It has become fashionable to criticize the metaphor of international competitiveness, yet this critique is to a large extent misguided. International competition does matter.
Paul Krugman revived his old critique of competitiveness. Ezra Klein and Will Wilkinson have jumped on the bandwagon. Steve Horowitz pens a terse admonition to the POTUS.
Yet, all of these critiques hinge on a false premise. That it is just as good for us to have capital in the US as to have capital in China. That it is just as good to have the smartest minds and the best Entrepreneurs in the US as it is to have them in South Korea.
This is wrong.
At least its wrong from a selfish prospective. One might say that the rest if the world needs capital more than we do but that’s not the story that I hear and not a story that I suppose anyone but Will is willing to sign on to.
There are numerous advantages to having industry in your country as opposed to someone else’s. Not least of which is that the tax system makes us effective equity partners in the economic fortunes of our countrymen.
In the US, government taxes take somewhere between 30 –40% of GDP. As the Tea Party,sometimes awkwardly, points out, this means that US resources are effectively 30 – 40% communally owned. That is, each American has an ownership stake in the entire American economy.
You can see this vividly by considering the fortunes of a 55 year-old working class soon-to-be retiree. If he or she is typical, the bulk of his or her retirement income will come from Social Security. If the US economy grows at 4% over the next 30 years that Social Security income is solid as rock. If the US economy grows at 2% a year there is a strong chance our retiree will see benefit cuts.
The same thing is true for government health care recipients, students of all ages and users of America’s infrastructure and defense forces. That is to say pretty much all of us.
Put quite simply, it is much better to be in a rich country than in a poor country and resources are in fact scarce. That other countries attract capital and talent will necessarily mean that the US does not.
Some people become confused on this because they forget that countries matter, that joint equity exists and in a very real sense you are in it with your fellow Americans.
Other people forget because they note that rising incomes in foreign nations has meant a wealthier world. To a large extent this has been true.
However, it has been true because the poor policies of those nations were depressing the total available resources in the world. In particular bad government can destroy human and physical capital, making the whole world poorer.
Removing that bad government makes the whole world richer. That can make the newly improved country richer as well as its trading partners. Once the whole world improves its government the calculus changes.
The developer of the next Facebook may be born in New Jersey or he may be born in South Korea. In either case we all get access to the new technology but only one country will get access to the rents from the technology. In only one country will the founder pay income tax. In only one country will the agglomeration effects contribute to the rise of a great city. In only one country will the headquarters boost local property tax revenue.
Indeed, if these type of “returns to having good neighbors” effects didn’t exist there would be no cities at all. Everyone would live on their own small country farm, trading just as readily with their neighbor down road as the man in Beijing. This is not what happens.
Closer networks, denser markets, higher tax bases, the stability of a larger and more diverse tax base etc. do increase well being and that’s why people choose to cluster.
From a purely selfish point of view, its better for your cluster to be getting rents than someone else’s.
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Wednesday ~ January 26th, 2011 at 12:47 pm
Karl
A quick correction: US taxes do not amount to 30-40% of GDP. They amount to less than 30%: 26.9% according to the Heritage Foundation.
This is not relevant to your point here.
Wednesday ~ January 26th, 2011 at 2:07 pm
Karl Smith
That’s got to be federal, not federal state and local
Thursday ~ February 3rd, 2011 at 2:31 pm
Fred Geisler
The Bureau of Economic Analysis ( http://www.bea.gov ) claims that their “government” numbers in the NIPA tables sum up Federal, State, and Local. Working the numbers between GDP and tax receipts, I found about the same percentage as the Heritage Foundation did. (Slightly smaller, but I was doing a quick-and-dirty comparison of one quarter.) While it’s not the point of this post, decisions that rely on inaccurate gut feelings are unlikely to be useful.
If you think that BEA is lying to us, I’d be interested in a blog post laying the case out explicitly.
Wednesday ~ January 26th, 2011 at 12:55 pm
Alexander Hudson
I think the criticisms of the “competitiveness” theme have in mind the irrational fear amongst Americans that one day we will no longer have the largest economy in the world. Hence the fear of a rising China. Obviously the location of capital, and especially the location of high-skill labor, matters a great deal. But I think a lot of people look at growth in China and, because they often think of economics as zero sum, see this as bad for America.
Wednesday ~ January 26th, 2011 at 2:07 pm
anon
“The developer of the next Facebook may be born in New Jersey or he may be born in South Korea. In either case we all get access to the new technology but only one country will get access to the rents from the technology. In only one country will the founder pay income tax. In only one country will the agglomeration affects contribute to the rise of a great city. In only one country will the headquarters boost local property tax revenue.”
The increase in welfare which is brought by access to e.g. a new technology absolutely dwarfs the rent which can be extracted by its owners, much less the portion of it which is taxed by the government. Capital mobility is just borrowing and lending on an international scale–there is no reason to think of it as a limited resource. Labor mobility is similar: we are made better off when workers can move to wherever they are most productive, regadless of national boundaries.
Krugman knows full well that some “competitiveness” effects exist–after all, he wrote the seminal papers on new trade theory. But he is right to criticize those who focus excessively on such effects, to the detriment of overall economic performance.
Wednesday ~ January 26th, 2011 at 6:55 pm
Ryan Vann
What soon to retire 55 year old has the bulk of his retirement in SSI contributions? Surely 11 years isn’t soon in your mind? Anyone actually have links for total revenue to GDP ratios. I had a site, but lost it.
Wednesday ~ January 26th, 2011 at 11:35 pm
liberal
“That it is just as good for us to have capital in the US as to have capital in China.”
Not a zero-sum game- we can have capital in both.
“That it is just as good to have the smartest minds and the best Entrepreneurs in the US as it is to have them in South Korea.”
It’s strictly better to have more smart minds in South Korea than less. The point is that the US should invest in human capital and research and development because it’s the right thing to do, not because we need to beat the South Koreans.
“The developer of the next Facebook may be born in New Jersey or he may be born in South Korea. In either case we all get access to the new technology but only one country will get access to the rents from the technology. ”
As has been pointed out before, the rents are negligible compared the the benefits of technology.
Let’s say the Chinese discover a technology that provides cheap solar power, and it takes a year for it to cross the Pacific to the USA. Are you saying that would be bad? I think it would be unbelievably good, though it means we’re “losing” the technology race to the Chinese.
The whole competitiveness argument relies on a zero-sum fallacy, or on factors like rents which are insignificant.
Friday ~ January 28th, 2011 at 2:49 pm
Doug Bonar
Yes, it is unambiguously better to have new technology X invested than to have it not invented. I think Karl is going a step beyond that to say that given technology X will be invested, those who live in the U.S. are better off having it invented in the U.S.
The U.S. is not exceptional in the sense of people here being “better” than others (by some measure). At the same time, it makes sense for those of us who live in the U.S. to want to make this country a more attractive place for people who will make the world better.
Of course, it also makes sense for those in other countries to want to make their locality attractive for the same reasons. We could compete purely by paying corporations and people to come to our nations. Cities and towns do it all the time. The problem is that that transfers much of the benefit the local might get to the firm or person. So we should also try to establish good laws and vibrant culture.
Tuesday ~ May 3rd, 2011 at 9:33 am
Competitiveness, Dani Rodrik Edition | Kantoos Economics
[...] Karl Smith offers a critique of Krugman et al: [A]ll of these critiques hinge on a false premise. That it is just as good for us to have capital in the US as to have capital in China. That it is just as good to have the smartest minds and the best Entrepreneurs in the US as it is to have them in South Korea. [...]