With the dollar's continued swoon and grim news on the job front, American economic competitiveness has become a central theme in the presidential election. Stumping in Ohio and Pennsylvania, old-line industrial states hit hard by the flight of manufacturing jobs, Democrats Hillary Rodham Clinton and Barack Obama have called for renegotiating the landmark North American Free Trade Agreement, or Nafta, to help American workers. (John McCain, the Republican nominee, supports the 14-year-old trade pact.)
The candidates are reflecting — and, some observers say, reinforcing — voters' economic unease. Twenty-eight percent of voters surveyed by Fortune magazine in January said that losing jobs to low-wage countries was one of two top reasons, along with high oil and energy prices, behind the current economic slowdown. Even Republican voters, who have traditionally been supportive of open trade, report being anxious about its impact.
Scholars, too, say the economy is at a critical juncture, but many worry that the increasingly isolationist rhetoric on the campaign trail could prove a distraction from efforts to stimulate innovation and improve the country's competitive position. The Chronicle asked several academics to weigh in on the major policy debates concerning economic competitiveness.
Is globalization bad?
In contrast to the Democratic candidates' contentions, most economists agree that, on the whole, the movement toward a single global market for capital, goods and services, and labor has benefited the United States and the rest of the world. The competitive pressures of international trade have led companies to innovate and to increase productivity, and have lowered the costs of many products for consumers. Living standards in the United States are higher by $1-trillion a year — or $10,000 per household — than they would have been without economic openness and trade, argues Robert Z. Lawrence, a professor of international trade and investment at Harvard University's John F. Kennedy School of Government.
"On balance, globalization has had a positive effect," Lawrence says.
He and others point out that the American economy surged in the years following Nafta's enactment, in 1994. The strong performance isn't necessarily attributable to the trade agreement, they say, but it does suggest that greater openness to trade has not been a drag on the economy.
In fact, amid the recent spate of bad economic news, export growth has been a bright spot, increasing at twice the rate of import growth in the last year.
That said, many scholars acknowledge that globalization does have losers, both within and between countries. Incomes and standards of living of workers in some developing nations, particularly in Africa and Latin America, have declined, says Suzanne Berger, a professor of political science at the Massachusetts Institute of Technology and author of How We Compete: What Companies Around the World Are Doing to Make It in Today's Global Economy (Doubleday, 2005), a five-year study of the impact of globalization. And some American companies and industries have struggled to compete internationally, which cost the jobs of workers here. The domestic job losses tend to be clustered in manufacturing and among less-educated workers.
"We've seen gains from globalization in a broad way," Berger says, "but the losers are pretty concentrated."
Should the country take actions to mitigate the impact of globalization on some Americans?
Berger argues that in order to ease insecurity and build popular support for global trade, American officials need to better cushion its negative impact on portions of the work force. She points to a country like Denmark, where employment law makes it fairly easy to hire and fire workers. But the Scandinavian country also has generous unemployment benefits and a robust retraining system. And, unlike in the United States with its employer-based health-care system, Danish workers don't lose their health insurance when they lose their jobs.
All three presidential candidates have outlined plans to strengthen the safety net. McCain has put forward a proposal to overhaul unemployment insurance to make it a program for retraining and relocating workers who have lost jobs. Both Obama and Clinton have called for expanding existing assistance programs to include dislocated service-sector employees and for providing pre-emptive training to workers threatened by global competition. And the Democratic candidates say that Nafta should be reviewed and that future trade agreements should include stronger labor and environmental provisions to protect workers in the United States and elsewhere.
Some scholars think public officials should help not just individuals but also communities and regions hit by widespread job losses resulting from global competition or other forces. In a policy brief for the Financial Services Forum, a nonpartisan group of financial executives, Lawrence and a pair of former Bush administration officials — Grant D. Aldonas, now at the Center for Strategic and International Studies, and William J. Slaughter, a professor of international economics at the Tuck School of Business at Dartmouth College — propose the creation of an insurance program, backed by the federal government, for local tax bases. It would allow communities to continue to provide public services during severe downturns and to better manage economic risk.
What does the United States need to do to help keep American companies productive?
While much of the political debate has focused on trade policy, many of the dynamics that threaten to undermine the country's competitive position are, as Lawrence says, "made in the U.S.A."
Economists equate competitiveness with productivity, or the measures of output from a production process as compared with a unit of input. Thus, factors that affect competitiveness are those that undercut the productivity of American workers and firms, or raise the cost of doing business.
Observers point to a variety of policy changes or strategic investments the government could make that would allow American companies to do business more cheaply, including the reduction of health-care costs and the elimination of shortcomings in broadband and other infrastructure.
The presidential candidates have embraced reforms, but each comes at a price, financially and politically.
