With the U.S. election just days away, it has never been more important to
consider what the next President must do to keep America competitive. In this
time of crisis, Washington has focused on the immediate and the short term. Lost
are the more basic questions we really need to worry about: What is the
fundamental competitive position of the U.S. in the global economy? And what
must we do to remain strong when other nations are making rapid progress?
The stark truth is that the U.S. has no long-term economic strategy—no
coherent set of policies to ensure competitiveness over the long haul. Strategy
embodies clear priorities, based on understanding the strengths we need to
preserve and the weaknesses that threaten our prosperity the most. Strategy
addresses what to do, but also what not to do. In dealing with a crisis,
experience teaches us that steps to address the immediate problem must support a
long-term strategy. Yet it is far from clear that we are taking the steps most
important to America's long-term economic prosperity.
America's political system, especially as it has evolved in recent times,
almost guarantees an absence of strategic thinking at the federal level.
Government leaders react to current events piecemeal, rather than developing a
strategy that unfolds over years. Congress and the Executive Branch are
organized around discrete policy areas, not around the overall goal of improving
competitiveness. Neither candidate has put forward anything close to a strategy;
rather, each has presented a set of disconnected policy proposals with political
appeal. Both parties contribute to the problem by approaching the economy with
long-held ideologies and policy positions, many of which no longer fit with
today's reality.
Now is the moment when the U.S. needs to break this cycle. The American
economy has performed remarkably well, but our continued competitiveness has
become fragile. Over the last two decades the U.S. has accounted for an
incredible one-third of world economic growth. As the financial crisis hit, the
rest of the American economy remained quite competitive, with many companies
performing strongly in international markets. U.S. productivity growth has
continued to be faster than in most other advanced economies, and exports have
been the growth driver in the overall economy.
The Age of Anxiety
Yet our success has come with deep insecurities for many Americans, even
before the crisis. The emergence of China and India as global players has
sparked deep fears for U.S. jobs and wages, despite unemployment rates that have
been low by historical standards. While the U.S. economy has been a stronger net
job creator than most advanced countries, the high level of job churn
(restructuring destroys about 30 million jobs per year) makes many Americans
fear for their future, their pensions, and their health care. While the standard
of living has risen over the last several decades for all income groups,
especially when properly adjusted for family size, and while the U.S. remains
the land where lower-income citizens have the best chance of moving up the
economic ladder, inequality has risen. This has caused many Americans to
question globalization.
To reconcile these conflicting perspectives, it's necessary to assess where
America really stands. The U.S. has prospered because it has enjoyed a set of
unique competitive strengths. First, the U.S. has an unparalleled environment
for entrepreneurship and starting new companies.
Second, U.S. entrepreneurship has been fed by a science, technology, and
innovation machine that remains by far the best in the world. While other
countries increase their spending on research and development, the U.S. remains
uniquely good at coaxing innovation out of its research and translating those
innovations into commercial products. In 2007, American inventors registered
about 80,000 patents in the U.S. patent system, where virtually all important
technologies developed in any nation are patented. That's more than the rest of
the world combined.
Third, the U.S. has the world's best institutions for higher learning, and
they are getting stronger. They equip students with highly advanced skills and
act as magnets for global talent, while playing a critical role in innovation
and spinning off new businesses.
Fourth, America has been the country with the strongest commitment to
competition and free markets. This belief has driven the remarkable level of
restructuring, renewal, and productivity growth in the U.S.
Fifth, the task of forming economic policy and putting it into practice is
highly decentralized across states and regions. There really is not a single
U.S. economy, but a collection of specialized regional economies—think of the
entertainment complex in Hollywood or life sciences in Boston. Each region has
its own industry clusters, with specialized skills and assets. Each state and
region takes responsibility for competitiveness and addresses its own problems
rather than waiting for the central government. This decentralization is
arguably America's greatest hidden competitive strength.
Sixth, the U.S. has benefited historically from the deepest and most
efficient capital markets of any nation, especially for risk capital. Only in
America can young people raise millions, lose it all, and return to start
another company.
