Category Archives: Competitiveness

Why Wouldn’t We Export Natural Gas?

The Wall Street Journal recently published an article that demonstrates how disputes about individual interests often impede us from doing what is best for the country.

According to the article, manufacturers are pressing the government to restrict potential exports of natural gas in order to keep prices low in the United States.  This is a blatant attempt to put their interests ahead of the nation’s.  The arguments make no sense from an economic point of view and would damage the economy.  This matters because exports will require the construction of large facilities to make liquefied natural gas.  If the administration uses these arguments to deny the permits needed to construct the facilities, there will be fewer exports.  Manufacturers may benefit from lower prices but these gains will be offset by losses to producers and to the customers of manufacturers.  Economic theory tells us that the nation will be worse off as a whole.

You might think that in the face of large persistent trade deficits, any exports — especially energy exports — would be welcome.  And with unemployment remaining stubbornly high the opportunity to construct billions of dollars of new infrastructure would be an important source of new construction jobs.  But apparently these gains might be thrown away to create a hidden subsidy for manufacturers.

The argument from manufacturers is that exports would raise the price of natural gas in the United States.  This would make domestic industries that use gas either as fuel or an industrial input less competitive internationally than they would otherwise be.  This is true, but it applies equally to all exports, not just natural gas.  To some extent exports of  any product reduce domestic supply and therefore raise the cost to domestic users, whether they are other companies or final consumers.  Does this harm the economy?  No, because the losses to consumer are offset by the gains to exporters and consumers.  Moreover, there is a general national interest in promoting economic efficiency.  Over the long run, the country is better off if all industries are forced to compete on a level playing field against international competitors.  Subsidizing companies by keeping their inputs artificially cheap quickly leads to dependency.  International competition benefits customers, whether they are consumers or other companies.

The United States has a strong interest in maintaining a reputation as a reliable exporter.  We strongly object when other countries restrict the export of raw materials in order to try to gain a competitive advantage.  A good example is China’s recent efforts to limit exports of rare earth metals.  We especially object in the case of energy exports.  Because the United States is a large exporter of other basic commodities such as grain, it has a strong interest in building a reputation as a reliable supplier even or especially when prices are high.  If foreign countries are not assured that we will allow their customers to compete against domestic customers  they will try to protect themselves by buying from other countries or subsidizing domestic producers.  This is one of the arguments Japan makes to justify its subsidies to Japanese rice producers and barriers to imports of American rice.

The manufacturers argue that raw materials are different.  For instance, a Dow Chemical spokeswoman is quoted as saying: “When natural gas is used as a chemical raw material, it creates eight times the value compared to other uses, and fuels higher-paying jobs, exports of finished goods and the vitaliaty of the manufacturing sector.”  It is easy to see why Dow, which uses natural gas as input to many of its products, would like to see its cost of business kept low.  But then why don’t we limit wheat and corn exports so that food processors can become more competitive?  For that matter, since a lot of Dow’s products serve as inputs for other manufacturers, why should we let Dow export or raise the price it charges to its customers?  Doing so only makes these customers less competitive.

The cynicism in these arguments can be seen  by reflecting on the fact that a short time ago people expected the United States would have to import gas rather than export it.  If the nations supplying us with gas had restricted those exports in order to help their companies, or if the government had denied the permits to build the necessary infrastructure, you can bet Dow would have objected.

The problem with economic progress in a modern economy is that it almost always hurts an existing interest.  If that interest is allowed to stop advancements, wages and living standards will be much lower and all American businesses will gradually become less competitive.  The Administration should see these arguments for what they are: a cynical attempt to put narrow interests ahead of the national welfare.

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Filed under Competitiveness, Energy, Exports

Does Manufacturing Need Government Help?

A recent article in the New York Times by Louis Uchitelle highlights the current debate over whether manufacturing in America is in decline and, if it is, whether government subsidies would help.  Unfortunately, the article raise as many questions as it tries to answer.  There are three main facts about manufacturing that I think warrant a great deal of attention.  Each is often ignored in articles like this one.

First, the health of manufacturing depends upon how it is defined.  It is true that manufacturing’s role in the economy is undergoing a long-term relative decline similar to the one that agriculture experienced at the beginning of the last century.  When it was founded, the United States was largely an agricultural economy.  Farming accounted for a large portion of total employment and other sectors of the economy were often rudimentary and/or expensive enough so that mass consumption was unaffordable for most people.  For example, although a textile industry existed then, clothes were so expensive that most people could only afford a few items and repaired those constantly rather than buying new ones.  As other sectors of the economy, particularly manufacturing, grew and as agricultural productivity increased, agriculture as farming declined in employment even as total farming production increased.  Yet agriculture as the food industry remains a large part of our economy two centuries later and includes many sectors that are high value and innovative.

