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Saturday, January 22, 2011


As Paul Krugman notes, President Obama has decided to make competitiveness his main economic theme. Krugman explains why this is a bad idea:

this is hackneyed stuff, and involves a fundamental misconception about the nature of our economic problems.
It’s OK to talk about competitiveness when you’re specifically asking whether a country’s exports and import-competing industries have low enough costs to sell stuff in competition with rivals in other countries; measures of relative costs and prices are, in fact, commonly — and unobjectionably — referred to as competitiveness indicators.
But the idea that broader economic performance is about being better than other countries at something or other — that a country is like a corporation –is just wrong. I wrote about this at length a long time ago, and everything I said then still holds true. ...

Robert Reich notes several different definitions of competitiveness:

But what’s American “competitiveness” and how do you measure it? Here are some different definitions:
It’s American exports. Okay, but the easiest way for American companies to increase their exports from the US is for their American-made products to become cheaper internationally. ... Their biggest cost is their payrolls. So it follows that the simplest way for them to become more “competitive” is to cut their payrolls...
It’s net exports. Another way to think about American “competitiveness” is the balance of trade — how much we import from abroad versus how much they import from us. The easiest and most direct way to improve the trade balance is to coax the value of the dollar down relative to foreign currencies (the Fed’s current strategy for flooding the economy with money could have this effect). ...
It’s the profits of American-based companies. In case you haven’t noticed, the profits of American corporations are soaring. That’s largely because sales from their foreign-based operations are booming... — so their profitability has little or nothing to do with the number and quality of jobs here in the US. In fact, it may be inversely related.
It’s the number and quality of American jobs. This is my preferred definition, but on this measure we’re doing terribly badly. Most Americans are imprisoned in a terrible tradeoff — they can get a job, but only one that pays considerably less than the one they used to have, or they can face unemployment or insecure contract work. The only sure way to improve the quality of jobs over the long term is to build the productivity of American workers and the US overall, which means major investments in education, infrastructure, and basic R&D. But it’s far from clear American corporations and their executives will pay the taxes needed to make these investments. ...
It’s politically important for President Obama, as for any president, to be available to American business, and to avoid the moniker of being “anti-business.” But the President must not be seduced into believing — and must not allow the public to be similarly seduced into thinking — that the well-being of American business is synonymous with the well-being of Americans.

The last point, that "the President must not be seduced into believing — and must not allow the public to be similarly seduced into thinking — that the well-being of American business is synonymous with the well-being of Americans." is important, and one Krugman notes as well.

Krugman and Reich have covered most of the ground, but let me add one more note. The notion of competitiveness -- and the idea that since businesses create jobs, anything good for business is good for workers (see Reich's first point above) -- will undoubtedly turn into a call to cut business taxes to enhance competitiveness and spur economic growth. Jobs will be featured in that argument, as they always are. But as I've noted before, there's little evidence that this will be successful:

"...One of the most frequent arguments for extending the tax cuts and for making them permanent is that failing to do so would hurt economic growth. Is this true? One way to answer the question is to ask whether the Bush tax cuts had a large impact on growth after they were enacted.

The evidence is not favorable. For example, according to this Census report (see table A1), median household income in 2007, adjusted for inflation, was lower than it was in 2000. And as the non-partisan Center on Budget and Policy Priorities reports, based upon data from the Bureau of Labor Statistics, employment growth was particularly weak, 'with employment and wage and salary growth ... lower than in any previous post-World War II expansion. Employment grew at an average annual rate of only 0.9 percent from November 2001 to September 2007, as compared with an average of 2.5 percent for the comparable periods of other post-World War II expansions. In addition, real wages and salaries grew at a 1.8 percent average annual rate in the 2001-2007 expansion, as compared with a 3.8 percent average annual rate for the comparable periods of other post-World War II expansions.'

Thus, there is little evidence to support that the Bush tax cuts had a significant effect on growth.  In addition, contrary to the argument that the tax cuts would pay for themselves being made at the time the tax cuts were enacted, the deficit ballooned as a result of the tax cuts. ..."

What will we need is "major investments in education, infrastructure, and basic R&D." That means that if we want productivity to grow, and to provide decent jobs for our citizens, it is vital that we make the necessary investments in our future that will allow that to happen (and that includes investments in economic security for workers and their families). We'll hear again and again how tax and spending cuts to reduce the size of the public sector are needed to restore competitiveness (after all, a small, hands off government is the key to success in China and in the European countries that we are worried will outcompete us). But the relatively mindless tax and spending cuts the GOP is pushing won't restore competitveness as properly defined, they'll undermine the foundation we need to build upon to provide decent opportunities for our citizens.

    Posted by on Saturday, January 22, 2011 at 10:17 AM in Economics | Permalink  Comments (61)


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