The American Dilemma: The Damage of Globalization on the American Economy
An Interview with Professor, Dr. Ralph E. Gomory
World renowned mathematician, Ralph E. Gomory, has long been exploring and vocal on the issue of globalization for more than three decades while warning the American public about how damaging globalization could be. The Liberty Magazine interviewed Dr. Gomory seeking his insight on why globalization and offshoring have started and what goals American corporations need to have for the betterment of America and the world.
About Ralph Edward Gomory: Ralph Edward Gomory is an American applied mathematician and executive. Gomory worked at IBM as a researcher and later as an executive. During that time, his research led to the creation of new areas of applied mathematics. After his career in the corporate world, Gomory became the President of the Alfred P. Sloan Foundation, where he oversaw programs dedicated to broadening public understanding in three key areas: the economic importance of science and research; the effects of globalization on the United States; and the role of technology in education. Gomory has written extensively on the nature of technology development, industrial competitiveness, models of international trade, and the function of the corporation in a globalizing world. His 2001 book, co-written with Professor William Baumol, “Global Trade and Conflicting National Interests”, raised the question of the roles and responsibilities of American corporations in a world where national economic interests may be in conflict.
Interviewer: Hanako Cho
Globalization and Job Loss
(I): Thank you very much for the opportunity to interview you today. Due to globalization, we have suffered job losses. Many Japanese people do not discuss the negative impact of globalization. Would you please explain why globalization is so harmful to us?
Gomory: Let me explain from the beginning that I am not an expert on Japan. I will try to explain why it is so damaging to the United States. I think you will see the sorts of things that Japan should avoid and that, unfortunately, the United States is doing. I hope that will be helpful to you.
Profit Over People
Gomory: I think the United States gives you a very good example of how it can be harmful and the sort of things that would be very desirable for Japan to avoid. Our corporations, in my opinion, unfortunately, are devoted to making as much profit as possible for their shareholders. So, if they are offered sufficient profit, they will move their productive capacity, their factories, their technology, over, for example, to China. In the short run, that is more profitable for them and that benefits their shareholders.
How the Economy Loses
There are two points I want to make: Firstly, benefiting the shareholders, at least in the United States, is not the same thing at all as benefiting the economy because by and large, the shareholders are relatively wealthy. So, in moving our plants overseas, we essentially replace the wages of our American workers with the smaller wage of workers in China. This is profitable for the shareholders at least in the short run but the American workers lose out. The country as a whole will probably be worse off. This certainly contributes very strongly to inequality because the money that was going to be spent on wages is instead turned into profits and it goes to a different set of people.
Loss of Technical and Competitive Capabilities
Secondly, in the long run, the companies will have moved their technical capabilities to China and created very strong competition, often government-subsidized, which eventually, they cannot compete with.
So, in the short run, there is a major impact on inequality. In the long run, there is actually, a loss of competitive ability. Those are the ways in which this can be harmful to a country. I hope that you in Japan are not going to make those mistakes.
How Visiting Japan Affected Interest in Globalization
(I): You have been speaking out this issue for more than two decades, especially in the book entitled “Global Trade and Conflicting National Interests”. What made you really interested in this issue?
Gomory: For many years, I was the Director of Research of IBM. From time to time I visited Japan, especially when we were negotiating the patent exchange agreements with the Japanese computer manufacturers. So, I got to see a great deal about the Japanese computer industry as it was at that time – We’re talking about the 1970s – quite a while ago. That’s what got me interested in it. For instance, we visited OKI Corporation.
We gathered every day after we visited a different Japanese company. We would get together and make notes about what we had seen. Otherwise it would be wiped out in our minds by the next day. I remember sitting in a hotel and my two most experienced semi-conductor people were with me.
They said to me: “That pilot line we saw at OKI is better than anything we have in IBM. OKI was just starting out in semi-conductors. It had no revenue to speak of, but they had a better pilot line than IBM. It came because the Government wanted OKI to succeed. They wanted Japan to succeed in the computer industry, and they did. That got me interested in the fact that, “Hey, this isn’t really a free trade world – an ideal world in which everything just somehow magically is managed by markets.”
