American leadership in the world is built on the foundation of its economic strength. In order to preserve its own national security, to play a leading role in maintaining the global order, and to set an example of successful democratic governance that other countries will want to emulate, the United States needs a healthy, growing economy. Yet the United States today faces enormous economic competition abroad and policy challenges at home in responding to that competition. During the 2000s, U.S. manufacturing lost ground in international markets and the United States became less attractive as a location for foreign investment. The Great Recession led to a surge in both short-term and long-term unemployment from which the economy is only now recovering. With the brief exception of the late 1990s, wage growth for most workers has been weak for decades. Yet the U.S. economy also has enormous strengths, from its world-class universities to its deep venture capital markets, and it has given birth to many of the world’s most dynamic and successful companies. Government policies that help build on those strengths while addressing some of the growing weaknesses are needed to ensure that the United States becomes an even more competitive economy and continues to create the prosperity at home that allows for a robust national defense and an outward-looking, engaged foreign policy.
CFR’s Renewing America initiative—from which this book arose— has focused on those areas of economic policy that are the most important for reinforcing America’s competitive strengths. Education, corporate tax policy, and infrastructure, for example, are issues that historically have been considered largely matters of domestic policy. Yet in a highly competitive global economy, an educated workforce, a competitive tax structure, and an efficient transportation network are all crucial to attracting investment and delivering goods and services that can succeed in global markets. The line between domestic economic policy and foreign economic policy is in many cases now almost invisible. Building a more competitive economy for the future requires that our political leaders—not just in Congress and the White House but also in state and local governments—understand how their policy choices can affect the choices of companies that can now invest almost anywhere in the world. Getting these choices right matters for more than just U.S. living standards. The United States’ ability to influence world events rests on a robust, competitive economy; if Americans lack confidence in their economic future, a less confident, more inward-looking America is likely to follow. The good news is that many of the obstacles to building a more competitive economy are well understood, and while the United States has lost ground in some areas, the measures needed to reverse those losses are not that difficult to conceive or to implement. During the 2012 U.S. presidential elections, Australia’s foreign minister famously said that, given its many strengths—from increasing energy independence to its relatively young workforce—the United States “is just one budget deal away from banishing all talk of American decline.” The chapters that follow suggest that, while the challenges may be somewhat larger than that, the right policy responses are certainly well within reach.
The Building Blocks of a Competitive Economy
Any discussion of whether the U.S. economy is competitive raises obvious questions. Competitive with whom? And in what? In its first report to President Barack Obama in 2011, the President’s Jobs and Competitiveness Council, which was chaired by General Electric Chief Executive Officer (CEO) Jeffrey Immelt, wrote, “Top global business leaders continually benchmark their operations against the best in the world in order to improve. On competitiveness, the United States should benchmark its performance aswell.” Some high-profile efforts have been made to do just this. The World Economic Forum (WEF), which hosts the annual Davos summit, has developed its Global Competitiveness Index, which ranks countries using an elaborate formula that assesses 123 variables over twelve “pillars” such as a country’s government institutions and its macroeconomic environment, as well as infrastructure, education, and technological sophistication. The good news for the United States is that, after falling as low as seventh behind such countries as Germany, Switzerland, Finland, and Singapore, it rose back to third in the most recent report, behind Switzerland and Singapore. But though the WEF report is valuable in highlighting the strengths and weaknesses of different economies, it has limited utility for policymakers. What was missing was a deeper comparative look at some of the capacities that go into making economies more or less competitive and an assessment of where the United States stands in these areas.
To help in developing such benchmarks, the Council on Foreign Relations started a new series of comparative publications called the Renewing America Progress Report and Scorecard series. Each installment took a deep dive into how the United States is measuring up against similar economies across a host of challenges pertinent to a high-functioning economy. The reports sometimes compared the United States with developing economies like China or Brazil, or with smaller economies like Denmark or Finland, but the most relevant comparisons are with other large advanced economies. Where, in other words, does U.S. performance stand alongside similar industrialized economies such as Germany, Japan, the United Kingdom (UK), France, and Canada? What can the United States learn from these countries, and they from the United States?
Many things, of course, go into making a competitive economy, from the quality of its corporate management to the smooth functioning of capital markets. The goal in this initiative was to focus on the role of government in creating the conditions for a more competitive economy. CFR therefore decided to look in detail at eight issues that are at the center of the debate over U.S. economic competitiveness.
Education. Human capital is perhaps the most important long-term driver of an economy. Smart workers are more productive and innovative. Yet the United States has fallen behind many other countries in moving its students successfully through school and college, and in particular has seen a huge achievement gap open between children from wealthier families and children from poorer families. Alone among those of other developed nations, the generation entering the U.S. labor force today is no more educated than the one that is retiring.
