Deep Currents

I’ve had a nagging concern for some time about where our economy might be headed. As everyone knows, China and India are coming up fast, and there are plenty of other developing countries that are also quickly moving up the rungs of the supply-chain ladder. What does America really have to offer? Michael Porter attempts to answer this question for the incoming administration in a brief but fascinating essay that appeared in the most recent BusinessWeek. (Porter is the business-school guru of competitiveness, whose built his name on the strength of the “five forces” model of competition in business and has since moved on to studying the industry clusters that form the backbone of national economies.) His verdict: we need strong executive focus on economic strategy, because we stand in a moment where the American economy remains the most innovative today but risks losing that position without supporting the structures that create that strength.

He credits us for being in the strongest in the world at the following:

• Providing an environment for entrepreneurship
• Generating science & technology innovation and converting those ideas into new products
• Running universities that equip students with the most advanced skills and produce innovation
• Fostering competition and free markets
• Making economic policy at the state and regional level, which leaves it appropriately decentralized
• Providing the deepest and most efficient capital markets of any nation, especially for risk capital, allowing young people to raise millions, lose it all, and return to start another company
• Maintaining dynamism and resilience through a cultural willingness to endure restructuring and losses in the name of growth

But we suffer from serious shortcomings:

• An inadequate rate of reinvestment in science and technology
• A waning cultural commitment to competition: less antitrust enforcement, more protectionism, more favoritism, less openness to capital flows, higher trade barriers, and higher taxes and subsidies
• A lack of regulatory oversight and capital requirements, which has undermined our financial markets
• Unequal access to colleges and universities
• A lack of federal support for decentralization and regional specialization
• A failure to provide a credible transitional safety net to aid in the transition from one job to the next

His critique of the two parties is particularly trenchant:

Republicans keep repeating simplistic free-market thinking, even though the absence of all regulation makes no sense. Self-reliance is preached as if no transitional safety net is needed. Some Republicans even argue passionately that the country should have no strategy because that would be “industrial policy.” Yet the real issue is not picking industry winners and losers but improving the business environment for all American companies, something we cannot do without identifying our top priorities. Overall, Republicans seem to think business can thrive without healthy social conditions.

Democrats, meanwhile, keep talking as if they want to penalize investment and economic success. They defend unions obstructing change in areas like education, cling to cumbersome regulatory approaches, and resist ways to get litigation costs for business in line with other countries. Democrats equivocate on trade in an irreversibly global economy. They seem to think social progress can be achieved only at the expense of business.

What would progress look like? Porter no doubt has his ideas, but in this short piece his suggestion is a point of process: make long-term economic strategy the subject of a focused effort by the nation’s political and business leaders, then institutionalize that effort in a presidential commission. In other words, we’re not lacking for good idea about where to take the economy. We just need our national leaders to decide that constructing a coherent strategy would be a better resume-builder than acquiring their constituents an extra serving of pork.

Written: November 2nd, 2008