a tenured professor again, reoccupying his old office in the suite with Solow and Samuelson, both fans of Krugman as a rising star in mainstream economics. But some of the mainstream economists in Krugman's camp are nevertheless critical of his view that the global economy has only limited effect on American wages.

Technology might have a greater effect on wages than the global economy does, said Michael J. Piore, a Harvard economist, but many factors play a role -- weaker unions, deregulation, job insecurity -- and assigning weights is futile. "The right position is agnostic," he said.

And Edward Leamer of the University of California at Berkeley has found that Chinese apparel makers do indeed exert downward pressure on wages here. When apparel workers lose jobs in this country because of the Chinese competition, they end up competing for jobs as gardeners, waiters, maintenance workers and the like.

"So the Krugman view that trade is not a large share of the gross domestic product is completely irrelevant, in my view," Leamer said. "I've told him that, but when he gets committed to a viewpoint, he doesn't let go."

The same might be said of Thurow.

"Lester provokes, he challenges, he takes chances with ideas that are often wrong, blindly wrong," said Lawrence of Harvard, an ally of Krugman in the economics debate. "But he is a very original guy, and you need those people. You ask, 'Would I like to see the world run by Lester Thurow?' No. Nor Paul Krugman, for that matter. But do I value his creativity? Yes."

All Contents © Copyright 1997 Lexington Herald-Leader. All Rights Reserved