America's most famous economist, Paul A. Samuelson, on protectionist tendencies in the world economy, the victims of globalization, U.S. debts and deficits, and how his teacher Joseph Schumpeter would have judged capitalism today
SPIEGEL: Professor Samuelson, there are obvious tensions between the United States and China, people are calling for restraints on outsourcing, and the French and the Dutch have rejected the EU constitution because they fear competition from Eastern Europe. Is the principle of free trade in decline again?
Samuelson: There's a specter of protectionism hanging over every modern society. America, which emerged from a colonial past, was known as a protectionist
society. And the Republicans, the party of President George W. Bush, were always the party of protectionism. That may even have Darwinian roots, because you only survived in the jungle if you were suspicious of outsiders.
SPIEGEL: That's scarcely what students of economics learn in the classroom.
Samuelson: Correct. In the classroom one of the most fundamental things we teach is that free trade will necessarily raise living standards for everybody and that specialization and diversification can prove a win-win situation for rich and poor countries alike. The first supporting evidence dates back to 1817 and the works of the great English economist David Ricardo.
SPIEGEL: And that's not true anymore?
Samuelson: Have you ever been to WalMart?
SPIEGEL: Yes, why?
Samuelson: The exceptional thing about Wal-Mart is that they have found such cheap sources of supply in places like China. If you go into one of their stores, you generally see poor Americans buying these cheap products - and that represents a tremendous boost to their living standard. At the same time, these same people are afraid of losing their jobs or having to give up one job for a lower paying position.
SPIEGEL: Do they lose more than they gain?
Samuelson: They may do on occasions. Globalization doesn't always produce a win-win situation for every party involved. Not everything that promotes globalization automatically benefits everyone. This is the reality of the Ricardian comparative advantage today.
SPIEGEL: You almost sound like an enemy of globalization.
Samuelson: To avoid misunderstandings: By and large, living in a globalized world means an increase in material well-being. There's no question that the world's productivity and knowledge has grown and spread as a result of post-Newtonian technological change. And as an American patriot, I have welcomed the rise of Europe after the war because economics is only ever a zero-sum game during times of war: When Bismarck was in the ascendancy, Louis Napoleon went into decline, if you think back to the Franco-German war of 1870/71. In the period after the war, though, it was different: Germany's and France's lots both improved.
SPIEGEL: So in peacetime, everyone prospers in the global economy?
Samuelson: Well, your generation has lived better than your parents' generation, and your parents have lived better than theirs. We wouldn't have seen that powerful economic upturn around the world without the dynamic force of globalization. But at the same time, not everybody benefits from it.
SPIEGEL: Is this a new phenomenon?
Samuelson: Not really. About 35 years ago, I was invited to speak to the directors of Ford, and asked, 'Can you imagine a car as good as a Ford being produced at a slightly lower price elsewhere in the world?' I was thinking of the new Toyota at the time. My audience obviously didn't want to hear that. If Toyota could build better cars more cheaply and more efficiently than Detroit, this was not - by my mathematics - a win-win situation. It was a win-lose situation. And we were the losers.
SPIEGEL: And this still applies today?
Samuelson: In my view, American economists have played down the importance of globalization and failed to realize how unfinished the process still is. The pattern of economic history suggests that win-win situations will be mixed with some winlose situations for most countries.
SPIEGEL: What's the consequence?
Samuelson: In the globalized society, the split between the upper half of the income distribution and the lower half in America increases. While globalization brings us this extra prosperity, it also brings us extra uncertainty, tension, and greater inequality. In America, it leads to a cowed workforce.
SPIEGEL: And first and foremost, it's the blue-collar workers that suffer.
Samuelson: Yes, but even for MIT graduates, things have changed. In the past, they used to get a first job, followed by better and better jobs with higher and higher wages until they retired. That no longer holds true today: Nobody knows what is going to happen next in their careers. It is a tenser world now, a more nervous world.
SPIEGEL: What makes you believe that?
Samuelson: CEOs of large corporations may only hold down their posts for three years - but I can't feel sorry for them because they can make a lot of money during that period. You are sitting in a building which once housed the American headquarters of Unilever. One of the highest paid CEOs in America had his office just three floors above this one. He was paid about 1,000 U.S. dollars a day - in 1940 dollars. A median employee probably earned about one-fortieth of that amount at the time. You know what the ratio is today?
SPIEGEL: Far higher, I presume.
