SPIEGEL Interview with Harvard Economist Kenneth Rogoff
Kenneth Rogoff discusses the dangers of unbridled capitalism, the greed of corporate CEOs and a fundamental problem with the United States economy.
"Unbridled Capitalism Will Lead to Very Real Problems"
SPIEGEL: Hurricane Katrina showed just how unjust the distribution of wealth in the United States and other wealthy countries can be.
Rogoff: That’s right.
(Wealth distribution has always been “uneven.” Is it therefore “unjust?” In a healthy society doesn’t reward always have to follow effort? Otherwise what would be invented, let alone produced, or what would otherwise increase the size of the “distribution” pie? PB)
SPIEGEL: Professor Rogoff, the US economy is surging forward, while President Bush celebrates high growth rates. But most Americans believe they are living in a recession. Who is right?
Rogoff: I too have asked myself whether people have gone crazy. But the fact is that the share of wages in total growth is shrinking.
(When does the declining share of “wages” in total growth become our real concern… perhaps that’s already happened…, and is not just the result of the real source of new wealth, which is no longer human physical labor, that which for so long wages used to reflect, but human brain power, the wages for which by the way are rising, while, yes, the wages for the former are declining or remaining stagnant.PB)
SPIEGEL: In other words, most people are not benefiting from the recovery and are justifiably disappointed?
Rogoff: The working population’s share of national income remained constant for 100 years. That’s why Marx’s theory that only capitalists benefit from capitalism and workers are exploited was completely wrong. Nothing could have been further from the truth. Workers earned more as economies grew.
(Again, the economist is not noting how the meaning of “working population” has evolved. Perhaps that meaning didn’t change while that segment’s share of national income remained constant for the 100 years. Now, who is in the working population? More and more the latter is made up of the local service industries, food supply and distribution, health maintenance, property maintenance, and all that the latter two categories imply. And these services no longer require the training and skills that were well remunerated in the industrial age. By the way, Marx’s theory that capitalists benefited most from capitalism, and that workers were exploited was probably right. Ask the former mill workers of the NorthEast if that was true. PB)
SPIEGEL: Is this no longer true?
Rogoff: There has been a noticeable decline in the labor factor in all wealthy countries in the past 20 years. The rich are getting richer, but those at the lower end aren’t moving ahead as quickly as the capitalists.
(Again, this is because the nature of “work” has changed, and, I believe, it has changed for the benefit of the global economy and the global worker, if not for the particular economies of the Developed Nations. Now the “workers” of the world, to use Marx’s terminology, are beginning to have more of their share of the world’s wealth that used to be the sole property of the Western World. Wealth is still not well distributed, still unevenly shared, but more of the world’s people than ever before now have a share of that wealth. One example, oil revenues are no longer the sole due of the oil giants like Shell and Exxon. PB)
SPIEGEL: So Marx was right after all?
Rogoff: We’re still a long way away from that. Workers are not being exploited. But if their share of growth doesn’t increase, this could be a potential cause of social tension worldwide. The point is that so far attempts to reverse this trend in the US have failed. Boeing employees achieved barely anything by going on strike last autumn. Instead, the workers are now in a weaker position — both in aviation and in other industries.
(Rogoff fails to note why it is that the Boeing employees’ earnings are not growing commensurate with the company’s growth and earnings. The reason is that Boeing is both in sharper competition than ever before with the European Airbus and that one of the most important worker benefits, health insurance, has taken on a much larger slice of the company’s worker obligations and responsibilities. PB)
SPIEGEL: Meanwhile, corporate CEOs and Wall Street bankers are cashing in on record bonuses.
Rogoff: There has never been a better time to get rich. It’s quite astonishing how much money people make in the hedge fund business and in the private equity field, and how well-off affluent families really are. Given these contradictions, it comes as no surprise that average Americans have a different perception of the economy than President George W. Bush and his friends. They can play around with statistics as much as they want, but it’s clear that we have an unfair distribution of wealth.
(Here Rogoff doesn’t use argument. This is not too different from name calling. Some people, money mangers in good part, are becoming hugely rich, while the bulk of the U.S. population is not keeping up. And again he uses the term “unfair distribution of wealth.” But again he doesn’t explain why this is “unfair.” Uneven, OK, but why unfair? When do differences, in wealth or anything else, become “unfair?” Is it unfair that you’re taller than I am? Is it unfair that you can run faster than I? Is it unfair that your work is better rewarded than mine? It may be but the term calls for an explanation.” PB)
SPIEGEL: That hasn’t seemed to bother anyone, as long as the dishwasher-to-millionaire dream still exists.