Similarly, as various service sectors grow, manufacturing is bound to decline in relative importance.  This can be seen in the long-term decline in employment (although some of the decline is due to companies outsourcing various jobs, such as janitorial services, that are then classified as service jobs).  Yet if manufacturing is defined as all of the inputs and services that go into making products that have a tangible form whether or not these are provided by the manufacturing company itself or outside service companies, there is less reason to worry about its long-term future.  Consumers are always likely to want more and better things and the task of getting them these things at a reasonable price will consume a great deal of effort.

The second major point is that manufacturing is in many ways a victim of its relative success.  Over the last several decades manufacturers have achieved impressive gains in productivity.  Many times this has allowed them to increase the quality of their products even as they reduced the price.  In static economics this is not supposed to happen.  There have been many reasons for this success.  Manufacturing is more exposed to international competition so governments have been less successful at creating domestic havens in which companies no longer need to innovate.  Original equipment manufacturers, especially in the auto industry, have been relentless in forcing their suppliers to commit to lower prices while keeping quality at least constant.  Technology such as computer aided design, 3-D printing, and inventory systems that allow just-in-time manufacturing and better quality control have also helped.  The result has been a further decline of jobs.  In a mature economy, total demand for manufactured goods rises relatively slowly and, if those goods can now be produced with fewer workers, layoffs are likely.

But characteristics of the rest of the economy act to make manufacturing appear relatively weaker than it is.  Large parts of the economy, including health care, education, government services, finance and legal services are relatively immune from productivity increases or price pressure.  In each of these government policies protect providers from the intense competition that manufacturers faced over the last 40 years.  Even worse, the structure of these markets encourages rising prices.  In part this is due to the mistaken belief that, for one reason or another, market forces cannot work in these sectors.  There is also the unstated assumption that consumers in these markets are better off being protected from competition than they would be in a dynamic market facing constant pressure to increase quality and reduce cost.  The political power of incumbents also plays a role.  But note that even if production in all sectors remains static so that producers deliver the same goods and services every year, the relative importance of manufacturing as measured by GDP will decline if it exhibits strong productivity growth while other sectors increase their prices.

Finally, it is important to remember that much of the growth in demand for manufactured goods occurs overseas.  The co-chairman of President Obama’s Advanced Manufacturing Partnership makes this same point.  Andrew N. Liveris, Chairman and CEO of Dow Chemical argues for vigorous government support similar to the government subsidies his company recently received.  Yet he also makes it clear that such support will not cause him to move manufacturing back to this country.  The article quotes him as saying: “We put things overseas because markets were growing there and we wanted to be close to them, and that will never change.”  In that case, what is the point of subsidizing production here?  To the extent that manufacturers feel the need to be in China because that is where the market is, then there may not be much we can do to stop them.  Chinese subsidies to these companies may merely transfer wealth from Chinese taxpayers to American companies and their shareholders.  And US subsidies meant to keep the companies here may ultimately be self-defeating because they lower national wealth.

We should be glad that other sectors of our economy are growing and that other countries are developing.  This is not to say that manufacturing is not important or that government policy could not be improved.  But direct government assistance to specific industries and companies is problematical.  Elsewhere in the article, Mr. Liveris says: “I would not let free markets rule without also addressing what I want manufacturing to be in 20 or 30 years from now.”  But if government agencies had spent several billion dollars in 1985, how likely would they have been to correctly foresee the changes that have occurred over the last 25 years?

Instead of trying to bet on specific industries or companies, we should concentrate on improving the general environment for creating value in this country.  That means reducing the corporate income tax, reducing trade barriers, streamlining regulation, and changing labor regulations.  Each of these changes would have a much larger and more lasting impact across a number of industries.  But because each challenges both the conceit that experts can manage society and the innate fear of unpredictable competition none are likely to occur.

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Filed under Competitiveness, Manufacturing

The United States Faces Five Big Challenges

In order to make its strategic and economic leadership secure, America must successfully deal with five complex challenges over the next 20 years.  A solution to each of these challenges is achievable with sustained effort and, if achieved, they will strongly improve America’s ability to enjoy rising livings standards and continued international leadership.  They will also have positive implications for the rest of the world.

The Reform of International Institutions

The United States has a fundamental interest in seeing other nations join it as wealthy, responsible members of the global community.  Yet as other nations develop, the relative power of the United States is certain to decline.  This makes it imperative to develop international institutions that effectively accommodate and constrain the rising power of other nations.

Americans are much better off in a world where the citizens of China, India, Brazil and similar countries enjoy rising living standards and greater freedoms and where their governments bear a proportionate responsibility for ensuring the maintenance of the Western liberal order that has governed during the last 60 years. This order stressing free trade, human rights, nuclear nonproliferation, and collective security has delivered enormous benefits to the world.  As globalization increases the number of problems needing a collective solution, international institutions will gain even more importance.

