Krugman Flat Wrong that Competitiveness is a Myth

In a Sunday op-ed in the New York Times, "The Competition Myth,” Paul Krugman argues that “competitiveness” is a myth, a bad metaphor, a fundamentally misleading goal, and that it doesn’t make “any sense to view our current woes as stemming from a lack of competitiveness.” About this, Krugman is absolutely, dead-on, 100 percent wrong. For the reality is that the perilous state of the American economy has everything to do with faltering U.S. competitiveness—and more than that—much to do with the abject refusal of neoclassical economists like Krugman himself to recognize that competitiveness is an issue, that countries compete, and that U.S. economic policy should be directly designed to bolster the competitiveness of U.S. organizations and industries.

Krugman’s like the young boy who finds himself losing a race with his buddies and who stops and yells, “I’m not racing!” Better to simply pretend that you aren’t racing than to lose. For if you can convince yourself that you aren’t in a race, you sure sleep better at night than if you admitted you were in a competition and were losing…That is, until you wake up one morning having lost ten million manufacturing jobs, have 10% unemployment, and have a horrifically bad trade balance. Moreover, when you refuse to even believe that you’re in a race, it’s a sure sign that you’re going to lose, as evidenced by the fact that the United States ranks 40^th of out of 40 countries and regions in improving its innovation competitiveness over the past decade, as ITIF’s Atlantic Century report found.

Krugman’s misguided perspective on competitiveness dates back to a 1994 Foreign Affairs article he wrote, “Competitiveness, A Dangerous Obsession,” in which he made the utterly astounding contention that, “The notion that nations compete is incorrect…countries are not to any important degree in competition with each other.” Like many U.S. elites, Krugman simply refuses to recognize that the U.S. is in global economic—and innovation—competition with other nations. This view remains readily apparent in the NYT article, where Krugman contends that “we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete with foreign rivals.” Krugman goes on, “But isn’t it at least somewhat useful to think of our nation as if it were America Inc., competing in the global marketplace? No.” So again, only companies compete with one another; and it’s not helpful to think of the U.S. as competing. Moreover, our companies are competing fine…so the problem must be a financial crisis (caused by a few malfeasant firms in the financial sector).

But the reality is that countries do compete and seek to win in the highest-value-added sectors of economic activity. In fact, Krugman dramatically underestimates the impact that countries’ strategies—whether fair and consistent with global rules or not—can have in shifting comparative advantage in critical technology-based sectors their way. There are two aspects to this competition worth discussing.

First, an increasingly globalized economy means that countries have become price takers—not price makers—on international markets. In other words, companies now shop the world for the best locations to situate their globally mobile innovation activity, such as where to locate R&D facilities or build new factories. These companies look for which countries offer the best pools of talent (skilled scientists and engineers and a highly educated, highly skilled populace); which have the most attractive tax laws in terms of low corporate tax rates and generous and stable R&D tax credits; which have the most robust physical and digital infrastructures, the latter especially in terms of fixed and mobile broadband, electric smart grids, or intelligent transportation systems; which have the best high-skill immigration policies; the deepest pools of capital; the best funding for R&D; the easiest place to start a business; etc.. Collectively, these attributes constitute a nation’s innovation ecosystem, and governments play a legitimate and crucial role in shaping their nation’s innovation ecosystem. In fact, it is these innovation ecosystems on which countries increasingly compete. As Greg Tassey, a Senior Economist at the Department of Commerce National Institute of Standards and Technology argues, “Competition among governments has become a critical factor in determining which economies win and which lose in the increasingly intense process of creative destruction.”

But Krugman refuses to see this because “only companies compete.” This raises a consequent challenge again explained by Tassey: “Another underlying problem is that U.S. firms are attempting to compete largely as independent entities against a growing number of national economies in Europe and Asia in which government, industry, and a broad infrastructure (technical, education, economic, and information) are evolving into increasingly effective technology-based ecosystems.” Or as Wayne Johnson, Hewlett Packard’s Director of Worldwide Strategic University Customer Relations, said at a 2008 conference, “We in the United States find ourselves in competition not only with individuals, companies, and private institutions, but also with governments and mixed government-private collaborations.” In other words, the United States has a collection of players (businesses) running around competing against other players (nations) that are well equipped, well coached, and running specific plays.

Second—while President Obama might claim, as he did on his Presidential radio address this past Saturday that, “We can out-compete any other nation on Earth,”—the stark reality is that we are being out-competed by our competitors. We accumulated a -$6.3 billion trade deficit in the prior decade; we run a $200 billion a year trade deficit in advanced technology goods; we lost 8.4 million jobs in the recession; we lost 32% of our manufacturing jobs in the past decade; contrary to official statistics, U.S. manufacturing productivity has actually not increased; and the U.S. share of global exports dropped from 17 to 11% over the pase decade. And from the second half of the 1990s to the first half of the 2000s, corporate foreign outward direct investment (the amount of money U.S. corporations invest in other nations) increased by $29.2 billion, or 20 percent, while foreign corporations’ inward direct investment to the United States decreased by $7.6 billion, or 4 percent.

So why are we seeing these poor economic results? It’s not just because we’ve had a financial crisis. The answer is that over the past 12 years, the United States has become a less attractive environment for innovation and investment as it used to be or as other countries now are. We have the 2^nd highest corporate tax rates in the world; our R&D tax credit is now less generous than Brazil, China, and India, in fact, it’s 17^th of 30 OECD countries and it’s not even stable; 30% of our citizens haven’t graduated high-school; our high-school students perform below average against OECD peers in mathematics (Chinese students in Shanghai topped the rankings) and just narrowly above average in science and reading; we rank  just 29th out of 109 countries in the percentage of twenty-four-year-olds with a math or science degree; three-quarters of electrical engineering and two-thirds of industrial engineering doctorates are awarded to foreign students; our corporations spend over twice as much on patent and other litigation than they do on research; we have a backlog of a million unexamined patents. In other words, our innovation capacity is slipping.

Therefore, the answer is not to blindly throw more money at infrastructure, as Krugman suggests (weren’t we supposed to have already spent $862 billion on that, anyway?) but to: 1) recognize that countries can and do compete; 2) recognize that U.S. innovation capacity and competitiveness is slipping; and 3) design our economic policies around fostering the competitiveness and innovation capability of U.S. firms and industries. (For plenty of ideas on how to do that, see ITIF’s Innovation Policy Toolbox.)

In contrast to what Krugman says, let’s hope that President Obama shines a bright light on U.S. competitiveness and innovation in his State of the Union address tonight.