The State of the Union and the Real Meaning of Competitiveness

The State of the Union and the Real Meaning of Competitiveness

January 31, 2011

Last Tuesday night, the President exhorted Americans to raise our economic game and challenged Congress to give us the means to do so.  His basic proposition, which comes from mainstream economics and more recently from Bill Clinton’s 1992 economic plan, is that expanding certain national investments can make us more competitive, especially if it’s tied to overall deficit restraint.  Moreover, Obama’s pitch for greater federal commitments to R&D, education and training and infrastructure carries greater urgency this time out, as recent sea changes in the U.S. and global economies have raised the stakes for most Americans in the new initiative’s success..

If expanding these public investments is a radical idea, as some of the President’s opponents claim, so is the last 200 years of economic thought.  Since Adam Smith, it has been an economic commonplace that private markets and businesses will always tend to invest too little for any nation’s good in basic research and development, education and training, and infrastructure.  That’s why it has been the business of governments for nearly two centuries to mandate and pay for public education, build roads and bridges, and in many cases support basic scientific research.

When Clinton called for the same roster of national investments, he argued from basic economics that they would make American workers more productive and American businesses more efficient.   That still holds true.  But the waves of globalization of the last 15 years provide a new framework for the operations of American businesses, based on international competitiveness.  The massive transfers of technologies and entire business organizations to developing countries by the world’s leading multinationals, especially in manufacturing, have shifted the basis of competition.  U.S., European and Japanese manufacturing operations can’t compete with the third-world dynamos on price.  Instead, our firms and workers have to compete on quality and innovation, which can depend fairly directly on the public investment priorities touted by the President last week, especially in R&D and education and training.

The toys, cell phones, basic laptops and so on made or assembled today in China and places like it will always be cheaper than what any firm and its workers in America can produce.  That’s an inescapable advantage for Chinese companies that pay their manufacturing workers less than $50 per-week and their engineers less than $75 per-week.  That’s also why American companies and workers largely don’t produce what China exports anymore — and why would they?   Instead, our firms and workers increasingly compete on the basis of newer, broader and higher quality goods and services.  In most cases, American companies can win this kind of competition for global market share, by coming up with more powerful and versatile laptops, cell phones and so on, often producing the technologically advanced new elements themselves.

Innovation comes in many forms, and American companies and workers operate through advanced business organizations that also can provide competitive advantages which outweigh price.  Wherever a computer, cell phone or other product is produced or put together, business customers often prefer an American or European company for the service.  When businesses wants to buy, for example, coated paper for high-end graphics, which is produced both here and in China, the vast majority still pay higher prices to buy American products, because the U.S. companies can provide better delivery times and terms, more flexible credit, and a more reliable supply of a broader range of products, all services still beyond the capacity of their developing-nation competitors.

A serious public investment agenda, then, follows not only from the classic cases of private underinvestment recognized since Adam Smith, but also from the actual terms of global competitiveness which American companies and workers face today.  It’s virtually certain that greater national support for basic R&D ultimately will lead to the development and use of more advanced products, manufacturing processes, and business methods.  Similarly, greater support for education and training would ensure that more American workers are truly competitive with their foreign counterparts when it comes to operating effectively in workplaces dense with innovative technologies and operating practices.

The third leg of the President’s public investment program focuses on traditional infrastructure.  Most infrastructure investments, to be sure, involve more traditional, price and efficiency-based competition.  But whether or not American companies are able to move people and goods from one place to another efficiently, through sound road, rail and air systems, affects their competitiveness — if not so much with China, than with their counterparts in Europe, Japan and other advanced economies.

The fate of these proposals will also reveal a good deal about the two parties’ real commitment to U.S. competitiveness.   With conservatives once again believing that deficits do matter – at those under Democratic presidents — can they nevertheless distinguish between real public investments and other kinds of federal spending which many of them now consider a scourge?  And for the other side of the coin, will the President’s allies in Congress be willing to give up any other kinds of domestic spending in order to finance these new investments?

These tradeoffs were dubbed “cut-and-invest” when Bill Clinton talked them up in 1992 and 1993 – and even he had real trouble selling the cuts to Congress.  But the truth is, it mattered less for U.S. competitiveness back then, when China and other low-wage developing nations made little that anyone else wanted to buy.  Those days are now long gone, and with them, the stakes for public investment have become much greater.



