China’s Sputnik Moment?
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Donald Trump's campaign has captured the deep disillusionment among many voters about America’s place in the world. “This country is in big trouble,” he said in the first GOP debate, a theme he has repeated in countless speeches since. “We don't win anymore. We lose to China. We lose to Mexico both in trade and at the border. We lose to everybody.”
Trump isn’t the only candidate to make this point. Scratch below the surface of either the Republican or Democratic presidential contests, and it is clear that much of the debate is over the United States’ economic standing in the world, and what it will take, in Trump’s words, to “make America great again.” The important word being “again.” Trump’s rhetoric—and much of that from Democratic insurgent Bernie Sanders—longs for an earlier time in which the United States was the strongest and most productive economy in the world and faced little in the way of global competition. It is no coincidence that both candidates find common ground in rejecting trade agreements, such as the Trans-Pacific Partnership (TPP), that would intensify the competition.
But nostalgia isn’t a good guide for policy. Strategies designed without an appreciation for where the United States actually stands could end up undermining its strengths without fixing any of the weaknesses.
So how does the United States stack up? According to the World Economic Forum’s most recent Global Competitiveness Report, the United States is the third most competitive economy in the world, behind only tiny Switzerland and Singapore and slightly ahead of other large economies such as Germany, Japan, and the United Kingdom. That is several notches up from the seventh-place spot the United States held as recently as 2012. U.S. job creation over the past five years has outpaced that of any other advanced economy, and the U.S. dollar has surged as investors flee Europe and Asia in search of better returns.
In our own research, we have looked in detail at how the United States measures against other advanced economies on many of the attributes that underlie national competitiveness, from innovation to education. The picture is a pretty good one. On innovation, for example, which drives economic growth in wealthy nations, the United States is far ahead of any country in the world. Corporate taxes and regulations, although both in real need of reform and modernization, do not pose the serious competitive disadvantage that many Republicans have suggested. The United States has slipped in global education rankings, but there are encouraging signs of progress, with high school graduation rates recently reaching record levels.
So if the United States is doing so well compared to its economic rivals, what accounts for the political appeal of claims that it has been a loser in global competition? The answer lies in the growing disconnect between the macro-level performance of the U.S. economy, which has been reasonably good, and the economy as it is lived by many Americans, which has been far from good.
The economist Michael Porter and his colleagues at Harvard Business School have called it “an economy doing only half its job.” Porter defines a competitive economy as one in which companies can compete successfully in global markets while also supporting rising wages and living standards for ordinary citizens. U.S. companies such as Amazon, Apple, Facebook, and Google account more than half of the top 100 companies in the world by market value, and such firms have only gained ground over the past five years. But despite this competitive triumph, wages and living standards for the average American have stagnated for decades. Real wages have been flat since the 1970s, which roughly corresponds with the time when the United States began facing tougher overseas competition, first from Japan and Germany and later from China. Young men today, who have been hit particularly by the disappearance of manufacturing jobs, on average earn less than their fathers did.
Porter and his colleagues argue that the biggest cause of this growing divide is the failure of governments, and of companies themselves, to invest in Americans—to give them the education, skills, infrastructure, and access to capital they to need to prosper along with U.S. companies. Our own research supports this conclusion. Compared with governments in other advanced economies, Washington is doing a decent job of supporting the competitiveness of its companies. But it is doing less to help bolster the competitiveness of workers and to help them prosper as individuals and families.
Consider government actions to support innovation and expand international trade. These are two areas in which the United States has done well. On innovation, the government supports an elaborate network that includes basic research in energy and life sciences, funding for university researchers, and subsidies and tax breaks for companies investing in developing new products. On international trade, the U.S. government has led a series of trade agreements that created new markets for U.S. goods and services abroad, but also made it easier for American companies to invest overseas and break up traditional supply chains in search of higher profits. Innovation and trade certainly benefit many Americans, who enjoy the latest Apple smart phones and can buy cheaper imported clothing and television sets. But the biggest benefits accrue to the companies themselves, and to their shareholders. Most of the jobs created by Apple, for example, are in Asia, and the large U.S. trade deficit suggests that growing trade has not brought many new jobs to the United States.