Rogoff: I tell my children that a man like Bill Gates has a personal fortune of $100 billion. They can’t even comprehend that. Then I explain that he has more money than some countries. If we have these extremes, I can’t understand why we should get rid of the inheritance tax. It hasn’t harmed the economy, and it has evened out the distribution of income across generations.
(Here I have no idea what he means. Is Bill Gates bad? And what does his personal wealth have to do with our doing away with the inheritance tax? Shouldn’t the argument for or against the inheritance tax be based on more that the wealth of one man? PB)
SPIEGEL: Billion-dollar tax cuts for the super-rich — such as eliminating the inheritance tax — are meant to generate growth for all. Conservatives like to say that a rising tide lifts all boats.
Rogoff: The New Orleans disaster made it painfully clear what happens to people in deep poverty: they don’t even have a boat. Even more tax cuts are the wrong approach, as long as we don’t even have universal health insurance for children. I think that’s outrageous.
(Rogoff doesn’t address the interviewer’s comment, that tax cuts to the rich will help the economy, which, after all, is the only source of new wealth and subsequently a bigger pie and more for distribution. And then he throws in the comment about it being shameful that we don’t now have universal health insurance for children. I think we’re all for children being properly cared for. We don’t yet seem to have a consensus as to how this might best be done. Does he know? He ought not to throw out purely gratuitous comments like this one. PB)
SPIEGEL: Are these injustices the price for lower unemployment and strong growth in the United States?
Rogoff: This unbridled capitalism in the United States can’t be sustained socially. It leads to tensions. If we experience another five years like the last five, we will start seeing greater social friction. After all, people aren’t looking at how they’re doing, but rather at how their neighbors are doing and at their own place in society. These huge inequalities are not a particularly desirable characteristic in our society.
(This is more name calling. “Unbridled capitalism” until you explain what you mean is not more than a cliché. His other comments are without seriousness… “People aren’t looking…but at how their neighbors are doing…” On what basis do you make such statements? PB)
SPIEGEL: Are Western corporate CEOs driven by globalization, or do they themselves use the situation to their advantage?
Rogoff: We react to market forces and we try to protect jobs — that’s the image many managers have of themselves. They have no idea why people are so furious with them. Look at corporate takeovers where outgoing CEOs get a $50 million settlements and 5,000 workers are let go. That kind of thing happens all the time. On the one hand, it shows that we have a flexible economic system and we permit change. On the other hand, it’s completely naïve to think that this doesn’t create tensions.
(Rogoff speaks several times of “tensions.” He needs to describe exactly what tensions and within what segment of society they are now found. I do agree with him about the obscene pay awarded to corporate CEOs, often not even for exceptional services rendered to the company. However, not making these payments would not affect the necessity to let some workers go when the global economic realities call for doing so. The quickest way for a company to die, and thereby letting go all of its workers, is not to do whatever is necessary to complete successfully in the global economy. PB)
SPIEGEL: But don’t companies and countries that oppose globalization end up hurting themselves?
Rogoff: There are no easy answers. Of course it would be suicidal to nationalize our industries, for example. But those who say the economy is growing and everything’s just great are simply unwilling to acknowledge these cracks in the system. Incidentally, this gap is much bigger in China. It’s the 21st century along the coastline, but if you travel to the interior, where two-thirds of all Chinese live, you’ll experience the 18th century. These are incomprehensible inequities. They have an extremely raw form of capitalism.
(He should have stopped with “There are no easy answers,” rather than going on to make a few additional gratuitous comments about the situation in China, which of course leaves much to be desired and is only justified when compared to the prior situation in the country. Most economic development may only be defended in as much as it leaves people wealthier than they were before. The problem we have today is that the people who benefit are not necessarily our fellow Americans, and this drives the nationalists among us up the wall. PB)
SPIEGEL: According to the 19th century English economist David Ricardo, free trade is good for everyone. According to his theory, the wealthy industrialized nations would simply have to concentrate on becoming even more technologically advanced to make up for their outsourcing losses in certain industries.
Rogoff: Ricardo was never right. Sure, there are more winners than losers, and winners profit to a greater extent than the losers suffer. But the assertion that everyone benefits simultaneously from free trade is simply incorrect.