What the Obama-Hu Meetings Can Mean for the U.S. Economy

January 19, 2011

Barack Obama and China’s President Hu Jintao have genuinely important economic matters to talk about this week, even if there’s little prospect for any agreements that could materially improve our own economy anytime soon. But President Obama can –– and certainly will –– use these meetings to hammer home his long-term priorities for the U.S.-Sino relationship. And so long as Hu continues to see the United States as the “indispensable nation” for China’s economic development –– Hu’s own words –– a U.S. President’s priorities matter. And in acknowledging China’s increasing success in the global economy, the President can also remind Americans why they have to raise their own economic game –– and how his domestic policies can help them do just that.

A few of these discussions may produce quick benefits. For example, Obama will press Hu on China’s lax enforcement of the intellectual property (IP) rights of American companies in the Chinese market. A lot of Americans still see such enforcement as a parochial issue for a few big pharmaceutical and software outfits. It’s true that Chinese producers regularly try to rip off U.S. patented drugs, mainly for third-world markets; and until recently even the Beijing government used a pirated version of Windows. But there’s much more at stake here for us. The fact is, the only promising, long-term strategy that the global economy offers the United States today depends on our outsized national capacity for developing and adopting economic innovations –– from new products and technologies, to new ways of financing, marketing and distributing goods, and new ways of organizing a business and running a workplace. IP rights in the world’s second largest market, then, affect everything from movies, machine parts and genetically-enhanced foods, to computer slates, Internet business processes, and nanomachines.

China already is legally obliged to protect the IP rights of American companies inside China under the rules of the World Intellectual Property Organization. So, Obama will press Hu to actually meet those obligations; and since China has recently begun to build its own R&D establishment, it’s an area where China’s interests and ours are beginning to align. The truth is, this is ultimately non-negotiable for the United States. But it also should prove to be a small price for China to pay for a solid economic relationship with the country that is not only one of its largest markets, but also its leading source of foreign direct investment into China –– including new technologies and business methods that are at issue in IP enforcement.

There’s less prospect of real progress on nudging China to revalue its currency, a recent hot-button issue for some prominent members of Congress. A stronger renminbi certainly would appear to be in our interest, since it would cut the price of U.S. exports inside China and raise the price of their exports inside the United States. In practice, it probably would make little difference to our economy. A stronger renminbi mainly would help companies in places which produce the same things as domestic Chinese companies –– places like Bangladesh and Thailand, not Michigan or Alabama. Yes, it would shave the price of U.S. products inside China –– but it would do the same for the products of our Japanese and European competitors.

Anyway, Hu has no intention of taking major steps in this area. Chinese leaders have always approached the value of their country’s currency as a matter of national sovereignty –– and the truth is, we don’t react very well either when China or the government of any other country criticizes U.S. monetary policies. And even if Hu approached this matter less dogmatically, it wouldn’t change that fact that the cheap renminbi is a critical part of the country’s basic strategy for strong, export-led growth; or that Hu and his fellow leaders see the success of that strategy as a lynchpin of their own political legitimacy. And while it won’t be mentioned this week, China’s long-term goal in this area is to claim for the renminbi part of the U.S. dollar’s role as the world’s reserve currency, which at our expense would help insulate the renimbi itself from future pressures to revalue.

Obama may get a more receptive hearing when he presses Hu to engage with the United States –– and the rest of the world –– on climate change. Both men know very well that China is now the world’s largest greenhouse gas emitter. That’s mainly because China has the world’s most ambitious program for building new electricity-generating plants; and since its only significant domestic energy source is coal, that’s what those plants run on. Hu also knows that the world will address this threat sooner or later –– and when they do, China cannot afford to sit on its hands. Obama’s challenge is the same one he faces with many Americans –– come up with a strategy that will raise the price of fossil fuels without imposing serious costs on the economy. Here at home, the answer to that riddle is a carbon-based tax with the revenues recycled for tax cuts in other areas. For China, Obama’s approach will have to be more subtle –– for example, intimating about a future agreement to promote joint ventures by U.S. and Chinese companies to develop and sell new alternative fuels and climate-friendly technologies.

These issues also give Obama the opportunity to drive home his case for new public investments at home –– in education and training, for example –– to expand America’s modest comparative advantage in fielding a workforce that can adapt easily to new technologies and business methods. This week’s meetings also could provide a platform to highlight his tax incentives for businesses, so they can make the investments required to better compete with Japanese and European companies in the Chinese market. And any meaningful U.S.-Sino discussions on climate change will dovetail nicely with the administration’s calls to expand R&D in this area, and so establish a more commanding position for the United States –– with or without China –– in global markets for green fuels and technologies.



