The Heritage Foundation

Backgrounder Update #30

November 21, 1986

November 21, 1986 | Backgrounder Update on

American Competitiveness: The Problem, and Cure, Is At Home

(Archived document, may contain errors)

11/21/86 30

AMERICAN COMPETITIVENESS: THE PROBLEM - AND.CURE -IS AT HOME

(Updating BackgXounder No. 457, 1136 Ways to Narrow the U.S. Trade Deficit," September 24, 1985.)

Deputy Treasury Secretary Richard G. Darman attracted considerable media and Wall Street attention earlier this month when he charged many of America's largest businesses with becoming "bloated, risk-averse, inefficient and unimaginative." In his speech to the Japan Society in New York, Darman said that many U.S. firms now resemble government bureaucracies.

Wall Streeters were stung by Darman's words. Yet he is right that some, though by no means all, U.S. industries have lost their competitive edge through their own poor business practices. But it is also true that past and present government policies often cause or reinforce bad business habits. The moral is that those who recommend that the competitiveness problem can be "solved" by more government interference, in the form of national industrial planning or trade protectionism, would compound the problem. To avoid this, the Reagan Administration should work with Congress to promote increased U.S. economic productivity and efficiency by removing the government restrictions that put American businesses at a competitive disadvantage against their foreign counterparts.

U.S. businesses have tended to blame foreign countries for their marketing problems, rather than their own shortcomings or U.S. government impediments. Many large companies, for instance, have been concerned insufficiently about quality control and product improvement, seeking short-term profits at the expense of longer-term gains. Further, as Darman points out,, "Much of corporate America remains parochial." Often little attention is paid to developing and adjusting to overseas markets and to keeping ahead of foreign competitors in the U.S. market. After World War 11, the lack of strong foreign competition permitted U.S. firms to be complacent. But the world market no longer allows this.

The problem of lagging U.S. competitiveness is at last generating concern. Unfortunately, "competitiveness" is often conceived too narrowly, in terms of the trade deficit. But the primary policy focus should be on how to encourage U.S. industries to improve their productivity and efficiency in order to create jobs and increase the standard of living of all Americans--not just those in exporting firms. Thus while direct government aid to exporting businesses, or a national industrial plan, might help some selected American businesses, it would harm others through increased taxes to pay for aid. Similarly, trade protection could "help" some firms by reducing foreign competition, but also would destroy more jobs than were "saved" and would cost the U.S. consumer billions of dollars, lowering the overall American living standard.

Those concerned with competitiveness should focus on the fact that many American businesses, large and small, new and old, are at a competitive disadvantage in world markets because of U.S. laws and regulations. They punish success and risk-taking, and make it difficult for American businesses to plan for the long term. In his speech, Darman correctly emphasized the importance of tax reform. The Reagan Administration now should work with Congress to remove other impediments to U.S. economic productivity. Among the steps needed:

o Modify or remove antitrust laws that inhibit U.S. business coopergtion. Since 70 percent of American goods are subject to ioreign competition, there is little danger that closer U.S. business ties on research, development and marketing will harm American consumers. They could,, however, help U.S. firms increase efficiency and better compete with their foreign counterparts.

o Lower the cost of capital by further tax reductions and budget cuts. Capital for investment and industrial improvements in the U.S. is between two and three times as costly as in Japan. Among the reasons for this, massive federal spending takes much needed funds away from productive business activities, double taxation of corporate earnings discourages investments, and capital gains taxes discourage savings. The government could free up capital for productive efforts by tax and spending cuts.

o Eliminate the Glass-Steagall Act. This 1933 statute prohibits banks from owning equity shares in businesses, and thus makes it more difficult for businesses to obtain long-term financing to improve productivity.

Many American businesses are highly competitive--at home and abroad. others, as Darman notes, are highly inefficient and do not deserve direct government help. It is better that capital and labor move out of these firms and into more productive enterprises. Elimination of scores of harmful government restrictions would accomplish this, and do far more to bolster the competitiveness and productivity of U.S. business than any federal attempts to plan America's economy.

Edward L. Hudgins, Ph.D. Walker Fellow in Economics

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