Finally, the U.S. continues to enjoy remarkable dynamism and resilience. Our
willingness to restructure, take our losses, and move on will allow the U.S. to
weather the current crisis better than most countries.
Yet what has driven America's success is starting to erode. A series of
policy failures has offset and even nullified its strengths just as other
nations are becoming more competitive. The problem is not so much that other
nations are threatening the U.S. but that the U.S. lacks a coherent strategy for
addressing its own challenges.
An inadequate rate of reinvestment in science and technology is hampering
America's feeder system for entrepreneurship. Research and development as a
share of GDP has actually declined, while it has risen in many other countries.
Federal policymakers recognize this problem but have failed to act.
America's belief in competition is waning. A creeping relaxation of antitrust
enforcement has allowed mergers to dominate markets. Ironically, these mergers
are often justified by "free market" rhetoric. The U.S. is seeing more
intervention in competition, with protectionism and favoritism on the rise. Few
Americans know that the U.S. ranks only 20th among countries in openness to
capital flows, 21st on low trade barriers, and 35th on absence of distortions
from taxes and subsidies, according to the 2008 Global Competitiveness Report.
We are fast becoming the kind of distorted economy we have long criticized.
Lack of regulatory oversight and capital requirements, in the name of
liberalization and well-meaning efforts to extend credit to lower-income
citizens, has undermined our financial markets. America underregulates in some
areas while it overregulates in others.
U.S. colleges and universities are precious assets, but we have no serious
plan to improve access to them by our citizens. America now ranks 12th in
tertiary (college or higher) educational attainment for 25- to 34-year-olds. We
have made no progress in this vital area over the past 30 years, unlike almost
every other country. This is an ominous trend in an economy that must have the
skills to justify its high wages. Instead of mounting a serious program to
provide access to higher education, like the G.I. Bill and National Science
Foundation programs of earlier years, Congress grandstands over the rate of
endowment spending in our best universities.
The federal government has also failed to recognize and support the
decentralization and regional specialization that drive our economy. Washington
still acts as if the federal level is where the action is. Beltway bureaucrats
spend many billions of dollars on top-down, highly fragmented federal economic
development programs. Yet these programs are not designed to support regional
clusters, nor do they send money where it will have the greatest impact in each
region. For example, distressed urban communities, where poverty in America is
concentrated, are starved of the infrastructure spending needed for job
development. Again, no strategic thinking.
At a time when insecurity and job turnover are higher than ever, the U.S.
also has abdicated its responsibility to provide a credible transitional safety
net for Americans. It is no wonder Americans are becoming more populist, more
protectionist, and more tolerant of harmful intervention in the economy. The job
training system is ineffective and receives less and less funding each year.
Pension security is eroding, and the most obvious step required to strengthen
Social Security—slowly adjusting upward the retirement age—has not been taken.
Improving access to affordable health insurance is a major worry for all
Americans. Washington could take basic steps such as equalizing the tax
deductibility of individually purchased insurance to assist those not covered by
their employers. Yet the government has failed to do so.
High Costs, Big Hassles
Federal polices have hobbled America's entrepreneurial strength by needlessly
driving up the cost and complexity of doing business, especially for smaller
companies. Cumbersome regulation of employment, the environment, and product
liability needs to give way to better approaches involving less cost and
litigation, yet special interests block reform. The U.S. has become a high-tax
country not only in terms of rates but also administrative hassle.
Infrastructure bottlenecks, due to neglect and poorly directed spending, are
driving up costs in an economy increasingly dependent on logistics. The U.S. is
energy-inefficient, but public policies fail to promote energy conservation.
Health-care costs are too high, but there is no serious effort to provide more
integrated and efficient care.
Collectively, these unnecessary costs of doing business, coupled with skill
gaps, are becoming significant enough to drive investments out of the country,
including investments by American companies. Instead of addressing the real
reasons for offshore investment, the parties spar over closing tax "loopholes,"
even though U.S. corporate rates are among the highest in the world. Where is
the strategic thinking?
Trade and foreign investment are fundamental to the success of the U.S.
economy, but America has lost its focus and credibility in shaping the
international trading system. Our economy today depends on advanced services and
selling intellectual property—our ideas, our software, our media. Yet rampant
intellectual property theft and high barriers to competition in services tilt
the world trading system against a knowledge-based economy.