Samuelson: The factor is 400, at least in some companies. The market has neither a heart nor a brain, it just does what it does. Every time I open my newspaper I learn of a new company that has reneged on its social security benefits, and this is all happening within the law. That would have been impossible in the past.
SPIEGEL: The situation you are describing should be the perfect breeding ground for a trade union movement.
Samuelson: Unionism died a long time ago in the U.S., when Ronald Reagan was in office. Much of the American unions' power began to dissipate because they no longer had any friends in Washington. And, even more importantly, every victory won by a union in one of the big companies turned out to be a Pyrrhic defeat. It only hastened the speed at which Japanese suppliers secured the business.
SPIEGEL: Can anything be done to mitigate these drawbacks?
Samuelson: Maybe we should slow the process of globalization down a bit, but you can't stop it, and nor should you. What we can do is to help the people who suffer from its effects. We can use the power of the fiscal system to transfer wealth from very affluent people like me to the less affluent. That wouldn't slow our rate of growth appreciably either.
SPIEGEL: Redistribution is the approach we have generally tried in Germany; low growth and high unemployment are the consequences.
Samuelson: You have to apply the fiscal system carefully. What you can't do is to go outside the market and neutralize its effects with legislation. You can't make the poor rich, or you will kill the goose that lays the golden egg. It's my hope that as much of Franklin D. Roosevelt's and John F. Kennedy's New Deal as possible can be preserved in America in order to alleviate the inequalities. Not to wipe them out, but to reduce them.
SPIEGEL: Are these kinds of tensions inevitable?
Samuelson: No frictions whatsoever would have been very surprising. You have to consider two things: In the modern world we have both the liberalization of trade and the erosion of borders. Now, in some ways, free trade is a substitute for allowing lower-wage people entry into your country. When people in the European Union consider whether to admit or reject new countries, they are not just making an economic decision. They're making a social decision too. Some of the social problems would actually be eased by outsourcing work rather than having the newcomers become your neighbors.
SPIEGEL: But the consequences are the same in America and Europe: People's jobs are endangered.
Samuelson: In America there are no powerful unions to prop up wages. As a result, people are willing to accept jobs although they may earn less than before. This process has been slowed in Germany, but if you block it completely, the economy will simply deteriorate further and further. In reality, hourly wages in France and Germany are roughly as high as in America. It's just that Europeans have shorter working days.
SPIEGEL: So working longer is the antidote to Germany's economic malaise?
Samuelson: In my opinion, a change in attitude is needed for Germany to experience a surge in growth. By that I mean fewer differentials between the privileged or fortunate blue-collar workers who have jobs and their own sons and daughters who may be unable to find work. Even in Denmark you can fire people - provided you have union approval. That's part of what it takes to survive and grow.
SPIEGEL: So politicians still have the power to shape globalization?
Samuelson: Yes, of course. Politics is extremely important. Let me give you an example: In 1945, I was a very able young economist, at the peak of my powers. If somebody from DER SPIEGEL had come to interview me ...
SPIEGEL: ... the first issue of our magazine wasn't published until 1947 ...
Samuelson: ... anyway, had somebody asked me which part of the world would develop fastest in the next 30 years, I would probably have said Latin America: Argentina or maybe Chile. These countries have a temperate climate, a population primarily of European heritage.
SPIEGEL: You were wrong.
Samuelson: I was completely wrong. Not because I misjudged the economics, but I underestimated the political aspect: The populist movements like the Peronist dictatorship. They were never able to control prices.
SPIEGEL: India and China seem to be making more headway on their path to prosperity.
Samuelson: India simply slept for 40 years. And China is the 800-pound gorilla in the living room. We are talking about a process that is accelerating. I think - and I hope I'm right this time - it is inevitable that China will outstrip Japan in the not too distant future.
SPIEGEL: Do you expect China to become an even bigger economic power than the United States?
Samuelson: A sober and realistic extrapolation would suggest that China will become the dominant economy in the world if its political system doesn't get in the way - but that's a very big 'if.'
SPIEGEL: Many people in the U.S. feel that China ignores the principles of fair play. Do you think China is one-sidedly milking the benefits of free trade?
Samuelson: You cannot expect a low-income, low-productivity country to have the amenities that America enjoys. It's unfair to expect labor and environmental standards as strict as ours. That is unrealistic. I grew up in a steel town, in Gary, Indiana. That was a long time ago, almost 90 years. If a worker's leg got caught by the hot molten steel, they didn't even stop work. You can see how things have improved over the years, and that will happen in China too.
