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Does the U.S. Economy Compete with Other Economies?

President George W. Bush poses for a photo with Dr. Paul Krugman, Economics Prize Laureate; Dr. Martin Chalfie, Chemistry Prize Laureate; and Dr. Roger Tsien, Chemistry Prize Laureate.

As we argue in our book “Innovation Economics: the Race for Global Advantage,” the United States has been losing the competitiveness and innovation race, with severe consequences for our economy. And we can’t get back to winning the race unless we put in place a national competitiveness and innovation policy. And we won’t do that unless policymakers recognize that America is an intense race for innovation and competitive advantage with other nations.

Unfortunately, too many economists who advise policymakers rightly note that U.S. companies compete with foreign companies but mistakenly counsel that America itself is not in global economic—and innovation—competition with other nations. Perhaps most well known for making such a claim is economist Paul Krugman who makes the astounding—but quite conventional (at least among neoclassical economists)—contention that “the notion that nations compete is incorrect . . . countries are not to any important degree in competition with each other.” And it’s not just liberal economists that hold such a view, so do many conservative economists. AEI’s Kevin Hassett claimed, “Non-economists regularly appeal to competitiveness when motivating a wide array of policies, while economists protest or look the other way.”

When our nation’s leading economists counsel policymakers that any concerns with national competitiveness are foolish, you can be sure that it will be more difficult for policymakers to argue forcefully for a national competitiveness policy.

The main argument Krugman and his neoclassical economist allies make against competitiveness is based on the view that while companies sell products that compete with each other, the companies and consumers in these nations are also simultaneously each other’s main export markets and suppliers of useful imports. In their view, even if European or Asian countries gain a larger share of global high-value-added production at the expense of producers in the United States, this benefits the United States by providing it with larger export markets and access to superior goods at a lower price. In other words, even if the United States lost most of its high-value-added traded firms (imagine Apple, Boeing, Cisco, Eli Lilly, Ford, General Motors, IBM, Intel, Merck, Microsoft and other similar companies laying off the majority of their U.S. workforce), America would still benefit from trade because at least it would receive cheaper imports and have access to larger export markets.

But the reality is that if Boeing, Ford, or the other companies mentioned here were to lay off most of their U.S. workers, America will be worse off, not better. The fact that one even has to state this is amazing since to the average “non-economist,” it’s obvious and right. And here non-economists are right. While some of the workers laid-off from these companies might find jobs with equal wages and value added, the majority would not and would ultimately end up with lower-wage, lower-value-added jobs. How could they then afford to buy those goods and services now produced overseas, other than to do what the United States has been doing for a generation: borrowing the money from overseas creditors who want us to keep importing. Unless America produces what other nations want, it cannot afford to buy the imports these countries now dominate in.

This in turn leads to neoclassical economists’ other major mistake: that governments should not be concerned about a nation’s industrial structure. In other words, what a country makes does not matter. According to this view if the United States were to lose its pharmaceutical, aerospace, auto and information technology industries to other nations, we’d just find other things to make. As George H.W. Bush’s economic advisor Michael Boskin memorably quipped, “Potato chips, computer chips, what’s the difference? A hundred dollars of one or a hundred dollars of the other is still a hundred dollars.”

But there is a difference. If a country loses the computer chip industry to foreign competitors, that value similarly disappears as the industry’s supply chains and industrial commons are hollowed out. The neoclassical assumption that residual assets will be redeployed to high-value-added sectors is not necessarily the case. More likely than not, many of the laid-off computer chip workers would end up working in lower-paying sectors, perhaps making potato chips.

So let’s be clear. The United States economy does compete with other nations for high value-added production and losing the race means a stagnant economy, with limited wage growth and higher unemployment rates. Just what America is facing today.


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  • 4Gbill

    There seem
    to be four schools of thought on economics and national competitiveness that
    creates jobs: (1) the neoclassical “economic school” believes in Riccardo’s
    comparative advantage and is represented by most economists including Krugman;
    they don’t understand innovation and reject “innovation economics” out of
    ignorance, reject Porter’s notion of country competitiveness (which is the “management
    school”) without discussion and also reject “new trade theory” that
    recognized the shortcomings of
    comparative advantage; (2) the “management school”, which supports the notion
    of competitiveness at a country level but doesn’t understand innovation or “innovation economics” ; (3) “new
    trade theory” and (4) “innovation economics”.

    The paper, “Does
    the U.S. Economy Compete with Other Economies?” makes the right conclusion,
    which is that both countries and firms compete in the global economy, but the
    paper should have discussed the fourth generation (4G) of innovation theory and
    practice that is required to be competitive.

    false argument in his 1996 paper

    is that
    countries don’t compete. He further falsely argues that anyone who proposes
    national competitiveness is either a “mercantilist” or a “strategist” who
    believes in “new trade theory”. “Strategists” believe government intervention with strategic
    trade policy is justified because neoclassical comparative advantage doesn’t
    apply to industries such as aircraft manufacturing that are oligopolies
    sustained by large economies of scale. Krugman’s false argument against
    national competitiveness is that government can’t practically determine an
    effective strategic trade policy in any industry. Therefore, he claims that
    trade policy for “realists” must be a mystical combination of neoclassical
    comparative advantage and new trade theory.

    Krugman’s argument
    is false because he completely ignores a strategic trade policy which supports
    national (and firm) competitiveness in a fourth generation (4G) of innovation methodology that can drive a sustainable
    comparative advantage in innovation which is the core of economic growth.