With no strategy, the U.S. has failed to work effectively with other advanced
countries to address these issues and has failed to assist poorer countries so
they feel more confident about opening markets and internal reform. The U.S. has
abdicated its strategic role in developing Latin America, our most natural
trading partner. We have failed to engage meaningfully in Africa, the Middle
East, and Asia to help countries improve the lot of their citizens. Our foreign
aid is still tied to the purchase of U.S. goods and services, rather than the
actual needs of countries. Congress fails to pass trade agreements with
countries highly committed to our economic principles, such as Colombia.
A final strategic failure is in many ways the most disconcerting. All
Americans know that the public education system is a serious weakness. Fewer may
realize that citizens retiring today are better educated than the young people
entering the workforce. In the global economy, just being an American is no
longer enough to guarantee a good job at a good wage. Without world-class
education and skills, Americans must compete with workers in other countries for
jobs that could be moved anywhere. Unless we significantly improve the
performance of our public schools, there is no scenario in which many Americans
will escape continued pressure on their standard of living. And legal and
illegal immigration of low-skilled workers cannot help but make the problem
worse for less-skilled Americans.
The problem is not money—America spends a great deal on public education,
just as we do on health care. The real problem is the structure of our education
system. The states, for example, need to consolidate some of the 14,000 local
school districts whose existence almost guarantees inefficiency and inequality
of education across communities. Instead, government leaders haggle over
incremental changes.
Same Old Arguments
We need a strategy supported by the majority to secure America's economic
future. Yet Americans hear the same old divisive arguments. Republicans keep
repeating simplistic free-market thinking, even though the absence of all
regulation makes no sense. Self-reliance is preached as if no transitional
safety net is needed. Some Republicans even argue passionately that the country
should have no strategy because that would be "industrial policy." Yet the real
issue is not picking industry winners and losers but improving the business
environment for all American companies, something we cannot do without
identifying our top priorities. Overall, Republicans seem to think business can
thrive without healthy social conditions.
Democrats, meanwhile, keep talking as if they want to penalize investment and
economic success. They defend unions obstructing change in areas like education,
cling to cumbersome regulatory approaches, and resist ways to get litigation
costs for business in line with other countries. Democrats equivocate on trade
in an irreversibly global economy. They seem to think social progress can be
achieved only at the expense of business.
To make America competitive, we have to get beyond this thinking. Political
leaders, business leaders, and civil society must begin a respectful, fact-based
dialogue about our challenges. We need to focus on competitive reality, not
defending past policies.
A strategy would address each of the areas I have discussed. If we are honest
with ourselves, we would admit the U.S. is not making real progress on any of
them today. Efforts under way by both parties are largely canceling each other
out. A strategy would direct our spending to priority investments that also put
money into the economy, such as educational assistance and logistical
infrastructure, rather than tax rebates. With a strategy, we would stop
counterproductive and expensive practices such as farm subsidies and spending
earmarks.
Is such strategic thinking possible, given America's political system? It
happens in other countries—Denmark and South Korea are just two where I have
participated in serious efforts by national leaders, both public and private, to
come together and chart a long-term plan. This almost never occurs in the U.S.,
except around single issues.
We will need some new structures to govern strategically. I served on the
last public-private President's Commission on Industrial Competitiveness—in
1983! This time we need one that is less politically motivated. Congress would
benefit from a bipartisan joint planning group to coordinate an overall set of
priorities. More up or down votes on comprehensive legislative programs are
needed to allow a shift to a coherent set of policies and away from lots of
separate bills.
The new Administration will have an historic opportunity to adopt a strategic
approach to the U.S.'s economic future, something that would bring the parties
together. America is at its best when it recognizes problems and accepts
collective responsibility for dealing with them. All Americans should hope that
the next President and Congress rise to the challenge.
Porter, the Bishop William Lawrence University Professor at Harvard
Business School, is a leading authority on competitive strategy and the
competitiveness of nations and regions. Professor Porter's work is recognized in
governments, corporations, nonprofits, and academic circles around the
world.
