Bids to Bolster U.S. Competitiveness Ignore Real Issues

Remember the energy crisis? The world food shortage? Or what about last year’s flurry of interest in drug abuse? Nothing excites official Washington as much as a “crisis,” and this year promises to usher in another.

The buzzword today is “competitiveness,” a mom-and-apple-pie issue that has whipped up a bipartisan storm of pronouncements and proposals aimed at reviving the nation’s lost industrial might, closing the $170-billion trade gap and putting America back to work.

President Reagan, struggling for issues to champion in hopes of recovering from the damage caused by the Iran- contras scandal, is expected to focus attention on the subject in his State of the Union address this week. Meanwhile, prospective presidential candidates of every political stripe are promising to make it one of the prime issues of the 1988 election.

But the new-found issue of competitiveness--a catchall for a host of worries as disparate as the huge U.S. trade deficit, a shrinking middle class, complacent business executives and declining educational achievement--already is encrusted more in myth than reality.

Advocates of improving U.S. competitiveness point, for example, to the 2 million jobs a year supposedly lost to foreign competition without recognizing that the U.S. economy has added 12 million jobs since 1979--far more than any of its foreign competitors.

And some lawmakers are proposing solutions that appear to have little to do with the underlying problems of the U.S. economy.

There is indeed much at stake in the profound changes that have transformed the position of the United States from unquestioned supremacy in the world economy to uneasy rivalry with other industrial powers. But the revival of ill-focused fears over the nation’s ability to compete shows signs of obscuring the issues rather than illuminating them. “On many of these issues, the accepted wisdom turns out to be misguided at best or simply wrong at worst,” says I. M. (Mac) Destler, a researcher at the Institute for International Economics here and author of a new book on the politics of trade.

“Competitiveness has become a word that means all things to all people,” acknowledges Howard Samuel, president of the AFL-CIO’s industrial union department.

Even some of the nearly unquestioned touchstones of the competitiveness and trade debate are highly misleading.

The central issue of jobs is a key example. Citing the 2 million jobs a year supposedly lost to foreign competition, labor unions and some lawmakers have called for establishing new barriers against foreign imports, along with more widely accepted measures, such as stronger worker retraining programs to ease the pain of job dislocation for workers laid off by failing industries.

“People are losing jobs everywhere,” says Rep. William D. Ford (D-Mich.), reflecting a widely held perception. “It’s not just the Rust Bowl anymore. In fact, California--that paradise of high tech--suffers more from job displacement than any other state. Silicon Valley is becoming Death Valley.”

New Jobs Ignored

Such claims, however, do not take into account the overall U.S. job gains--28 million since 1973, the fastest growth in total employment in peacetime history. By contrast, most of the nation’s major industrial competitors, with the exception of Japan, have actually suffered an overall loss of jobs during the same period.

But the vast majority of those jobs gained, critics retort, are nothing more than low-paying service “McJobs” in fast-food restaurants and the like, while high-wage manufacturing jobs are being wiped out, undermining personal income and contributing to a decline of the American standard of living.

Manufacturing employment has indeed shrunk, continuing a steady trend dating back to the Korean War.

But what these critics are overlooking, some analysts point out, is that most new jobs invariably pay below-average incomes, because younger workers entering the job market must accept lower wages than older, established employees. This situation has been exacerbated by the baby boom, which created a flood of young job seekers into the workplace in the last 15 years.

With so much competition for new jobs, the relative average earnings of younger workers fell. In 1970, for example, men under age 25 earned about three-fourths as much as men over 25. By 1984, though, younger men were earning only about half as much.

The demographic bulge, along with a much greater number of women entering the labor force, means that the 70 million people born in the baby boom years from 1946 to 1964 will always be faced with greater competition than those who were born during the Great Depression, economists say.

Will Stay Out of Reach

To some analysts, this suggests that the promise of the American dream--a home, a college education for the children, a secure retirement--will remain out of reach for growing numbers of people.

“Those who already enjoy a middle-class standard have largely been able to retain it, but those that haven’t have seen their prospects dim,” says Frank Levy, a researcher at the University of Maryland and author of a forthcoming book on the subject, “Dollars and Dreams.”

However, some economists say that dismal conclusion may fail to take into account a counter-trend.

Now that the baby boom has waned and the flow of new workers into the job market has begun to fade, it is possible that the economy’s performance may substantially improve as the work force settles down, young workers climb the job ladder and gain experience on the job that contributes to productivity gains.

Indeed, there is some evidence that such improvements have already begun. Manufacturing productivity, which had barely improved at an annual rate of just 1.3% from 1973 through 1980, has picked up dramatically since 1981 to a 4.1% annual rate of gain.

Another disputable contention at the heart of the competitiveness issue is that manufacturing and the production of goods is disappearing from the United States.

