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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