(I): It was aided by Government. Right?
Gomory: Exactly! It was very clear that the Government had a very intelligent approach and they were successfully helping Japanese computer manufacturers to become successful. I thought: Well, I’m not an economist but I’m interested in this. Later on, I became more of an expert on trade. My co-author, Will Baumol, is a very well-known economist. So, we tried to put that question into the book. So, that’s how the book came about.
(I): How interesting! So, you decided to write on this issue by coming to Japan?
Gomory: Absolutely! You can say I was inspired by the very good support that the Japanese Government was providing to our competitors.
The Government’s Role in Creating Competitive Industry
(I): In your book, you elaborate on the issue. Could you elaborate more on the Government’s role to create a competitive industry?
Gomory: One very traditional role which the Japanese Government played was: It’s very hard for private industry to get into something big. You can’t compete in semi-conductors with a little plant. It’s not economical, right? There are many industries in which it is very hard to enter the industry because there are economies of scale. So, one thing that a government can do is to provide the money that enables the industry to start in their own country and get up to scale. That’s a very traditional and useful role for them. The Japanese Government did that in a very good way from the Japanese point of view. Yet, it wasn’t so great from an IBM point of view. That’s different!
Loss of the Spirit of Nationalism in the United States Post 70s
After the World War II, there was considerable conflict between the United States and the Soviet Union. The Soviets at that time, really wanted to spread Communism around the world and the United States was very much opposed to that. Our companies at that time, wanted to serve the nation. They were so used to the idea from the War that they had served the nation. They were not thinking primarily of the shareholders. They were thinking of everybody. We’ve got to be productive. We’ve got to have decent wages. We have to treat people right. We have to be a model to combat communism as we fought against Hitler in the War. So, that spirit animated the companies at that time. They were not just trying to maximize their return to the shareholders. If you look at how the wages grew during that period from World War II into the seventies, you will find that profits and wages went up together. Shareholders were getting something – wage earners were getting something at about the same rate. They were not contributing to inequality. They were bringing the nation along with them. So, much of that has changed a great deal. You know this better than I do. I think there’s still a spirit in Japanese companies that they want to serve Japan. You know this better than I. It is important that spirit remains.
How American Corporations Changed After the 70s
(I): Why did the American corporation lose this kind of spirit after so many years?
Gomory: If you look at my website, you will find there’s a part of it called “The Role of the Corporation”. That’s where we discuss in many different ways why it changed.
There are two articles. One is very long. The long one is called “The American Corporation”. Down the page, you will find an article which says: “New Goals for American Corporations”. The one after that is called “The American Corporation”. “The American Corporation” is quite long and very academic. The “New Goals for American Corporations” is a short summary of that article. So, one is quite long and then there is a short summary one. If you want the written description of what happened, those two give it to you, in the short form and the long form.
Now, I’ll describe to you what happened. In the 1970s, the threat from the Soviet Union at that time was abating. Also, in the seventies, the stock market in the United States didn’t go anywhere. It ended up in ten years where it had started. So the shareholders became dissatisfied. They didn’t think they were getting enough attention. In some sense, they were right. I was already quite high up in IBM. I was reporting to the CEO. We didn’t think much about the shareholders. We were trying to have a good product.
Use of Stock Options to Incentivize Profits
We were trying to increase revenue. We were trying to be profitable. We had lots of competition. That’s what we thought about. We were not trying to “squeeze out” something special for the shareholders, but they became dissatisfied. This wasn’t hidden. They published their dissatisfaction and they found a way to change things. Instead of paying the top management with salary, they added to it a large slice of stock options.
They gave so many to the top management. If the top management could get the stock price up, they would become much richer than they had ever imagined. In fact, that’s what happened. In the course of not many years, the pay of the top people went up by a factor of ten. I don’t mean 10% – I mean, ten times. So, soon they were doing everything possible to get the stock price up.