Transportation infrastructure. Roads, bridges, and rail lines are the arteries of an economy, allowing goods to move domestically and to international markets, and allowing people to get to and from work in an efficient manner. The current U.S. road and transportation system is only of average quality compared to those in other advanced economies.
And while the United States should be spending more to improve and expand its transportation infrastructure, it barely spends enough to maintain the existing network, even as the population continues to grow. Traffic congestion is now twice as bad as it was in the early 1980s.
International trade and investment. The United States depends far more on the global economy than it did two decades ago, and international trade and foreign investment are increasingly vital to U.S. prosperity. Yet on most measures of trade and investment performance—including the growth of exports and its ability to attract foreign investment— the United States remains in the middle of the pack among advanced economies. The good news is that the U.S. trade agenda, including the recent Trans-Pacific Partnership (TPP) agreement with Japan and ten other Pacific Rim countries, and the Transatlantic Trade and Investment Partnership (TTIP) negotiations with Europe, is the most far-reaching in two decades and could reinforce U.S. competitive advantages.
Corporate tax. Corporate tax rates play a big role in encouraging or discouraging companies from investing in the U.S. economy. The U.S. government, however, has not significantly revised its corporate tax rules since the mid-1980s. The result is that, though the United States once had among the lowest corporate tax rates in the industrialized world, it now has the highest. Most advanced countries have been lowering corporate tax rates and changing how they tax foreign profits. Worse, even with the rich world’s highest corporate tax rate, the United States does not raise as much corporate tax revenue as most other rich countries. This is because U.S. tax rules perversely encourage companies to invest offshore and to move profits offshore whenever possible so that taxes payable to the U.S. government can be deferred indefinitely.
Worker retraining. The United States has long had one of the world’s most dynamic and flexible job markets, with new jobs being both destroyed and created at a pace few other economies can match. But in the aftermath of the Great Recession, many more workers have faced crippling long-term unemployment. Although unemployment has fallen, the labor force participation is still the lowest in more than three decades. Ineffective worker-assistance policies slow economic recovery, lead ing to skills shortages for employers and hurting U.S. competitiveness. Many other advanced economies invest more in worker retraining and use more innovative programs to help workers return to the job market.
Regulation. Government regulations are increasingly costly for U.S. businesses, and especially for small businesses, even though they do not appear to pose a competitive disadvantage for U.S. companies relative to those based in other advanced economies. The American public is deeply divided over whether businesses face too many regulations, and Republicans and small-business leaders have grown more concerned over the course of the Obama presidency. Yet when asked about specific regulations, such as standards on air quality, fuel efficiency, or workplace safety, most Americans favor the status quo. Compared with some other advanced economies, however, the U.S. government does a poor job of reviewing the stock of existing regulations and altering or eliminating those that no longer make sense.
Government debt and deficits. The U.S. government faces unsustainable long-term debt, which has already crowded out investments in education, infrastructure, and scientific research that are needed to maintain U.S. economic competitiveness. And the problem will get worse. In 2000, the United States had less debt in relation to its economic output than most other advanced economies, but by 2015 it had nearly caught up to the average. The good news is that U.S. annual budget deficits have fallen from highs of nearly 10 percent of gross domestic product (GDP) in 2009–2012 as a result of the Great Recession to about 3 percent of GDP currently. But the debt burden will grow rapidly again in about a decade as entitlement spending rises with the aging population. By 2040, the U.S. debt-to-GDP ratio is projected to reach unprecedented peacetime levels, and the U.S. government has yet to take the steps needed to change that trajectory.
Innovation. The United States is well ahead of other advanced economies in technological innovation, which drives rising living standards in rich countries. Although China and some other developing countries are ramping up research and development (R&D) and graduating many more scientists and engineers than a decade ago, they remain far behind the United States in combining innovation quality and quantity. There are challenges; the United States is underinvesting in basic scientific research, and its patent and immigration systems are discouraging innovation. A successful innovation system is a complex web that requires substantial investment and brings together businesses, universities, and human capital. Few countries are seriously challenging the United States in any of those areas. U.S. government policy, though not without flaws, deserves credit for creating a nurturing innovation environment and for directly promoting innovation where the private market cannot.
Where Does the United States Stand?
Given the broad range of policies that affect the competitiveness of the U.S. economy, the conclusions of these reports do not lead to easy judgments about whether the United States is becoming more competitive or less compared with other advanced economies. But it is still possible to draw some broad judgments about where the United States is leading and lagging, and—just as importantly—on where effective policy could make the biggest difference.
