Playing To Win

Krugman's third and final argument is that although countries may be rivals for status and power, such rivalry is something apart from economics and has no impact on living standards. A high relative growth rate may enhance Japan's status, for example, but it does not reduce the living standard of other countries. Although this notion may be true in the short-term, absolute sense, it is not necessarily true in the long-term, potential sense. Since the end of World War II, the United States has grown faster than Great Britain. The United States has done so in part by taking British inventions such as jet planes and radar and commercializing them faster than the British, thereby closing off those industries as potential avenues of British growth. Of course, if Britain could enter other high-growth, high-wage industries, the U.S. position would make no difference. But at any one time the number of those industries is limited; missing the boat on one can mean losing potential gains in living standards. In the extreme, loss of economic competitiveness can weaken national security and cause greater vulnerability to political regimes and international cartels that may severely constrain a country's economic potential. This competition is, after all, what imperialism and its opposition has been all about.

SPLITTING HAIRS

To buttress his arguments, Krugman attacks his critics' arithmetic as careless. Yet Krugman's own arithmetic is careless and selective. His analysis of how manufacturing job loss affects real average wages ignores the relationship between service and manufacturing wages. American barbers are not notably more productive than Bangladeshi barbers. But their wages are much higher because their customers work with much higher productivity than the customers of their Bangladeshi counterparts. Loss of high-wage U.S. manufacturing jobs also depresses not only manufacturing wages, but service industry wages as well. Krugman, however, fails to mention this drag.

Krugman's discussion of value added is even more questionable. He may have a point in that "high value added" has become a kind of shorthand for technology-intensive and high-wage industries when that is not always the case. But Krugman uses very broad industry categories to make his point, although the data he draws on clearly show that a huge industry like electronics consists of many sectors, some with high value added and others with low. Overall, Krugman notes a figure of value added per worker in the electronics industry of only $64,000. But why did he ignore the tables showing the figures of $443,000 for computers and $234,000 for semiconductors?

Krugman concludes by expressing fear of the possible distortion of the U.S. economy through the application of flawed competitiveness policies. He could, of course, be right. But can the United States be confident that an analyst who has such obvious gaps of his own and who has now argued both sides of the competitiveness issue can be relied on as the guide? Perhaps he is wrong, and competitiveness, far from being a dangerous obsession, is an essential concern.