October 2016 Monthly Article – U.S. Competitiveness

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By Jerry Pacheco

In 2011, the Harvard Business School founded the U.S. Competitiveness Project, which reports on the state of the U.S. economy, its competitiveness, and what steps could be undertaken to make improvements. The 2016 report, titled “Problems Unsolved and a Nation Divided” by Michael E. Porter, Jan W. Rivkin, Mihir A. Desai, and Manjari Raman, is a startling look at how the U.S. economy arrived at its present position and the challenges it faces going forward. The authors make a case that although the U.S. economy is growing faster than in many other developed countries, our present growth, job creation, and income gains lag behind our historical economic growth.

The authors review how the U.S. was a pioneer in the world to strengthen universal public education, public infrastructure such as the federal highway system, and the funding of research. After WWII, the public and private sectors closely collaborated on these objectives. At the same time, regulations hampering business were low and labor markets could make quick adjustments. However, over time, investment and focus on these key elements started slowing down. At the same time, the report states, new technology, a changed geopolitical system, and a shift in governance allowed business to be conducted from “anywhere to anywhere.” It was during a time period in which large firms became mobile across the globe. Technology spurred the creation of more automated processes, thus allowing companies to operate with fewer, albeit more highly skilled, workers.

While these shifts brought on positive changes, the report states several unforeseen consequences occurred. The connectivity between businesses and their communities weakened, thus reducing the participation of companies in local education and infrastructure. Second, the American working class found itself struggling to keep up with new technology advances and foreign competition that threatened their traditional livelihood. Finally, those with higher skills such as engineers, managers, and innovative entrepreneurs saw their opportunities in the global market expand, and inequality along the employment spectrum greatly increased. On the governance side, U.S. regulations increased, the tax code became more complicated, and costs in areas such as healthcare soared, all serving to decrease the competitive advantage of the U.S.

According to the authors, rather than refocusing on infrastructure and educating the middle class to compete, the U.S. made promises to “maintain the illusion of shared prosperity,” such as the over-extension of credit to people who could not pay back the debt, increased entitlements, the cutting of taxes across the board, and increased public-sector employment/benefits. These moves left governments at all levels overextended and the focus shifted to paying for the past instead of investing in the future. A political fight ensued over who was to blame for the deepening crisis, and the ability to address these complex challenges was stifled by party politics.

The results of these changes have severely undermined U.S. competitiveness. Although small businesses in the U.S. have traditionally played a major role in creating jobs, for the past 17 years, larger businesses with more than 1,000 employees have assumed the lead in creating new jobs. Smaller businesses have not bounced back from the recession as fast as larger businesses, and companies with fewer than 10 employees have the slowest job creation pace. Since 2008, the total number of companies with fewer than 500 employees has decreased by five percent. Currently, the demand for low-skilled labor in the U.S. is stagnant, which is exacerbated even further by the high incarceration rates of male workers in this sector. According to the report, this has caused a 3.4 percent decline in the workforce participation of men ages 25 to 54 years old since 2000. Particularly affected are African-American men, and also women, who have seen their workforce participation gains erode.

Entrepreneurship, a cornerstone of the U.S. economy also has suffered. Start-ups of new companies as a percentage of all U.S. firms has fallen from more than 12 percent in 1980 to eight percent in 2015. The report highlights the disparity between the continued success of thriving high-tech centers such as Silicon Valley, Boston, and New York with other struggling centers across the U.S. Incredibly, approximately half of the country’s new business establishments between 2010 and 2014 were accounted for by only 20 U.S. counties.

While the authors paint a bleak picture of how the U.S. economy has arrived at this point, they do provide solutions proposed by colleagues and businesspeople that the U.S. can take in the future to improve its competitiveness and to create jobs.