Meanwhile, when it comes to investing in Americans to help them secure a bigger share of the gains, the government has done less. Consider the challenge of retraining workers to fill the demands of a rapidly changing economy. During the Great Recession, long-term unemployment in the United States spiked to European levels, and even with recent strong job growth, overall labor market participation is the lowest it has been since the mid-1970s. Yet the United States spends next to nothing retraining its workforce, even as more than five million jobs go unfilled. In fact, U.S. spending on “active labor market” measures—job retraining, apprenticeships, and job search assistance—amounts to just 0.1 percent of GDP; in contrast, Germany spends 0.8 percent of GDP and Denmark an astonishing 2.3 percent in helping unemployed workers find their way back into the job market. Although those economies have not outperformed that of the United States, they weathered the recession with less disruption to the lives and economic well-being of their citizens.
On education, the United States spends a lot of money, but most of it goes to those who need it least. The achievement gap between children from wealthy families and those from poorer families is much larger than it was a generation ago. Yet public schools in poor neighborhoods get fewer resources than public schools in wealthy neighborhoods, and federal financial support for universities mostly benefits the better-off students attending those institutions. Community college funding has languished, and American students in vocational and technical colleges get less support than similar students in most European countries.
The result of such failures is a massive disconnect between the economy of U.S. companies and the economy of average Americans. That is the fuel on which insurgent campaigns are built. Both Trump and Sanders, in different ways, are appealing to Americans who feel like they have been the losers.
The risk now, however, is that such sentiments will overwhelm sound policy. Trump’s few forays into actual policy prescriptions suggest that he would make the problems much worse. He wants huge tariffs on imports from China and Mexico, which would result in retaliation that would shrink trade with two of the three largest markets for U.S. companies. He calls for deep cuts in corporate and individual taxes, which should help to attract investment, but his tax plan—and those of several other GOP candidates—would cut revenues so deeply that it would be impossible to pay for programs to boost the skills of American workers or invest in infrastructure.
Sanders’ campaign is longer on specifics, and he promises a great deal to correct ongoing underinvestment in Americans. He calls for eliminating tuition at public universities, and creating a $1 trillion Rebuild America fund, which would put millions of Americans to work rebuilding the nation’s infrastructure, creating “jobs that cannot be shipped offshore or outsourced overseas.” But to pay for these programs, he wants vast increases in corporate taxes that would drive more companies to look for other places to invest.
Building prosperity in a highly competitive global economy requires both an attractive investment climate for companies and initiatives to help more Americans acquire the education and skills to take advantage of the new opportunities. These problems should not be that hard to address. There is already a broad consensus in Washington, for example, on the need to reduce corporate tax rates to attract more investment. Regulatory reform that cuts out the needless, costly duplication of regulations should likewise enjoy support in both parties. Universal pre-K education and greater support for community colleges would reduce some of the inequities in education and help train Americans for jobs that are currently open. And with oil prices down near $30 a barrel, Congress should certainly be able to increase the tax on gasoline to fund badly needed investments in roads, bridges, and mass transit that would create jobs and build the infrastructure to make the United States a more competitive business location.
Sadly, the failure of Congress and the Obama administration to make any real progress on these challenges has opened the door to more radical approaches. And the more voters are persuaded by the “America the loser” campaign rhetoric, the likelier government will be to embrace policies that will do real harm to the United States’ economic competitiveness. Instead, it is time to take another look at the many underlying strengths of the U.S. economy and build on them so that their benefits are more widely shared. As former President Bill Clinton put it in his inaugural speech in 1993—following an election in which a weak recovery and growing foreign competition had similarly fueled insurgent campaigns for the presidency—“there is nothing wrong with America that cannot be cured by what is right with America.” As the presidential campaign enters a critical phase, the candidates and the voters need to rediscover that truth.