To help bolster battered industries, business lobbying groups are mounting, among other causes, a renewed assault on the new tax law, seeking to restore several lost business tax deductions. The U.S. Chamber of Commerce, in a long list of actions it insists are necessary to restore competitiveness, even includes such perennial proposals as easing antitrust rules, softening foreign bribery restrictions, and clamping down on product liability suits.

Production Has Jumped

But despite industry’s well-reported travails, manufacturing production has risen by 30% since 1982, and overall industrial production, which includes the depressed mining and energy sectors, has gained 22%.

By contrast, industrial production has barely risen at all in Europe and the United States has even slightly outpaced Japan’s production increase of 21%.

But perhaps the argument most questioned by analysts in the competitiveness debate is that trade barriers, such as import quotas, directed at nations exporting disproportionate amounts of key goods to the United States would help narrow the severe U.S. trade deficit.

In recent years, the American trade deficit has soared from $28 billion in 1981 to more than $170 billion last year.

Prompted by the alarming rise in the trade deficit, the House approved strong protectionist trade legislation last year, but it died in the Senate at the urging of the Reagan Administration, which has contended that such barriers would only lead to retaliation against U.S. exports.

Though Congress, with its new Democratic majority, has indicated some form of trade legislation will be passed this year, Destler, among others, maintains barriers won’t solve the problem.

“Trade imbalances are largely immune to treatment by trade policy measures,” he said.

The reason for that seeming paradox, Destler explains, is that currency rates would adjust to reflect the changes in trade flows because of the continued U.S. need to borrow money from abroad to finance its record budget deficits.

Even if other nations did not retaliate against U.S. trade barriers, sending the world economy into a downward spiral, as long as foreign investors were needed to finance U.S. borrowing, a decline in U.S. imports would do little more than push up the value of the dollar. That would make American goods more expensive on the international market, leading to an equivalent fall in exports.

“It is hard, at first glance, not to blame an overall trade imbalance on unfair foreign competition or on weak-kneed American trade bargaining,” Destler says. But even though “there are good reasons for tough trade bargaining, correcting large trade imbalances is not one of them.”

Face Major Obstacles

None of this is to dismiss the serious obstacles hosts of U.S. firms face in the global market, nor does it lessen the problems confronting thousands of blue-collar workers who have lost their jobs as American companies struggle to remain competitive primarily by slashing costs, reducing staffs and moving production facilities abroad.

This seriously endangers the long-term health of American producers. “America cannot maintain its wealth or high wage economy by only playing a role as laboratory for the world, while others make the products,” says John Zysman, co-director of the University of California’s Berkeley Roundtable on the International Economy. “Lose control of the manufacturing or production process and you risk losing control of both the technology and the final markets.”

But in developing economic policies over the past decade, White House officials have tended to seek short-run fixes at the expense of the nation’s long-term international competitive position.

“The Carter Administration pushed down to the U.S. dollar to artificial lows to stimulate the American economy through the promotion of exports. . . . But far from stimulating the domestic economy, this depressed it, resulting in simultaneous record unemployment and accelerated inflation--the worst of all possible outcomes,” wrote Peter F. Drucker, professor at Claremont Graduate School, in a seminal article last year in Foreign Affairs magazine.

“President Reagan pushed up interest rates to stop inflation, and also pushed up the dollar. This did indeed stop inflation. It also triggered massive inflows of capital,” Drucker added. “But it so overvalued the dollar as to create a surge of foreign imports. As a result, the Reagan policy exposed the most vulnerable of the smokestack industries, such as steel and automobiles, to competition they could not possibly meet (and) deprived them of the earnings they needed to modernize themselves.”

The core of the issue, many analysts agree, are the fundamental questions of the U.S. budget deficit and currency rates.

Large Flows of Capital

At bottom, analysts argue, the huge trade deficits of the past few years are a product of the large flows of capital to the United States needed to finance the nation’s budget deficits.

Although Congress has taken action aimed at reducing the annual budget deficit this year, the central dilemma is not likely to be adequately addressed, many analysts say, as lawmakers’ focus their immediate interest on trade and other approaches that only deal with competitive problems on the surface.

Reagan, in his State of the Union address, is expected to issue a ringing call to restore old-fashioned work habits and lead a new crusade for excellence, but aides have disclosed that the White House has done little more than dust off a handful of previously rejected proposals to offer as the core of his program.

Democrats, harking back to President John F. Kennedy’s campaign promise in 1960 to “get the country moving again,” are pressing for more government spending for education and research that hold out long-term promise, but their immediate program mostly consists of a number of trade measures threatening to retaliate unless Japan and Europe make greater efforts to open their markets to U.S. goods.

“I’m afraid that Congress and the White House are so taken with the new interest in competitiveness,” says Barry Bosworth, a senior economist at the Brookings Institution and a former Carter Administration official, “that they’ll just say to hell with the budget deficit, which is still the core of the problem. They are running away from the real economic policy choices rather than facing them.”