In my last column, I wrote about the Harvard Business School report, titled “Problems Unsolved and a Nation Divided” by Michael E. Porter, Jan W. Rivkin, Mihir A. Desai, and Manjari Raman, which is part of the school’s U.S. Competitiveness Project. The report examines how the U.S. economy has arrived at its present position and the competitiveness challenges it faces in the future against other countries. The authors state that the factors which made the U.S. competitive in the post-WWII period — universal public education, public infrastructure such as the federal highway system, and the funding of research – have succumbed to disconnectivity between businesses and their communities, reduced private sector participation in education, misdirected government debt, and a blame game between political parties that has resulted in a Washington, D.C. quagmire.

Although the U.S. has perceived strengths such as world-class research universities, strong entrepreneurship, innovation, quality management, and vibrant capital markets, these are offset by a decline in the country’s workforce skills, flexibility in the labor market, questionable macroeconomic policy, a complicated tax code, aging infrastructure, an elementary to high school education, and health care system.

Two areas of the report strike me as being the most critical. The first is U.S. investment in the infrastructure needed to grow and attract businesses. In the 1960s, the U.S. invested approximately 2.2 percent of its GDP in transportation infrastructure, which has declined to just 1.6 percent today. This is less than what Europe and China are investing, which the report says is evidenced by the modern airports in these regions compared to aging U.S. airports such as JFK Airport in New York. The decline in infrastructure investment has the greatest impact on the “everyday American,” who heavily relies on public infrastructure to commute to work and to conduct business.

The second, and perhaps most disconcerting factor as I read the report, was the examination of the K-12 education system in the U.S., which traditionally has been the ticket for the working and poorer classes of society to create future opportunity in order to better their economic status. The report states that, “Younger cohorts of U.S. workers have higher literacy scores than older cohorts in absolute terms, reflecting U.S. skills improvement over time. But workers elsewhere have improved even faster. American workers from earlier generations are more literate than their international peers of the same age, but younger U.S. workers are less literate than their peers.” In other words, while there have been gains in the U.S. education system, they are being outpaced by stronger gains in other countries. Future U.S. competitiveness will be affected if educational gains are not increased.

Last, but not least, the report focuses on the broken political system by emphasizing while these challenges accrue, “What has Washington done?” The authors argue “little to none.” They strongly accuse the U.S. government of failure in areas for which it is responsible: tax code, health care, regulations, and focusing on new infrastructure. While there is general bipartisanship in the business community about changes that need to take place, the two major political parties have failed by infighting and the blame game being played.

The authors use a couple of examples to highlight Washington’s failures. The first is free trade, which the report states has been a major advantage and a reason why the U.S. economy became strong and a leader in the global economy. Rather than exploring how existing and new trade agreements can make the U.S. more prosperous and competitive, Washington politicians adhere to political factions that serve to demonize free trade. Second is the inability of policymakers to address the U.S. corporate tax code, which at 39 percent, is only behind the United Arab Emirates (55 percent) and Chad (40 percent), and is the highest combined tax rate of any advanced country. This is forcing companies to locate operations in foreign countries, while both parties agree that something needs to be done but sink further into political squabbles. Depressingly, the report is clear in its position that no candidate running for the presidency has adequately put forth a plan to address any of these issues.

On the bright side, the authors state that some major changes the U.S. needs to remain competitive in the future, such as the tax code, can be done relatively quickly. In conclusion, the report states that an eight-point strategy is needed which includes: simplifying the tax code; moving to a territorial tax system like other leading nations; making it easier for highly-skilled immigrants to come to the U.S.; addressing distortions and abuses in the international trading system; improving logistics, communications and energy infrastructure; streamlining regulations; creating a federal budget that is sustainable, including a reform of entitlements; and “responsibly” developing the U.S.’s energy advantage, which is referred to as “unconventional.”

As I finished reading the report’s suggestions, it occurred to me how strikingly obvious and not necessarily groundbreaking they are. I think most Americans would agree with the suggestions, but what becomes frustrating for me is how does this translate into bipartisan political action in Washington, when we are seeing mudslinging from both sides of the aisle with no real bold plans of incorporating what obviously needs to be accomplished by people at the cusp of being elected?