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Made in America: We Can Still Compete

February 08, 1987|Charles L. Schultze | Charles L. Schultze, a senior fellow at Brookings Institution, was formerly chairman of the Council of Economic Advisers and federal budget director.

WASHINGTON — The latest buzzword in U.S. politics is competitiveness: America's declining ability to compete in world markets, and what to do about it. Policies as diverse as funding remedial education, removing anti-monopoly exemptions for exporting industries and plain old protectionism are all being promoted under the label of competitiveness. That theme will surely be common in 1988 election campaigns.

Concentrating on competitiveness is obviously better than concentrating on raw protectionism. In that sense we have to welcome the new theme. Unfortunately, however, much of the current rhetoric and debate that surrounds the discussion mix two concepts: international competitiveness, which refers to the ability to sell our goods in world markets; and productivity, which is the output we can produce per hour of work.

After 1973 the overall growth of productivity slowed sharply in the United States. Since 1981, because our currency became highly overvalued, the United States also suffered a loss of competitiveness in world markets and began to run a huge trade deficit. Both of these are serious problems and deserve national attention. But they are not at all the same thing. However desirable it is that political leaders be concerned with improving U.S. productivity, confusing productivity with competitiveness can lead to bad policy.

The growth in our living standards is dependent on the growth in national productivity--whether we trade with other nations or not. If productivity growth slows or quality deteriorates in industries producing domestic goods and services--which account for almost 90% of the things we buy--the country's living standards suffer directly, because we have fewer or lower-quality goods available per hour we work. When productivity growth or quality declines in the export industries, we produce fewer or less-desirable export goods per hour worked. The cost and price of U.S. exports rises or their attractiveness falls.

A depreciation of our currency can make the dollar cheaper for foreign buyers, and in that way offset the higher costs or lower attractiveness of our exports, enabling us to remain competitive in world markets. But our living standards will suffer because we can then buy fewer imports with our depreciated dollars. The bottom line is that a loss in U.S. productivity growth is equally serious whether it occurs in industries producing domestic or export goods, in services or in manufacturing.

If the dollar exchange rate gets out of kilter--as it has in the past five years, thanks principally to our huge federal budget deficit--we can lose competitiveness even if our productivity performance is good. And, conversely, with a depreciated dollar, we can be very competitive while growth in our productivity and living standards are slipping. Indeed, that is exactly what happened to the United States over the last generation.

In the 1960s and early 1970s, when productivity growth in American manufacturing was high, the U.S. share of world manufacturing exports slipped badly, because the dollar was overvalued and other countries were catching up after wartime destruction. During the remainder of the 1970s, manufacturing productivity growth in the West declined, but our export share rose because the U.S. dollar depreciated. And finally, in the past five years, our manufacturing productivity growth recovered handsomely, but--again because the dollar became overvalued--our competitiveness fell and our share of world markets shrank.

Our ability to sell goods abroad in competition with other countries is chiefly a matter of the exchange rate, not of productivity growth. As our still-overvalued currency comes down further, we will become more competitive in world markets. But that itself will not improve the growth of our living standards.

The current political discussion about competitiveness frequently promotes another misconception: that something is fundamentally awry with U.S. manufacturing industries and that government needs to find tools to repair the damage. But, exchange rate aside, that is just not so. Ironically, in the past four to five years it has been manufacturing productivity growth that has recovered handsomely, while productivity growth in the non-manufacturing industries--services, trade, construction--has dropped alarmingly, almost to zero.

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