Competitiveness Council wide of its mark

I didn’t know whether to laugh or cry after the celebration last week of the 25th anniversary of the Council on Competitiveness in whose founding I played a bit role.

If you can imagine spending a whole night and day talking about America’s competitiveness with nary a mention of the U.S. trade deficit, currency manipulation and dollar over-valuation, value added taxes and their rebates on exports, mercantilism, "buy national" policies and practices, anti-trust and competition policies, enforcement of global trade rules, financial subsidies aimed at luring the outsourcing of production and technology development abroad, and indigenous technology development preferences – but, of course, you can’t imagine that can you?

To be sure, the dates — December 7 and 8 — Pearl Harbor Day in the United States and Japan (both days because our 7th is Japan’s 8th) — were not propitious. In my experience nothing good for the United States ever occurs on those dates.

The absence of any discussion of international trade, investment, and competition was particularly striking because the Council was originally called into being in response to the competitive challenge posed to the United States by Japan in the 1980s. As the 1984 Presidential campaign developed in the midst of a recession and tsunamis of imports of cars and semiconductors from Japan that were putting U.S. workers on the street in Detroit, Silicon Valley, and elsewhere, the Democratic party acted like it might make competitiveness a major issue in the race. In response, President Reagan appointed then Hewlett Packard (HP) CEO John Young Chairman of a blue ribbon commission to find out what America needed to do to compete better.

It was just a political maneuver on Reagan’s part to have a response to any possible Democratic critique. But Young took it seriously and put together a real analysis of the strengths and weaknesses of the U.S. economy. In particular, his commission noted the erosion of U.S. leadership in manufacturing even in leading edge industries like semiconductors, optical electronics, and telecommunications. It made a series of important macro and micro- economic policy recommendations which taken together represented a genuine economic development strategy that also incorporated a broad industrial policy. Young sent the report in to the White House and arranged to make a presentation of his recommendations to the president and the Cabinet. By the appointed day, the election had already been held and Reagan had won in a landslide. Young made a crisp thirty minute powerpoint presentation and then waited for questions. None were asked. The president thanked Young for his efforts and promptly stored the report in the deepest, darkest White House basement. After all, it had served its political purpose and there really was no need of any activist government in a world in which it was "morning in America."

But Young really thought America had some serious competitiveness problems and also thought his commission had some solutions. So he took the initiative and established the Council on Competitiveness as a private sector initiative comprising leaders from business, labor, and academia in 1986. At this time, the U.S. trade deficit was about $150 billion or around 3 percent of GDP, a level considered unsustainable by most economists. The dollar was over-valued as Japan intervened in currency markets to keep its yen under-valued as a kind of indirect subsidy to its exports. The United States was rapidly shifting from being the world’s largest creditor to becoming its largest debtor. U.S. unemployment was stubbornly high, and living standards were stagnating as more and more production was being moved offshore to East and Southeast Asia. To respond to this the new council emphasized innovation but also emphasized that manufacturing is the funder of about 70 percent of U.S. research and development and thus extremely important to the long term health of the U.S. economy. In short, the council said "it matters what you make" and called for a variety of new laws and policies to ensure that America continued to make what matters.

It was a brave start, but the council never really got off the ground. It dabbled with the latest business fads — forming clusters of related industries, optimizing innovation, moving beyond manufacturing to the "post-industrial" age, and moving to the "higher ground" of sophisticated services, R&D, and design. It never addressed the anomaly of its leading business members moving their production and increasingly their research to Asia even as they propounded the gospel of competitiveness in America.

The disconnect was stark between the conversation at my table at last night’s dinner and the comments of the panelists at today’s conference. At dinner, a top executive of one leading U.S. technology company told me the corporation was now doing a large part of its global production in Singapore because the Singapore government offers very attractive financial packages that include tax holidays, free land, free training of workers, infrastructure support, capital grants, and more. In the panel discussion, several CEOs said that the most important factor in making a decision on where to locate their operations is the availability of talent (skilled workers and researchers).

The council has long promoted more and better education, more and better innovation, more and better infrastructure, more and better R&D, and so forth. In short, all the conventional, motherhood and the flag nostrums. Of course, there is nothing wrong with these. By all means, let’s have them. But they are in the category of necessary but insufficient. Until something is done about currency misalignment, matching financial investment incentives, offsetting "buy national" policies, establishing globally competitive tax rates, and responding to serious violations of international trade and monetary agreements, the motherhood and the flag stuff won’t be enough.

Interestingly, there has been a change of tone at the Council. Five years ago at the twentieth anniversary dinner it was triumphant. Last night and today it was subdued and concerned. Importantly, it was agreed that what a nation makes matters, that a manufacturing renaissance will be necessary, and that that the council’s focus must now return to where it began.

Back to the future. That’s what passes for progress in my world.