For example, one open question is whether regulations imposed on companies need to be reduced to encourage innovation. Some economists worry that the recent problems in the mortgage market could cause the pendulum to swing too far in the opposite direction, toward heavier regulation. Deborah L. Wince-Smith, president of the Council on Competitiveness, a nonprofit group of corporate executives, university presidents, and labor leaders, says she is concerned that the existing regulatory environment, in particular U.S. product-liability law, already is a drag on innovation.
"No other advanced nation has that sort of drain," she says.
Meanwhile, the council has called on the presidential contenders to lay out a national strategy for securing access to energy supplies, and increasing the country's energy productivity and companies' energy efficiency. The recent rise in energy costs has increased the cost of American goods and made it more difficult for companies here to compete with those in countries with lower energy costs.
While the political candidates have said the United States must become less dependent on foreign sources of energy, observers say there has been too little debate about how to stimulate innovation in the energy sector. "We should be doing more, but we're not," says Clyde V. Prestowitz Jr., president of the Economic Strategy Institute, a Washington research institution, and author of Three Billion New Capitalists: The Shift of Wealth and Power to the East (Basic Books, 2005). "A Manhattan Project for energy would make a lot of sense."
What sorts of educational investments need to be made?
If consensus can be found on any issue, it is that the United States needs to educate future generations better to compete in a global economy. A report last year by the Organisation for Economic Cooperation and Development found that other countries are producing college graduates at a faster rate than the United States, particularly in the sciences.
But observers differ on where in the education pipeline the holes should be plugged. Some say that the United States needs to convince more college students to major in critical areas, such as math, science, and engineering. Clinton, for example, has proposed federal support to college programs that encourage more minority and female students to study in those areas.
Others, pointing to American public-school students' scores on standardized tests, say that intervention has to happen earlier. "There really are deficiencies in K-12," says Kent H. Hughes, who directs the Program on Science, Technology, America, and the Global Economy at the Woodrow Wilson International Center for Scholars.
The Democrats have proposed several efforts to invest in schools, to improve mentoring for at-risk students, and to encourage top math and science graduates to teach in public schools. McCain, for his part, advocates greater school choice, saying that would force schools to be more innovative.
Clinton and Obama have also called for greater spending before children ever reach classrooms, on preschool programs and early-childhood care. Lane Kenworthy, a professor of political science and sociology at the University of Arizona, says such investments might make the "biggest dent" in educational attainment. "If we don't deal with those early disparities," says Kenworthy, who studies the causes and consequences of inequality, economic growth, and social policy, "when students go to school, they'll maintain that gap or fall further behind."
And Charles M. Vest, president of the National Academy of Engineering, argues that investment in education has to extend beyond the classroom and into the workplace. He proposes a "21st-century equivalent of the GI Bill," which would provide midcareer retraining for American workers to keep their knowledge up to date.
Scholars of global competitiveness also say the United States must change its immigration policies in order to retain a larger share of the talented international students drawn to American colleges. Stringent visa requirements can deter those students from remaining in the country after graduation, and critics say elected officials have been too timid and incremental in their solutions.
Legislation recently considered by Congress, for example, would have increased the number of H1-B visas, which allow foreigners to work temporarily in the United States in certain high-tech and high-demand fields, such as engineering. Wince-Smith, however, argues for more "fundamental" reforms of the immigration system, such as awarding green cards automatically to international students who graduate from American colleges.
"That's a big, bold thing," she says. "We need to be a magnet for talent, and not just educate other countries' students here."
But Congress has repeatedly failed to pass politically volatile immigration-reform measures. And McCain, who had championed such changes, has recently tempered his rhetoric.
Are there other ways to encourage innovation?
Congress last year passed legislation to significantly increase federal spending on physical-science research and to intensify efforts to train more science teachers, but lawmakers have yet to budget the funds to do so. Both Clinton and Obama have called for doubling federal spending on basic research.
That may not be the solution, according to Robert D. Atkinson, president of the Information Technology and Innovation Foundation and author of The Past and Future of America's Economy (Edward Elgar, 2005). He says that such efforts focus on expanding supply without tackling the issue of demand, or how to encourage American companies to take advantage of those resources. In the early 1990s, the United States had the most generous tax incentives for research among the major industrialized countries; by 2004 it had dropped to the 17th-most-generous.
One option, Atkinson says, is to change tax policy to better reflect how innovation actually occurs: more often in conjunction with universities and national laboratories than in-house. Atkinson proposes an expansion of the flat research-and-experimentation tax credit for collaborative research.
Another idea is to create a federal agency to promote technology and innovation, much in the same way the National Science Foundation supports basic research. Other countries, including Ireland, Japan, and South Korea, have established or expanded such agencies in recent years.
Hughes, of the Wilson Center, says the challenge that faces the next president is to ensure "U.S. innovation is translated into investment in the U.S."
"Otherwise," he says, "will we find terrific U.S. innovations translated into investment in China or jobs in India?"
Karin Fischer is a staff reporter at The Chronicle.
http://chronicle.com Section: The Chronicle Review Volume 54, Issue 33, Page B15
