The State of the Union and the Real Meaning of Competitiveness
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.