Offshoring to Drive Up Profits
That then drove the motivation for offshoring. In particular, offshoring to Asia because there were many advantages that were being offered by the Asian countries, especially China. That’s how this offshoring of the American technology and industry came about.
(I): I see.
Creating the Trade Deficit
Gomory: This is also how the inequality came about because they moved the productive facilities overseas. Even today, we have a trade deficit. We have a trade deficit of about half a trillion dollars a year.
(I): Most of it to China?
Gomory: A large part of it is to China, yes. The manufacturing part is to China. China in turn, outsources some of that to Japan and Korea. So, it’s complicated. However, it’s not in the U.S.
Gomory: So, that really is the history. That has been going on now for a very long time. It is a huge strain on the American economy.
The Creation of Inherent Conflicts
(I): Have there been any internal conflicts in the minds of top management between what is good for them and what is good for America? In the short-term, it’s profitable, but in the long-term, it’s going to be really harmful for employees and wages.
Gomory: I think there’s definitely a conflict in their minds. They are decent human beings. That’s why they had to be given that much to overcome their natural feelings.
Shareholder Control Driving Push for Profits
(I): I see.
Gomory: That’s why they had to go up by a very large factor of ten. They can always think: “Well, I’ll have all that money and do something useful with it.” So, it was difficult to overcome. However, once it became established, that’s the only thing they should think about. They also learned that if they didn’t act that way, the shareholders would throw them out. In the end, the shareholders elect the Board of Directors and the Board of Directors control. So, the fact that the shareholders control is so to speak the fundamental problem.
Effects on Manufacturing
(I): What is actually happening to the manufacturing industry?
Gomory: It’s being greatly weakened. People say things like productivity has increased. That’s a numbers game, because if you look closely at manufacturing, there’s one industry that always improves productivity enormously from year to year. That is the computer industry. That’s built in to the way computers are built. Next year’s computers are always much better. The growth masks the fact that in all the ordinary industries, we’re going nowhere. Many people say that the loss of jobs is due to automation. That’s not true. That’s what they want people to believe so they will continue to do this.
Loss of Research and Development in the U.S.
(I): So, do you think that the R&D is also weakened in the United States?
Gomory: Yes. It’s unavoidably weakened. One of the ways you learn to make something better is by making it.
(I): I see.
How Japan Prospered During This Period
Gomory: In fact, one of the great strengths of Japan during the period that I knew Japan, was this: They’ve always trained their engineers in manufacturing first, even if they were just going to do research or development. So they understood what it meant to actually manufacture things. That was a very wise thing the Japanese did. You learn by doing in those things, and that applies to manufacturing.
The Argument and Effects of Free Trade
(I): What about free trade? Free trade supporters often say they are supportive because they can buy cheap goods from overseas. Do you think their thoughts are valid?
Gomory: By the way, this is a well-known American argument. First of all, you have to consider that they have to use their decreased wages to buy the cheap goods. So there’s a trade-off in that. If you write down all the equations that govern this exchange, even assuming balanced trade, which we don’t have, what you find is this: There’s a net benefit to the country if you start trading with a much undeveloped country that doesn’t have manufacturing and so forth. However, as that country develops, it becomes less advantageous for you, and very soon it becomes disadvantageous to you. In other words, you’re losing more in wages than you’re gaining in cheapness.
Global Trade and Conflicting National Interests
Now let me point out to you on my website, the article that lays that out very clearly. If you go to the heading “Trade” and we go down under that heading, we come to a very good summary article. It begins with the words: “Ricardo Revisited”. That is a lecture. There is a published paper but the lecture is better. The paper after it is where we published that. This is the best presentation. This is all in the book but this summarizes it better, too. The book is about global trade and conflicting national interests. You’ll notice if you look on the back of the book, it is supported by a Nobel Prize Winner and a very prominent leader in international trade, Bhagwati. On the back of our book, Bhagwati endorses it.
