Does the U.S. Economy Compete with Other Economies?

As we argue in our book “Innovation Economics: the Race for Global Advantage,” the United States has been losing the competitiveness and innovation race, with severe consequences for our economy. And we can’t get back to winning the race unless we put in place a national competitiveness and innovation policy. And we won’t do that unless policymakers recognize that America is an intense race for innovation and competitive advantage with other nations.

Unfortunately, too many economists who advise policymakers rightly note that U.S. companies compete with foreign companies but mistakenly counsel that America itself is not in global economic—and innovation—competition with other nations. Perhaps most well known for making such a claim is economist Paul Krugman who makes the astounding—but quite conventional (at least among neoclassical economists)—contention that “the notion that nations compete is incorrect . . . countries are not to any important degree in competition with each other.” And it’s not just liberal economists that hold such a view, so do many conservative economists. AEI’s Kevin Hassett claimed, “Non-economists regularly appeal to competitiveness when motivating a wide array of policies, while economists protest or look the other way.”

When our nation’s leading economists counsel policymakers that any concerns with national competitiveness are foolish, you can be sure that it will be more difficult for policymakers to argue forcefully for a national competitiveness policy.

The main argument Krugman and his neoclassical economist allies make against competitiveness is based on the view that while companies sell products that compete with each other, the companies and consumers in these nations are also simultaneously each other’s main export markets and suppliers of useful imports. In their view, even if European or Asian countries gain a larger share of global high-value-added production at the expense of producers in the United States, this benefits the United States by providing it with larger export markets and access to superior goods at a lower price. In other words, even if the United States lost most of its high-value-added traded firms (imagine Apple, Boeing, Cisco, Eli Lilly, Ford, General Motors, IBM, Intel, Merck, Microsoft and other similar companies laying off the majority of their U.S. workforce), America would still benefit from trade because at least it would receive cheaper imports and have access to larger export markets.

But the reality is that if Boeing, Ford, or the other companies mentioned here were to lay off most of their U.S. workers, America will be worse off, not better. The fact that one even has to state this is amazing since to the average “non-economist,” it’s obvious and right. And here non-economists are right. While some of the workers laid-off from these companies might find jobs with equal wages and value added, the majority would not and would ultimately end up with lower-wage, lower-value-added jobs. How could they then afford to buy those goods and services now produced overseas, other than to do what the United States has been doing for a generation: borrowing the money from overseas creditors who want us to keep importing. Unless America produces what other nations want, it cannot afford to buy the imports these countries now dominate in.

This in turn leads to neoclassical economists’ other major mistake: that governments should not be concerned about a nation’s industrial structure. In other words, what a country makes does not matter. According to this view if the United States were to lose its pharmaceutical, aerospace, auto and information technology industries to other nations, we’d just find other things to make. As George H.W. Bush’s economic advisor Michael Boskin memorably quipped, “Potato chips, computer chips, what’s the difference? A hundred dollars of one or a hundred dollars of the other is still a hundred dollars.”

But there is a difference. If a country loses the computer chip industry to foreign competitors, that value similarly disappears as the industry’s supply chains and industrial commons are hollowed out. The neoclassical assumption that residual assets will be redeployed to high-value-added sectors is not necessarily the case. More likely than not, many of the laid-off computer chip workers would end up working in lower-paying sectors, perhaps making potato chips.

So let’s be clear. The United States economy does compete with other nations for high value-added production and losing the race means a stagnant economy, with limited wage growth and higher unemployment rates. Just what America is facing today.