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Thurow, Dornbusch Use Wits in Economics Debate

By Naveen Sunkavally

Armed with a compendium of facts and jokes, two of MIT's heavyweight intellectuals, Lester C. Thurow of the Sloan School of Management and Rudiger W. Dornbusch of the Department of Economics, squared off in a battle of wits and economic analysis on Tuesday night.

Over 350 spectators showed up, filling the small, Colosseum-style room E51-345 to overflowing.

The two, who fielded both prepared and extemporaneous questions, debated economic issues, ranging from the European Monetary Union, to growth and productivity, bank mergers, income inequities, the International Monetary Fund, and the future prospects of Japan, China, Germany, and Italy.

Productivity measures debated

The first question asked Dornbusch and Thurow to discuss why the United States has had such a low growth rate in the last twenty years despite having undergone a massive technological revolution.

Thurow said that the answer depends on which part of "the elephant you feel up." For the wealthiest 20 percent of the nation, technological progress has created many billionaires, and the 1990s have been the best decade in U.S. history, he said. Conversely, for the bottom 60 percent, Thurow said, the 1990's has been the worst decade, and productivity growth, which is "the ultimate economic objective," has hovered at around only 0.8 percent.

"[In my field] we don't feel up elephants," Dornbusch responded. He adopted a more optimistic view and blamed Gross National Product accounting for not adequately representing the growth rate. Dornbusch said that the GNP does not measure services, especially the booming financial services sector, and that it does not take into account the increase in flexibility afforded by these new technologies.

"It's not as clear as he's making it," Thurow said, arguing that services only account for a "little better than zero percent of growth."He expressed distaste for the Boston correction method of arbitrarily adding a percentage point here and there to growth levels.

Betting on the euro

The European Monetary Union was also a topic of contention for Dornbusch and Thurow. The EMU, as established by the Maastricht Treaty of 1991, is a collection of countries including most of Europe that will adopt a single currency, the euro, on January 1, 1999.

Both more or less agreed that Italy, which "has no credibility" according to Dornbusch, would emerge as the big winner in the EMU deal. But they differed more strongly on how strong the euro would be a year after January 1, 1999.

Thurow maintained that the euro would have a higher value one year after its release. After Thurow said he was willing to bet on his position, Dornbusch pulled a bill out of his wallet and handed it to Thurow, who then handed to the mediator.

"Europe cannot afford a hard currency," Dornbusch said. He pointed to the German elections as the key determinant of whether Europe would have a hard or soft euro. If the elections allowed Germany to break out of its mold of strict regulation, Thurow would win his bet, Dornbusch said.

When the mediator tried to hand Dornbusch back his bill, Dornbusch refused. "You know he doesn't have confidence," Thurow said after eyeing the value of the bill. Thurow then put in $20.

Japanese economy criticized

Neither Dornbusch nor Thurow had kind words for Japan. "Japan is really screwed up." Dornbusch said. He said that Japan must work to resolve a financial crisis, a political crisis, a confidence crisis, and the problems caused by "an incompetent prime minister."

Thurow added his own criticisms of Japan to the debate. He said that there was a crisis in Japan's capitalistic system and that the nation needed to change from an economy "based on debt" to one "based on equity." He said further that Japanese firms are earning a profit close to zero and that the second-largest economy is the middle of a eight-year "great stagnation."

Both were more optimistic about China's prospects. Dornbusch and Thurow said that the estimate of a 10 percent growth rate was most likely overvalued. Thurow placed the growth rate around six percent, saying that exaggeration and a higher-than-stated inflation were probably responsible for the reported 10 percent growth rate.

Dornbusch placed China's growth rate for the next two to four years at about three percent. He said that a suffering Japan would hurt China and that devaluing the Chinese yuan would be impossible because its banks are among the worst in the world.

European leaders face criticism

Thurow and Dornbusch had little sympathy for the high unemployment rates in Europe.

Thurow said that European countries should cut wages 25 percent. France's unemployment compensation is double minimum wage, he said. "The Netherlands is proud of an employment rate only slightly below European average. Most people my age work with pain - no pain, no gain," Thurow said.

Europeans need more initiative than simply, "Learn your Latin, eat your spinach," Dornbusch said. Right now, "the government has everyone's shoe size," he said. European countries need to stop paying people not to work, he added.

Several other questions came up at the discussion. Thurow and Dornbusch had few kinds words for British prime minister Tony Blair. "Blair isn't doing anything; he's just smiling," Thurow said. Dornbusch characterized Blair's political career as that of "unmitigated opportunism."

One student asked whether the Federal Reserve Board would cut interest rates, to which Dornbusch responded, "Yes. Next month, no." "[Alan] Greenspan is a series of grunts," Thurow said. "The more important you are, the less you say."