(Did David Ricardo say that everyone benefits “simultaneously?” Or did he mean simply, as Spiegel says, that free trade is good for everyone? It seems to me that we all benefit from the fact that our textiles and are shoes are not produced in low manufacturing cost places like China and India. How much of our income would go for clothing (and food without Walmart like superstores) without this manufacturing specialization? It may start by being painful, as the necessary changes are made, but in the end we most of us, if not all of us, benefit. PB)
SPIEGEL: Protectionism …
Rogoff: … is not a solution. We can’t turn back the clock. But unbridled capitalism will lead to some very real problems. We will see that ever-increasing deregulation can lose political support among the population in the long term.
(Again, clichés… “we can’t turn back the clock,” “unbridled capitalism.” And what does he mean by “ever-increasing deregulation can lose political support among the population in the long term?” Ever-increasing anything “can lose political support” in the long or short term. So what? PB)
SPIEGEL: If entire industries are shifted to the Far East, how can new jobs be created in the West?
Rogoff: Our high-tech industries are raking in tremendous profits, but for 50-year-old steelworkers or people in the aviation industries, it’s difficult or impossible to improve their situations. The problem — at least in the United States — is not that people can’t find jobs. The problem is that they’re no longer finding jobs that provide them with dignity and decent social status. This tremendous downward pull for unskilled laborers has been around for a long time. But now outsourcing is also beginning to affect people in mid-level and higher-level jobs — those who had felt secure in their positions.
(And this guy’s at Harvard?? Why not simply say that we need to enter into the new informational and post-information economy and we need to prepare our young people for the jobs, no fewer of them, that are and will be more and more available. We should stop feeling victimized by the loss of manufacturing jobs. This was inevitable, and was a good thing in respect to human progress. We need to help people make the change to the new economy, not support them in their resistance to the new, as Rogoff seems to be doing. PB)
SPIEGEL: Are you saying that not even a first-class education can protect against competition from the Chinese?
Rogoff: You know, I was a chess pro in my younger days. Back then, the best player in New York could earn a pretty good living. But now the Indians and Chinese have become brilliant chess professionals. They get on a plane and play all over the world. This has led to dramatic pressure on incomes. Nowadays, the best chess player in Argentina can no longer make a living playing chess.
(What is this supposed to mean? That the Indians and Chinese are beating our best chess players? It means that they work at it more, are better suited for it, whatever, but this means nothing else. Is he lamenting that the best players in Argentina can no longer make a living from their chess playing?” What about the cowhand who can no longer make a living from a cattle drive, or the potter from making pots? Cocktail chatter. Fun, but insubstantial.” PB)
SPIEGEL: What’s Germany’s place in the globalized world?
Rogoff: Even if your economy grows a little this year, the trend is pointing downward. You need reforms in the labor market, in the tax system, in the area of corporate governance and in the education sector. Your school system is very good compared with the US, but your universities are not competitive.
(Too bad he didn’t say what he meant by “reform in the labor market.” And all the rest. He might have found himself recommending the very same things the presence of which he is lamenting in the U.S. PB)
SPIEGEL: You’ve already written off one of the world’s biggest economies?
Rogoff: Please don’t misunderstand me. If Berlin would finally enact some decisive reforms, it could surpass the United States in growth for 20 years. Germany has such incredible wealth –with its culture, its education and its highly qualified population. It would just have to flex its muscles a little to achieve growth rates of four to five percent in the coming years and turn itself into an economic miracle, as it did in the 50s and 60s. But that won’t happen as long as you have this political paralysis.
(Again, too bad he doesn’t say what he means. In general when people talk about necessary reforms for the continent, in particular in France, Germany, and Italy, don’t they mean entering more fully into the global economy, and putting their own workers at greater risk, making them less secure?” PB)
Kenneth Rogoff was Economic Counsellor and Director of the Research Department for the International Monetary Fund (IMF) from 2001 to 2003. After having taught economics at both Princeton and Berkeley, he is now a professor at Harvard University. The former chess grand master is a critic of the IMF’s neo- liberal leanings and describes himself as a "Schwarzenegger Republican." In his most recent publications, he points to the negative effects of globalization and warns of political unrest should politicians and managers fail to provide for a more just distribution of wealth.
Interview conducted by Frank Hornig