Self-inflicted wounds. The two issues on which the policy choices appear easiest, and the failure to act most puzzling, are transportation infrastructure and corporate tax reform. Congress has grappled with these issues unsuccessfully for many years. The United States has failed to maintain, let alone expand with the growing population, its network of roads, bridges, rail lines, and mass transit. Infrastructure has been woefully underfunded despite years of historically low interest rates that have made it almost cost-free to invest in long-term projects. While the new highway bill passed by Congress at the end of 2015 at least ensures stable funding for five years, it falls well short of the country’s needs and relies on one-off funding gimmicks to cover the costs. Simple fixes, such as a small increase in the gas tax to finance new construction or a $10 billion seed fund to launch a National Infrastructure Bank to leverage private investments, have been beyond the reach of a divided Congress.
Corporate tax reform should not be that difficult either. The high U.S. corporate tax rate makes the United States less attractive for investment. U.S.-headquartered multinational companies have managed largely to offset the corporate tax burden by investing and holding cash offshore, and by shifting profits to lower-tax jurisdictions to avoid U.S. taxes. Many sensible proposals have been put forward that would lower the tax rate, discourage this sort of tax maneuvering, and increase incentives for companies to invest in the United States. But as with all tax reform, there will be winners and losers in the corporate sector and some will win more than others. Congress simply needs to stand up to the opposition and move forward.
Hard trade-offs. Other issues present more difficult public policy choices. Government regulation, for example, involves a genuine tradeoff between health, safety, and environmental benefits, on the one hand, and costs to business, which could reduce the competitiveness of the U.S. economy, on the other. Finding the right balance is difficult. The federal deficit, which ballooned during the Great Recession before returning to more normal levels, is nonetheless on a trajectory to grow out of control as baby boomers begin retiring in large numbers. Closing that gap will require some unpleasant mixture of higher taxes and reduced benefits. The encouraging aspect of both these challenges, however, is that they are easier than they might appear. The biggest business complaint about regulations is not that they are necessarily unreasonable but that they are too numerous, overly complex, and often redundant. If the United States followed countries such as Australia, Canada, and the UK in creating a sensible regulatory management system, these complaints could be addressed. On the long-term debt picture, countries like Germany, France, and Italy face much bigger challenges than the United States: an older workforce and fewer young people entering the labor market. Yet, unlike the United States, they have been able to reduce projected spending on entitlements to levels that are likely sustainable in the long run.
Long-term challenges. Some problems are genuinely difficult, and improvements come slowly and incrementally. Such is certainly the case with education. The United States is more than two decades along in a serious experiment in educational reform driven by Washington, and encouraging signs of progress are evident. But the U.S. education system is big and complex, and control is divided among the fifty states and many private institutions. Even without the contentious debates over testing, charter schools, and student debt, progress would at best be slow, with ongoing disagreements over what is working and what is not. Retraining workers for available jobs should be easier, but here, too, understanding about what works and what does not is weak. Some of the unemployed need to develop specialized skills of the sort that can be taught in community colleges, but others need the most basic remediation in math and reading. In a rapidly changing economy, upgrading the skills of workers to match available jobs is an ongoing challenge. Here the United States has much to learn from leaders such as Germany and Denmark.
Natural advantages. Fortunately, in some areas the challenge is not to remake failing policies but to build on the advantages that the United States already enjoys. The two issues in which this is clearest are innovation and international trade. On innovation, the United States has no peer—no other country has created anything like the number and variety of highly innovative, technology-intensive firms such as Apple, Google, and Microsoft. And no other country has the rich variety of universities to drive research and the deep venture capital markets to fund new ideas. The challenge here is to keep investing and to fix problems as they arise in order to maintain U.S. advantages. On trade and investment, U.S. performance does not stand out quite so clearly, but the potential is enormous. A recent report by the Boston Consulting Group found that the United States was a better bet for investment in manufacturing than any other advanced economy in the world. If the United States can successfully conclude the TPP and the TTIP, it will be well placed to build and attract the internationally competitive industries of the future.
Next Steps Forward
This book includes revised and updated research on each of these issues to present readers with as current a picture as possible of where the United States stands in these policy areas. The updated infographics offer a visual presentation of important conclusions on each of the challenges. They provide an easily accessible resource for anyone interested in the competitive performance of the U.S. economy, or in the particular issues raised here. Casual observers can scan the infographic images to get the highlights; others will want to delve more deeply into the details. As the 2016 presidential election campaign heats up, this short collection can serve as a quick reference to some of the policy challenges that are likely to be front and center in the coming election-year debates. Each of these issues is about America’s future: Is the United States laying the foundation to build a stronger and more productive economy that will offer better jobs and opportunities to the next generation? And is the United States nurturing the economic capabilities that have allowed the nation not only to ensure its own defense, but also to play a leading role on the global stage? The answer to both questions needs to be yes.