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Rethinking competitiveness and the State of the Union

It is widely expected that this evening President Obama will use his State of the Union address to highlight America’s economic competitiveness and the challenges we face.  He will call for greater investments in R&D, education and infrastructure.  That will touch off a debate over the federal government’s budget and the role of government in the economy.  GOP critics are likely to call for less regulation, tax cuts and spending reductions as an alternative means on boosting competitiveness.

However, I fear that both sides may be stuck in an earlier vision of economic competitiveness that is no longer useful as a guide for policymaking (see our earlier paper Info Age: Recast Issues Demand New Solutions).  A quarter of a century ago, the United States confronted and overcame a challenge to its economic competitiveness.  The U.S. now faces a similar challenge.  However, the situation today is different in profound ways while our policy responses are, in many ways, echoes of the 1980s. We need to reevaluate so that we can reformulate appropriate policies.

The global economy has entered a new era. The industrial age was driven by machines and natural resources.  This new innovation age is being driven more and more by people and intangibles. Foremost are worker skills and know-how, innovative work organizations, new business methods, brands, and formal intellectual property such as patents and copyrights. Our economy increasingly runs not just on technological advances, but also on ways of expanding consumer choice through more customized products, more individualized service, and greater attention to aesthetics in order to respond to changing consumer tastes.

In the 1980s, the U.S. faced global competition in goods and loss of domestic manufacturing firms; now it faces the fusion of manufacturing and services and the opening to international competition of services sectors once thought immune to such challenges. Then, the operating issues were quality and productivity; now they are customization, speed, and responsiveness to customer needs. Then, the concern was how to build on our successful scientific research system; now we must look for ways to maintain innovation defined broadly, including understanding and harnessing new models of technological and non-technological innovation.

Then, a key concern was creating a flexible and educated workforce; now, in addition, we must foster an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy.

Then, the main financial challenge was reducing the cost of capital; today’s equivalent challenge is unlocking the value of underutilized knowledge assets and ensuring the efficiency and stability of the global financial system. Then, the policy problem was raising awareness of the importance of international trade; now it is crafting policy appropriate to a globalized and interconnected economy.

Our focus in the 1980s was on individual firms and industries; now we must find ways of sustaining networks of firms and of adopting new business models. Finally, these problems and challenges, as well as myriad new ideas and technologies, are rapidly sweeping across the domestic and international economy. Their speed requires that U.S. industry, both manufacturing and services–as well as the suppliers of financial, scientific, and human capital–have the capabilities and resources necessary to prosper and grow in this new environment.

Thus, the situation is different from where we were three decades ago.  Consequently our policies should be different as well. 

In dealing with this new situation we need to go beyond the standard rhetoric of increased spending on public education, R&D and infrastructure on one side and the call for tax cuts and less regulation on the other.  Those are simply tools.  We need to address what it is we seek to accomplish.

For example, we need to look at how we constantly upgrade the skills and knowledge of our entire population and create a learning society — not just look at the formal education system.  We need to look at the process of creating new goods and services (innovation ) — not just R&D.  We need to look at the organizational infrastructure that makes our workers and companies competitive — not just the physical infrastructure of road and communications networks.  We need to look at how incentives for are created — not just address the tax rates.  We need to have a pro-innovation regulatory system — not just less regulation.

But first we need to understand the changes so that can we begin to craft policy responses.  The new President’s Council on Jobs and Competitiveness is a good start.  Let’s hope it can craft an overall vision on how to address the competitiveness issues of the 21st Century.

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Cross posted on The Intangible Economy.

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