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The Past and Future of U.S. Competitiveness

What should the United States do to remain the leading economy in the 21st century?

June 2, 2005

What should the United States do to remain the leading economy in the 21st century?

Focused on the threat of international terrorism and haunted by the specter of 9/11, the United States is in danger of ignoring the lessons of the 1990s that will make a U.S. economy that is even stronger and more innovative.

The new challenges are all around us. China has thrown off the shackles of Maoist thought. India is turning from government direction to private markets. And the old Soviet sphere of influence has shattered into a dozen countries all seeking to participate in the international marketplace.

In addition, digital technology and the spread of broadband capacity have brought a new dimension to global competition. Millions of highly skilled, well-paid service sector employees now must contend with overseas peers who are paid only a small fraction of U.S. wages.

The new competitors are joining Europe and Japan in creating their own version of the United States’ highly successful model of innovation. For the first time, the United States is facing serious competition for the overseas scientists, students and professionals that have contributed so much to the U.S. economy.

The United States is also steadily eroding its international financial standing. Record trade and current account deficits are sustained only by foreign purchases of stocks, bonds and other U.S. assets.

In his March 2005 letter to Berkshire-Hathaway stock holders, Warren Buffet referred to an emerging “sharecropper” economy that will have to send more and more of its earnings overseas.

What should the United States do to remain the leading economic power in the 21st century?

The answer lies in the not too distant past when the United States responded to an earlier period of economic difficulties at home and rising international competition abroad.

As the United States entered the 1980s, it faced stagnant productivity growth, surging inflation and rising international competition. By the middle of the decade, Japan was scaling the heights of high-tech industry that the United States thought defined its own economic future.

The United States rose to the challenge. The private sector, political leaders and students of policy all responded. Private industry adopted and adapted lean production to meet and often beat the price, quality and pace of innovation set by Japanese companies.

Leading academics, key policy analysts and thoughtful journalists helped the private and public sectors develop new public policies and private practices.

The record prosperity of the 1990s had many causes. Much of U.S. industry had remade itself and was poised for investment just as new technologies — including the internet — were ready for commercialization.

Favorable supply shocks in the form of low oil prices and an overvalued dollar helped to keep inflation low. Taxes on bubble-driven capital gains contributed significantly to budget surpluses.

But make no mistake — good public policies played a critical role in fostering what eventually came to be called the “Goldilocks” economy.

More important for the future, the strategy that worked so well in the 1990s created a framework for policy that can — and must — be adapted to the new economic and geopolitical challenges of the 21st century.

First, we need to restore an economic climate that encourages long-term public and private investment. Under the current circumstances, that requires deficit reduction at home and international negotiations to gradually reduce the U.S. current account deficit.

Second, we need a new U.S. learning system that starts from before the cradle and extends past traditional retirement. Fixing our world-lagging K-12 system is the first step in adapting our higher education system to create new specialties that are not easily subject to international, online competition.

Third, we need to monitor and strengthen the entire U.S. innovation system — beginning with more funding for research in physical sciences and engineering.

Finally, trade policy should become part of a much larger commitment to global engagement that encompasses everything from managing economic interdependence to a broad geoeconomic strategy that matches our long-standing strengths in geopolitics.

Too many Americans think that the 1990s success and even our recent recovery from a financial bubble, the shock of 9/11 and the 2001 recession were a largely effortless reaffirmation of the U.S. economy’s natural superiority.

To some, it was a “Look, Mom: no government, no corporate change, no new policy” era. But U.S. prosperity in the 21st century is not a foregone conclusion.

The competitiveness policy of the past does point the way toward lasting 21st century prosperity. We can create the next American century, but we have to start building now.