That is a very profound thing. If you have a trading partner that’s much undeveloped, it’s good for both of you if they develop to a certain point. After a certain point, it becomes bad for you that they develop further. Unfortunately, this shows that there’s inherent conflict in international trade under the standard models. What’s the best for one country is poor for the other country. What’s best for the other country is poor for this country. In the middle (or in-between), is best for the world. Neither country wants to stay there because they can do better by destroying the other one. So it’s a very unpleasant conflict that is built in which is no one wants to admit it’s there.
(I): It’s probably very difficult to realize all those “Ricardo’s ideals” in the real world. Right?
Gomory: Yes. By the way, David Ricardo, who really was the originator of all this, understood this stuff. However, the conditions of the world were different.
(I): You mean he really understood the real situation?
Gomory: He understood it perfectly. He said in his famous chapter: “Essentially, if the British investors were willing to invest abroad, that would be bad for England. Of course, today, people invest anywhere. So, the world has changed. Ricardo understood it.
National Protectionism – Is the U.S. Doing a Good Job?
(I): With regards to China, Secretary of Commerce, Wilbur Ross said China is the most protectionist country. Do you think this is true?
Gomory: Well, there’s no question that they control what happens in the Chinese economy. They only let in foreign industries when they want to as a temporary measure. I don’t think it’s necessarily the most protectionist but its scale makes it the most formidable. Many countries are protectionist. It’s rather exceptional to have one that is just sort of leaving things alone. They do a good job. Japan when I knew Japan, was doing a good job for Japan. China, I think, is doing a good job for China. My objection is that our companies and government are not doing good job for the United States. I think these other people are doing much better jobs for their countries.
Trump’s Trade Policies and the Direction of the U.S. Economy
(I): How do you think Trump will address these issues? He said he’s going to work very hard for people who are left behind by getting jobs back from China, Mexico and Japan. What do you think of Trump’s Trade Policy?
Gomory: Well, I understand Trump’s trade objectives and I sympathize with him. Now whether he can get that to happen is another story, because he offends many people and I can understand that is more the question. I think his objectives are good in trade. In fact, I will now give you another reference.Look under “Trade”, the very first article
(I): The very first article: “Can this President Change the Direction of “Our Economy”?
Gomory: Exactly. That’s all about Trump. We just don’t know whether he can do it. I think his intent is there. Curiously enough, I believe that he was quite impressed, as I was many years ago, by the Japanese Economy. So he understands that we’re not in this mysterious free trade world. He understands that thoroughly. Now whether he can really do anything, well, that remains to be seen. I think he’ll try. He may not succeed.
Restoring Manufacturing Jobs in the U.S.
(I): Some manufacturing companies send jobs overseas. I think it’s going to be a really difficult task to restore these.
Gomory: It’s very difficult to bring things back. You can grow things instead.
(I): Inside their own countries?
How the U.S. Government Can Grow Jobs
Gomory: That’s right. Inside your own country, you can do a lot. You can get government contracts and not let other countries have the government contracts. All the things other countries do to advantage their own. These companies are American companies. If they decided to build in the U.S., they could do it. They’re going to be under pressure to try and do that. The government will try, in some fashion, to help them. It’s just a question of how effective that all will be.
Job Inequality: Is There Hope for the U.S.?
(I): So, under the Trump Administration, will inequality in America improve?
Gomory: That’s very hard to know. Anyway, I don’t have an article written about that. I can say this, if we don’t change what we’re doing right now, inequality in the United States will not improve.
Japan’s Income Stagnation: How Can This Change?
(I): Japanese people’s average income remains unchanged for more than two decades. We are falling into the same trap as in the United States. We are wondering, what should we do to improve the situation?
Gomory: I think it’s very important that your companies work to benefit the workers as well as the stock holders and customers. That they don’t use their political influence to do things that are bad for the country and good for their profits. They have great political influence in the United States. I don’t know how it is in Japan.
(I): Thank you very much for sharing your view today.
Gomory: I have enjoyed talking with you. Thank you very much.
The end of interview