How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
Paul Krugman contends that those who speak of competitiveness fail to understand three important points. First, nations are not like companies. No single number indicates their bottom line and the analogy does not apply. Second, he says that competitiveness is at best a meaningless concept. If it has any meaning whatever, it is "a poetic way of saying productivity." Productivity is the robust and unique measure of the performance of a national economy. Third, international trade is not a zero-sum game.
These are not stinging revelations but merely oft-repeated truisms. All his assertions are set out mundanely in The Report of the President's Commission on Competitiveness, written for the Reagan administration in 1984. The report provides what even Krugman acknowledges has become the standard definition:
Competitiveness has different meanings for the firm and for the national economy . . . . A nation's competitiveness is the degree to which it can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously expanding the real incomes of its citizens. Competitiveness at the national level is based on superior productivity performance.
So all of Krugman's revelations are on page one of the basic text: no simple analogy equates a nation and a business, productivity lies at the center of competitiveness, and trade is not a zero-sum game; it can and should be free and fair.
What then, if anything, is Krugman flailing at? Nobody with whom Krugman should deign to take difference has ever said the silly things he pokes with his jousting spear. Lots of people vulgarize competitiveness, but that is true of just about every other idea in economics.
Krugman objects to President Clinton's likening of the U.S. economy to "a big corporation competing in the global marketplace." Presidential metaphors, which try to encapsulate complicated matters for purposes of political mobilization, have their own logic and history. Perhaps Clinton's simile is akin to Franklin D. Roosevelt's famous likening of the Lend-Lease Act to lending a neighbor a fire hose. Clinton was neither mendacious nor wrong. To remind Americans that in many ways they are all in this together is important, and in a sense the national economy can be likened to a huge corporation, not big in the rude, trivializing example Krugman uses, Pepsi versus Coke, but big in the Mitsubishi, Mitsui or Sumitomo sense. The six main keiretsu, massive structures of grouped companies, which for many purposes come very close to being the Japanese economy, produce about half the Japanese total output of transportation equipment, banking, insurance, oil, glass, cement and shipping. Over one-half of all intermediate products are produced and bought within the cozy network of the six main groups, not to mention the lesser vertical keiretsu.
Lots of people, not just politicians, use "competitiveness" as a metaphor and do so a bit freely. Scientists talk of national competitiveness in biology; educators, in math. Part of the problem is the need for a single substantive term for "competitive position." Part is a heightened awareness, all to the good, that the United States is no longer supreme, benchmarking is a first step toward serious improvement, and comparative measures, even of economic welfare, have important and legitimate meanings.
Krugman criticizes those who write about competitiveness for their tendency to "engage in what may perhaps most tactfully be described as 'careless arithmetic.'" Yet Krugman's own arithmetic is, to say the least, careless. He provides a table that purports to demonstrate arithmetically that value-added production correlates not with technology but with capital intensity. But relating capital intensity to value added by sector contains a concealed correlation because the same table also ranks sectors by degree of monopoly power. And nothing generates more value added than monopoly. Furthermore, Krugman omitted at least one sector: pharmaceuticals. This sector should be number three on his list, with value added almost twice as high as autos. But value added in pharmaceuticals is not explained by lots of capital per worker; instead the pharmaceutical industry has lots of research per worker along with lots of sales effort and monopoly concentration. And for a more sophisticated understanding, one should look beyond production to sales figures in the United States, which include competition from imports. In cigarettes, the number-one industry in value added and number-one in monopoly concentration, competition from imports is trivial. That is a major reason for the high value added in cigarette production. But that raises big questions, such as what determines productivity? What operationally can and cannot be done with simple productivity numbers?
Krugman warns that an obsession with competitiveness is dangerous and advises cathecting onto productivity. A near-exclusive focus on productivity, however, has some particular dangers and problems. Competitiveness puts productivity at the center of its concerns but not as an explanation. Instead competitiveness points out that overall productivity rates, which are very complex syntheses, are the things to explain, and that economics does not know how to do that.
Krugman unwittingly illustrates the problem of relying on a single number for overall production rates when he provides an alternative to a competitiveness approach. To say that 91 percent of the slowdown in the growth of per capita GNP "was explained by a decline in domestic productivity growth" does not explain the decline but rephrases it. To say that gnp grew slowly because the growth in output per hour grew slowly is simply to push aside the real question: What caused the decline? Krugman's numerical exercise does not even adequately fulfill the smaller role he assigns to it, to show that foreign competition played a trivial part in lowering the rate of growth of national welfare. This failure occurs because Krugman counts only the prices and quantities of imports, not their impact on profits, investment, jobs and wages. The typical case outlining the advantages of trade to the U.S. economy always focuses on these elements because they are much bigger than the simple, first-round effects of the prices and quantities of imports, which, with a modicum of craftsmanship, can be manipulated to demonstrate whatever one wishes. Similar problems of logic and data flaw the calculations that yield Krugman's most sweeping single-number assertion, that the U.S. trade deficit in manufactured goods has only a very small impact on wages, a reduction at most of only 0.3 percent. The problem, again, is not just with the single number but with the static approach Krugman adopts. Only a dynamic understanding and methodology can appreciate those impacts because that is how they proceed, iteratively, with real and consequential feedback. Finally, national productivity data have several smaller, technical difficulties that radically reduce the reliability of the numbers. It is impossible to get reliable productivity numbers for the core sectors of the service economy, for example, well over a third of GNP. And operationally, market and institutional structures lead economists to assign low productivity growth rates to industries such as semiconductors although engineers know that productivity has grown at fabulous rates.
The clean simplicity and apparent analytic power of the simple, one-number approach, though it fits snugly with the models and methods of traditional American economics, has given rise to efforts to define a different organizing concept, competitiveness, in order to open a broader, more open-minded and modest approach. The competitiveness approach poses a sensible question: How are we doing as an economy? No single number sums it all up, especially given the follow-up: How are we doing compared to the other guys? And why? Competitiveness is reconsideration of a broad set of indicators, none of which tells the whole story but that together provide a highly legitimate focus.