Yet important international institutions including the World Bank and the International Monetary Fund, have lost much of their relevancy.  Decision making needs to be changed to reflect the rising influence of developing countries.  Just as important, their operations need to be streamlined and focused on a new mission that better reflects the need’s of today’s international community.  Other institutions like the United Nations and the General Agreement on Tariffs and Trade, look increasingly unable to deal with increasingly complex global problems.  Both the United Nations General Assembly and its Security Council continue to have difficulty addressing global issues.

Countries such as India and China need to find that the institutional structure surrounding them both furthers their interests and restrains their ability to act unilaterally against the interests of the general community.  And the world community needs institutions capable of dealing with collective problems.

Preparing Society for the Impact of Technology

Technology continues to increase at an accelerating rate.  In fact, it is likely that the amount of change occurring during the next 30 years will be at least an order of magnitude greater than the changes over the last 30 years.  If one remembers the social, economic and political changes that technology forced over the last three decades and then multiplies by 10 or 20, it becomes clear that new technologies will have a tremendous effect on both the wealth and shape of society.

These changes will have dramatic effects on privacy, life expectancies, industrial structure, and ethics.  What will happen to entitlements and the work place when people routinely live to be 120?  Will parents be allowed to alter their child’s genetics?  Who will have access to all of the data on our personal movements and transactions that future information systems will collect?  Will everyone be guaranteed access to drugs that eliminate disease or enhance mental performance regardless of cost?  We cannot answer these questions now, but we prepare for them.  In addition, the government should change policies governing work, health care, and savings to accommodate a world in which workers need to be more mobile and continuously retrain and in which they will live much longer.  Second, the government can begin to lead a national dialogue about the responsible use and legal framework that should surround new technologies.  It should also begin to enact policies to ensure that the benefits of technology are widely shared.

Competitiveness and Innovation

Globalization will continue to require greater collective decision making by the world’s powers.  If in 20 years the United States is not among the world’s leading economic powers these decisions will still be made, but Americans will have less influence over them.  Remaining the world’s leader in economic competitiveness and innovation boosts our role in global governance and our ability to protect our vital interests.  Concerns about international competitiveness can easily be overdone and other nations face more serious hurdles than we do.  Yet there is little doubt that the United States could do a much better job of ensuring that its laws encourage rather than retard greater productivity.  Failure to generate additional wealth impacts both our national security and our living standards.

Continued technological change can make a large contribution to national productivity, but only to the extent that organizational changes allow for its full use.  Significant reforms to the education, health care, and finance sectors will be necessary before we can see the steady improvement in both performance and price that characterize other sectors of the economy.  Additional investments in the nation’s transportation, energy and communications infrastructures will also be necessary but great care will be needed to ensure that the spending generates a high rate of return.  Finally, we need broad reforms to taxes, worker training programs, and regulation in order to channel activity away from consumption and into productive activity.

The New Social Contract

To obtain the necessary political support for the above changes, a new social contract is needed that strikes a better balance between individual responsibility and collective security.  Workers need to become less dependent on their employers for pensions and health care and individuals need more control over them.  Government assistance should be conditioned on responsible behavior, including an affirmative obligation to work.  In exchange, workers should be able to count on a higher level of protection against the uncertainties and dislocations that accompany a dynamic society.  This includes a fair distribution of the benefits of higher growth, better access to decent education and health care, and tougher enforcement of laws against deceptive and anti-competitive behavior.

The new social contract should provide the minimum level of income needed for a decent standard of living.  It should take the form of an income supplement so that individuals have the maximum flexibility to meet their own needs.  And it should be accompanied by policy reforms that make it easier for everyone to find decent shelter, save, obtain the training needed to improve their prospects, and gain access to affordable health care.

Fiscal Balance

The achievement of each of these goals requires the government to have a long-term focus.  This is unlikely unless it first learns how to balance its commitments with its resources.

The recent fiscal crisis is highlighting the large gap that has developed between America’s commitments to the future in the form of entitlement programs, debt, and infrastructure needs and its present ability to pay for them.

Far too many sectors of society, including all levels of government, are burdened with commitments that they cannot keep.  These commitments need to be renegotiated so that resources are devoted to more productive uses and the burden of future investment is more evenly spread.  A government that tries to meet every want is unlikely in the end to be able to meet even its most important needs.

In facing these challenges it is important to remember that, not only do other nations face their own challenges, our problems are in many ways less serious and our strengths more solid than those of our major competitors.  But the failure of other nations should not give us hope for, until we face up to the challenges before us, we will fall far short of of our potential.

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Filed under Budget Deficit, Competitiveness, Five Challenges, Impacts of Technology, International Institutions, Social Contract, Uncategorized