Cooling Off About Keeping Up

What's 'Competitiveness'?

A prominent journalist wrote in 1947: "The basic power determinant of any country is its steel production, and what makes this a great nation above all is the fact that it can roll over 90 million tons of steel ingots a year, more than Great Britain, prewar Germany, Japan, France, and the Soviet Union combined ." Well, that was then. In 2005 the United States ranked third in raw steel production. Its output (95 million metric tons) was behind Japan's (113 million tons) and less than a third of China's (349 million). So?

We are experiencing another competitiveness panic. These occur every 15 or 20 years. There's an outpouring of worried reports and articles. After Sputnik in 1957 -- the first artificial Earth satellite -- we were supposedly doomed to be overtaken by the Soviet Union. In the late 1970s and 1980s, it was Germany and then Japan. Lately, China and India have been the threats. Through it all, the United States has remained the dominant global economy, representing about one-fifth of the world's total output.

One problem with these debates is that competitiveness is a vague term. What does it mean?

If it means keeping the lead in every industry where we once led, we're doomed. As other countries develop, they create larger and better industries to meet their needs. Steel is an example. The United States doesn't need 350 million tons of steel. Textiles, consumer electronics and automobiles are other industries where we've lost ground to countries that have greater local needs, lower costs or better management. In many cases, U.S. multinational companies have relocated plants abroad to cut costs.

Similarly, if competitiveness requires the United States to maintain its present share of the world economy, we are also probably doomed. We have recently maintained our share only because Europe and Japan have grown more slowly than the United States. But if China and India continue to grow rapidly, the U.S. share will shrink. The U.S. economy is now about $13 trillion; China's is about $2.2 trillion, says economist Nicholas Lardy of the Institute for International Economics. China's growth is 9 to 10 percent annually; the United States' is 3 to 4 percent. At those rates, China might pass the United States in 20 or 30 years, says Lardy. (However, per capita incomes in China would still be much lower.) The point: Global economic growth -- something the United States encourages -- erodes America's dominance. Technology, talent and wealth spread everywhere.

One possible "competitiveness" definition is the ability of countries to stay ahead in developing new industries. Economists once saw land, labor and capital as the basic inputs of any economy. But they've now added "knowledge," as David Warsh -- former economics columnist for the Boston Globe -- shows in his engaging book "Knowledge and the Wealth of Nations." It doesn't just matter how much countries invest or how many people they employ. What also matters is how smartly. Can they create gadgets and services that people want or that solve important problems?

By this standard the United States is still doing well. It's a leader in many industries -- aerospace, computers, biotechnology, investment banking and entertainment. It also leads in research and development. In 2002 American R&D spending ($267 billion) exceeded the combined total of Japan, Germany, France, Britain, Italy and Canada, reports the National Science Foundation. Ambitious Americans seem adept at commercializing laboratory ideas -- or almost anything.

Still, no country has a monopoly on inventiveness, intelligence, innovation or ambition. Some of America's strengths might also fade as the country's population ages.

Maybe we ought to settle on this definition: productivity. That's economists' code word for "efficiency." It's usually measured as output per hour worked. Higher productivity allows for new products and services, from health care to iPods. Incomes and living standards tend to move parallel with productivity changes. In the first 25 years after World War II, productivity in the business sector grew about 3 percent a year. Then, in the early 1970s, it slowed, averaging only about 1.7 percent annually for the next 25 years. Since 1995, it's grown at about 3 percent again. If we can sustain that, we'll have an easier time meeting all the future's competing needs.

How to do that? Good question. Unfortunately, economists don't understand why productivity has fluctuated so much. They tend to attribute the recent surge to information technologies -- but productivity actually improved after the dot-com crash. In practice, gains seem to stem from almost everything: good schools; open markets (including to foreign products and investments) that force companies to do better; sensible taxes and regulations that reward risk-taking; low inflation. The list runs on. We're really competing with ourselves to make the future better than the past. It's a tall order.