SPIEGEL: How would your former professor - the Austrian economist Joseph Schumpeter who defined creative destruction as the driving force of capitalism - have analyzed the current status of globalization?
Samuelson: I actually talked to him ten days before he died, at the 1949 American Economics Association. I knew his mind pretty well. He would have said that this burst of energy, released essentially by the computer, is fully consistent with his 1912 book, The Theory of Economic Development. He wasn't going to waste much time, as I might, brooding over the fate of the poor. I suspect he would have approved of the former British prime minister Margaret Thatcher. And he would have strongly disapproved of Germany's Social Democratic programs, even though he was Austria's Treasury Secretary in a Social Democratic government. But his heart wasn't in it.
SPIEGEL: Schumpeter considered the Great Depression a good thing because it purged the system of its excesses.
Samuelson: My other Austrian colleague, Friedrich-August von Hayek, shared this belief. He argued that giving a drunkard more alcohol, so to speak, would just make the situation worse. In the context of the time, I think this was crazy. In both Germany and America, over a quarter of the population had no job during that period, and they were arguing that we should 'let the system sweat it out.' This shows a faith in unadulterated capitalism that is unwarranted.
SPIEGEL: Because capitalism needs to be "tamed"?
Samuelson: Capitalism needs a fair set of accounting rules. It needs a system of justice. People will not lend money to other people if those other people can go bankrupt and simply default on the loan. This is as true in the business world as it is between states. President Bush has little unilateral power to tell the Chinese what to do: to revalue their currency for example. He is talking to equals.
SPIEGEL: Many Americans are scared of the new competitors. Where do you see the future of the American economy?
Samuelson: We may still be the lead cyclist breaking the wind for the riders behind us, but the others are closing in. America's status as a leading nation is growing increasingly tenuous because we have become such a low savings society. We are a society of me, me, me, and now - not thinking about others and tomorrow. I suppose the problem is the electorate, not its leaders. That, of course, is not an optimistic diagnosis.
SPIEGEL: What is wrong with America?
Samuelson: Just take a look at the Mathematics Junior Common Room at MIT: Maybe only one out of ten students was born in America. I blame TV.
SPIEGEL: Television is a threat to competitiveness?
Samuelson: In the past, bright kids who later became mathematicians were doing challenging puzzles. Today they watch TV. There are too many distractions, which is another reason why we have this attitude of me, me, me, and now.
SPIEGEL: That's why you think America is losing ground?
Samuelson: It's not the only reason. The U.S. is so vulnerable because it has an aging population, like Japan and Germany. In 2020 the baby boom generation will retire en masse. This much has been understood since the early eighties. The workers should have been saving like the devil, but all they do is spend. We are actually using up the savings of countries much poorer than ourselves who recycle their trade surpluses into very low-interest government bonds.
SPIEGEL: You're referring to the financial relationship between the United States and China. The People's Republic gives almost unlimited credit to the U.S., and the Americans buy their products.
Samuelson: The Chinese are happy to do it at the moment, and will continue to accept it for a while longer. But when the demographic shift occurs, this could change. It won't just be foreigners who are taking their money out of the country; there will be Americans investing abroad as well, until everything becomes so disorderly that capital controls are needed.
SPIEGEL: At which point the world would face a pretty substantial financial crisis.
Samuelson: I don't think it will be anything like the Great Depression because - as mankind has learned - you can avoid permanent deflation if you print enough money. But I think it might still prove a very rough ride if that scenario does come to pass.
SPIEGEL: Is this degree of risk unusual in historical terms?
Samuelson: I would say so. You know, breaking the peg of the Chinese yuan would help a little, making us slightly more competitive. But I don't believe for a moment that this will substantially decrease the foreign debt the U.S. will be accumulating between now and 2020. And that is the time when the pinch will truly come.
SPIEGEL: Professor Samuelson, thank you very much for this interview.
Paul A. Samuelson
Paul A. Samuelson has shaped 20th century economics like no other. Millions of students around the world have been initiated into the subject by his 1948 classic Economics: An Introductory Analysis, which is currently in its eighteenth edition. Samuelson was born in 1915 in Gary, Indiana, where his father was a pharmacist. He attended the University of Chicago and Harvard, before being awarded an assistant professorship at the Massachusetts Institute of Technology (MIT) in 1940. At the start of the 1960s, he served as an economic advisor to President John F. Kennedy. Notwithstanding his retirement in 1986, the 90-year-old Nobel Memorial Prize winner still spends four days a week in his office at the Sloan School of Management; he is currently working on several articles and, according to his assistant, has plans for another ten.