Made in America: We Can Still Compete

The latest buzzword in U.S. politics is competitiveness: America’s declining ability to compete in world markets, and what to do about it. Policies as diverse as funding remedial education, removing anti-monopoly exemptions for exporting industries and plain old protectionism are all being promoted under the label of competitiveness. That theme will surely be common in 1988 election campaigns.

Concentrating on competitiveness is obviously better than concentrating on raw protectionism. In that sense we have to welcome the new theme. Unfortunately, however, much of the current rhetoric and debate that surrounds the discussion mix two concepts: international competitiveness, which refers to the ability to sell our goods in world markets; and productivity, which is the output we can produce per hour of work.

After 1973 the overall growth of productivity slowed sharply in the United States. Since 1981, because our currency became highly overvalued, the United States also suffered a loss of competitiveness in world markets and began to run a huge trade deficit. Both of these are serious problems and deserve national attention. But they are not at all the same thing. However desirable it is that political leaders be concerned with improving U.S. productivity, confusing productivity with competitiveness can lead to bad policy.

The growth in our living standards is dependent on the growth in national productivity--whether we trade with other nations or not. If productivity growth slows or quality deteriorates in industries producing domestic goods and services--which account for almost 90% of the things we buy--the country’s living standards suffer directly, because we have fewer or lower-quality goods available per hour we work. When productivity growth or quality declines in the export industries, we produce fewer or less-desirable export goods per hour worked. The cost and price of U.S. exports rises or their attractiveness falls.

A depreciation of our currency can make the dollar cheaper for foreign buyers, and in that way offset the higher costs or lower attractiveness of our exports, enabling us to remain competitive in world markets. But our living standards will suffer because we can then buy fewer imports with our depreciated dollars. The bottom line is that a loss in U.S. productivity growth is equally serious whether it occurs in industries producing domestic or export goods, in services or in manufacturing.

If the dollar exchange rate gets out of kilter--as it has in the past five years, thanks principally to our huge federal budget deficit--we can lose competitiveness even if our productivity performance is good. And, conversely, with a depreciated dollar, we can be very competitive while growth in our productivity and living standards are slipping. Indeed, that is exactly what happened to the United States over the last generation.

In the 1960s and early 1970s, when productivity growth in American manufacturing was high, the U.S. share of world manufacturing exports slipped badly, because the dollar was overvalued and other countries were catching up after wartime destruction. During the remainder of the 1970s, manufacturing productivity growth in the West declined, but our export share rose because the U.S. dollar depreciated. And finally, in the past five years, our manufacturing productivity growth recovered handsomely, but--again because the dollar became overvalued--our competitiveness fell and our share of world markets shrank.

Our ability to sell goods abroad in competition with other countries is chiefly a matter of the exchange rate, not of productivity growth. As our still-overvalued currency comes down further, we will become more competitive in world markets. But that itself will not improve the growth of our living standards.

The current political discussion about competitiveness frequently promotes another misconception: that something is fundamentally awry with U.S. manufacturing industries and that government needs to find tools to repair the damage. But, exchange rate aside, that is just not so. Ironically, in the past four to five years it has been manufacturing productivity growth that has recovered handsomely, while productivity growth in the non-manufacturing industries--services, trade, construction--has dropped alarmingly, almost to zero.

Contrary to the popular view, manufacturing has remained a constant share of total national output for the past 30 years. Because efficiency has grown faster in manufacturing than in the rest of the economy, especially lately, it has taken a declining share of our income to buy the manufactured goods we use and a declining share of our labor force to produce them. And in the past four to five years American manufactured exports have taken their lumps because of the awesomely incompetent budget policies which produced the highly overvalued U.S. dollar. But the dollar has turned around and this particular problem will eventually correct itself.

This is not to say that all is for the best in the best of all manufacturing worlds. There is much to be improved in both U.S. manufacturing and service industries. And the misconceptions that characterize the rhetoric of competitiveness may also channel government policy in the wrong direction. The current discussion tends to focus attention exclusively on manufacturing industries, leaving the impression that they are somehow more important than other industries--and that misconception is not the basis for sound policy. The competitiveness theme easily lends itself to measures that would subsidize, cartelize and protect those of our manufacturing industries that are in particular competitive trouble. This is a sure way to reduce productivity growth.

Another dangerous aspect of some of the competitiveness rhetoric is its implicit premise that what counts is not so much the state of our own industrial efficiency and technology, but how well we do compared with other countries. One gets the impression, for example, that what is important is not whether we do or do not build a supercomputer but whether the Japanese beat us to it. This is nonsense. The best of all words is indeed that we invent the supercomputer. But if we do not, we are better off if somebody else does.

For a long time in the postwar period, the United States was largely alone at the technological frontier. We can justly be proud that we helped other nations, including our one-time enemies, to catch up to that frontier. Now that many countries are there, we must expect that it will not always be Americans who make every technological advance. We do not want to fall behind the frontier. But it would be extremely dangerous if we began to see ourselves as a failure whenever other industrial countries like Japan, Germany, France, and soon Korea and Taiwan, were the ones to push the technology frontier forward. The economic life of the world is not a football game. We are in it to improve the stability and growth of our living standards, not to win some global Super Bowl.