Why America Needs an Economic Strategy
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.
The most heated, high-stakes, and divisive Presidential election in recent memory is now over, and on Jan. 20, 2009, the U.S. will welcome Barack Obama as our next President. Even the most diehard Republicans would have to agree that President-Elect Obama ran an outstanding campaign, but Obama's greatest challenges lie ahead: preventing our teetering economy from collapsing, ending a war that most U.S. citizens believe has gone on for far too long, helping more than 40 million uninsured Americans get the health care they need, improving an education system that has long been in disarray, and many more seemingly insurmountable tasks.
To assist Obama in this monumental undertaking, I humbly propose the following code of ethics. Ethical guidelines act as a kind of global positioning system to help us stay on track and, when we get lost, to get back to where we should be. The rules here are based on the principles of ethics (BusinessWeek.com, 1/11/07) that are common to all cultures, all civilized societies, and all religions. Obama, and most of the rest of us, know these rules well, but it can be far too easy to forget about them or put them to the side when it's convenient. There is no better time for a refresher course for our next Commander-in-Chief than as he prepares to assume the Presidency.
1. DO NO HARM.
It isn't just doctors who have an ethical obligation to "first, do no harm." All of us, including (or especially) the President, have such a responsibility. Indeed, it is the most fundamental ethical concept of all, since no society can survive for long if its members willfully inflict damage on other people and suffer no consequences for doing so. Before signing any bill into law or proposing any policy to the public, Obama should ask: "What harm is likely to come from this and how can we avoid it?" Of course, there are circumstances, such as war, in which it is impossible to avoid causing harm. In these situations, the President should seek to minimize harm that is unavoidable.
2. KEEP YOUR PROMISES.
This seems obvious to the point of triviality, but cynical voters (and perhaps those disappointed by the outcome) are already braced for the President-Elect to overlook some of the promises he made on the campaign trail. It's hard to blame the public for such cynicism, since all Presidents to date have either failed to honor at least some of the pledges they made or, as was the case with George H.W. Bush's "no new taxes" pledge, have intentionally broken them. Obama has made a lot of promises, and it is unlikely that he can keep them all, but he should do his level best to keep his word and, when he can't, to explain why.
3. TELL THE TRUTH.
As I've noted previously, Warren Beatty's film Bulworth (BusinessWeek.com, 4/17/08) was a satire based on the apparently ridiculous notion that a politician would dare to speak his mind. But why should honesty in politics be the stuff of comedy? Much has been made of the current Administration's history of playing fast and loose with the truth, but Democratic and Republican Presidents alike have failed to take the duty of veracity seriously. Yes, national security issues sometimes demand that the President not be forthcoming about strategy, but except in such rare circumstances, the President has an obligation to be open and honest.
4. PROTECT PRIVACY.
It is no secret that, for the past eight years, Americans have had their right to privacy compromised significantly. In the name of "winning the war on terror," the government has engaged in wiretapping, has had unfettered access to phone records and e-mails, and more. It is reasonable to question whether such violations of personal privacy are indeed justified.
There are times when our national interest allows, or even requires, the government to obtain private information, but the President cannot be cavalier in sanctioning such actions. President-Elect Obama would do well to remember that freedom for citizens means, in part, freedom from having to worry that our government will be snooping around our computers, phones, and workplaces without having a strong and compelling reason to do so.
5. MANAGE YOUR TIME.
Time management is usually presented as a strategic or organizational concern, but at its core, it is really an ethical one. Time spent on one thing is time that can't be spent on something else, so this valuable resource must be apportioned wisely and fairly (BusinessWeek.com, 2/8/07). After all, in a democracy, the President's time is really our time, and we're entitled to expect that he (or, someday, she) focus on the most pressing concerns. How Obama chooses to spend his time will say a lot about him and his commitment to fairness.
6. APOLOGIZE WHEN APPROPRIATE.
It's a sign of strength, not weakness, for anyone, including a President, to say: "I made a mistake," and to take steps to remedy the situation (BusinessWeek.com, 6/21/07). But when was the last time this actually happened? President-Elect Obama has way too much to live up to, and we should expect him to fail—perhaps even spectacularly so—from time to time. The ethical issue is not whether he will slip up but how he will respond when he does. By taking full responsibility for mistakes in his own judgment, or by those under his watch, he'll be setting a good example for everyone. Most of all, he'll simply be doing the right thing.
7. BE COMPASSIONATE.
Politicians often say: "We're a nation of laws," but we're much more than that. We're a nation of human beings, and the law does not—and cannot—demand that we treat one another with loving kindness (BusinessWeek.com, 2/22/07). But ethics can, and it behooves the President to demonstrate this consistently. Just as a CEO's behavior sets the standard for all employees to follow, the President's conduct either inspires or discourages citizens. Yes, a President is as fallible as the rest of us, but Obama is in a special position to make a positive difference in the world, and the most powerful way to do this is to act with compassion in all that he does. Compassion isn't the only important character trait one can possess, but it's the key to solving problems peaceably.
May President-Elect Obama find the courage to live by these rules every day, no matter how great the obstacles are. May we be inspired to do the same.