Why It Matters So Little that Obama’s Jobs Record is Much Better than Bush’s

January 5, 2011

The great partisan squabble of 2011 over the economy begins this week with the new Congress. Even if some of the rhetoric seems fresh, the core issues likely to become the stuff of real political fights — the terms of entitlement spending, the shape of the tax code, and the value of public investment — are all familiar from battles during the previous two administrations. There is one important difference, however, which will startle both sides. When we probe the economics and politics, it appears that the real issue for most Americans isn’t jobs and unemployment, but incomes and wealth. The first clue lies in public data which have been almost universally ignored: George W. Bush’s record on jobs was much worse than Barack Obama’s. Both men took office during recessions which had taken shape under their predecessors, but with quite different effects. So far, we have 21 months of jobs data under Obama, from February 2009 to November 2010: Over that period, as the administration took numerous steps to support the economy, American businesses shed a net of 1,975,000 jobs. George W. Bush’s approach was much simpler, relying almost entirely on large tax cuts. Yet, even though the 2001 downturn was barely a blip compared to what Obama would face eight years later, Bush saw 2,852,000 private-sector jobs disappear in his first 21 months. The job losses in Bush’s first two years, then, were nearly 1 million larger than during Obama’s first two years. Set aside the first six months of each president’s term, before their policies could take effect, and the comparison grows even starker. In those subsequent 15-month periods, American business under Bush shed 1,772,000 jobs, compared to job gains of 715,000 under Obama’s program. By any economic measure, the Obama approach has been much more successful with regard to jobs than the Bush program which congressional Republicans now want to repeat.

But the Bush program was much more successful politically, judging by the 2002 and 2010 midterm elections. To be sure, the Bush White House managed to change the subject from its dismal jobs record to terrorism and Saddam Hussein, which helped a lot. But the huge Democratic losses last November, despite Obama’s much better record on jobs, tell us that the main issue for most voters — at least those with jobs — probably wasn’t unemployment at all, but rather their overall economic condition. In this regard, Bush was as lucky as a Rockefeller: He inherited an economy which under Clinton had produced large income and wealth gains for most Americans, giving them a critical cushion to muddle through the 2001 recession without having to cut back much. Obama, on the other hand, had the misfortune of inheriting a much weaker economy from Bush, one which had left most Americans treading water even before the financial crisis and Great Recession of 2007-2009 eroded their assets. Let’s retrace the real conditions. Throughout the Bush expansion, most Americans experienced no income gains, although their wealth appeared to increase. Here, the stock market isn’t very important. The Federal Reserve reports that the top 20 percent of Americans control 93 percent of the value of all financial assets, including pension and retirement accounts. With 80 percent of the country holding only 7 percent of the nation’s financial assets, the falling stock markets of 2000-2001 and 2007-2009 had little direct effect on most people’s economic condition.

But one asset is widely held by Americans: Nearly 70 percent of the country owns their own homes. Bush’s legacy to Obama, then, included not only a half decade of stagnating incomes, but also wealth losses for most people amounting to between 25 and 30 percent of the value of their homes. Layer a deep recession on top of all that, and voters grow very cranky.

So, Americans are prepared to live with large job losses that affect others, so long as their own economic conditions remain decent. But wipe out a good slice of their assets, so that most of them have to cut back, and whoever is in office will pay a big political price.

Where does Washington go from here? The GOP wants to replay the Bush program, which is no more likely today to lead to sustained income progress and wealth gains than it was in the last decade. And this time around, they want to layer on deep cuts in public spending, an approach likely to cut the legs off of the fragile expansion which is just now beginning to take hold.

The administration’s alternative looks a lot like Bill Clinton’s program, which at least did help promote broad income gains. In his State of the Union address and budget proposal, President Obama will likely call for targeted, new public investments in infrastructure, R&D and education, additional steps to expand foreign markets starting with the free trade agreement with Korea, and measures to bring down the deficit very gradually by restraining defense, Medicare and overall discretionary spending. This agenda may not usher in another historic boom, but it would provide a more solid foundation for long-term income progress.

It’s also time to help Americans rebuild their assets through new public measures to finally stabilize housing values. The best way to do that is to provide some direct assistance to those facing home foreclosures, since those foreclosures are the most powerful force still driving down housing prices in most places. Otherwise, the voters may prove to be quite cranky again in 2012, endangering second terms for scores of congressional Republicans and perhaps even President Obama.