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May 18, 1994
"Competitiveness? Why Worry"
San Jose Mercury News
By Timothy Taylor
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PAUL KRUGMAN of MIT, one of the world's leading specialists in international economics, is on the warpath against the idea of competitiveness. He recently wrote: "The whole concept of 'competitiveness' is at best problematic, at worst misleading."

Krugman is pushing this argument hard. He has a just-published book for non-specialist readers called "Peddling Prosperity." The book was excerpted in the March issue of Fortune; related essays by Krugman appeared in the March/April Foreign Affairs, and the April Scientific American (the latter written with Robert Lawrence of Harvard).

But what can Krugman possibly mean? Isn't competitiveness just obviously a good thing, like parenthood and apple pie?

Well, no.

For Krugman, as for most economists, the economy exists to deliver a higher standard of living, and higher productivity is a means to that goal. The link is a tight one. Krugman cites evidence that domestic productivity increased a total of 5.1 percent from 1979 to 1989, which is almost exactly the same as the (pathetically small) increase in the average compensation of workers over that time.

Sometimes, "competitiveness" is just a flashy synonym for policies to improve domestic productivity through the time-honored and well-proven methods of sustained investment in physical capital, new technology, and skilled workers, who are then allowed to function in a market-oriented environment.

But "competitiveness" can also describe an economic philosophy which holds that a country cannot prosper without success in international markets, particularly success in certain key industries (somehow decided upon). Further, this philosophy often claims that a certain degree of government assistance (somehow decided upon) can be critical in determining whether industry attains such an international lead.

Krugman holds that Clinton and many of his economic advisers have been led astray by this broader idea of competitiveness.

Consider with cold logic, for example, the proposition that a country cannot prosper without success in international markets, especially certain key markets.

But why not? Only 10 percent of the U.S. economy is exports and imports. About two-thirds of the U.S. economy (on Krugman's estimate) is non-traded goods, essentially unaffected by international trade.

If U.S. productivity were to increase substantially in the two-thirds of the economy that isn't affected by trade, the national standard of living would rise substantially, with no effect whatsoever on the U.S. position in those supposedly key international markets.

Nowadays, everyone knows to snicker at the ponderous arrogance that once proclaimed "what's good for General Motors is good for the country." But the competitiveness mavens of today have simply updated the slogan to argue that what's good for the export performance of certain industries that they choose is what's good for the country. Cynicism about such sloganeering is in order.

Of course, there is no reason to neglect productivity gains in the international trade sectors. But are those areas especially important?

The actual problem is that low U.S. productivity will always hurt the U.S. standard of living more generally. Falling behind international competitors may hurt our feelings, but it doesn't cause any additional reduction in the standard of living.

Or as Krugman puts it: "The moral of our discussion, then, is that while low productivity is a problem, international trade does not make it any more of a problem. Instead, the option of exporting the things you don't make too badly, and importing the things you do, reduces somewhat the costs of being unproductive on average."

When "competitiveness" just means working toward high U.S. productivity, it does little harm. "But ultimately," Krugman argues, "the rhetoric of competitiveness will be destructive, because it can all too easily lead to both bad policies and to neglect of the real issues."

For example, competitiveness policies tend to offer special benefits to the minority of the economy involved in international trade, thus leaving the majority of the economy at a relative disadvantage.

Talk of competitiveness tends to focus on a few visible industries where activist politicians want to claim credit (like the flat-panel display industry) or on industries that are suffering (like the U.S. auto and steel industries in much of the last decade), rather than on creating economic conditions for a broad range of industries to germinate and flourish.

Finally, competitiveness fanatics tend to focus on the fairness of rules about trade, taxes, and subsidies. They are more interested in trade skirmishes than in how to create conditions where the average American worker produces more per hour.

International competitiveness may serve as a useful rallying cry for the Olympic games, and for individual companies. But the economy is not an ice-dancing competition, nor a profit-seeking corporation.

Productivity growth may not sound as catchy as competitiveness. But if policy makers want to reinvigorate the standard of living for the average American, which has now stagnated for two decades, higher productivity is the only way.

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