Global Policy Forum

No Longer No. 1, and No Wonder


By Steven Pearlstein

Washington Post
September 27, 2006

On the surface, two studies out this week seem to raise warning flags about the competitiveness of the U.S. economy.

One, the annual ranking from the World Economic Forum -- the elite business organization that runs the annual winter schmooze-fest in Davos, Switzerland -- finds that the United States has fallen from No. 1, a position it shared with Finland for most of a decade, to an unsettling sixth place.

And the National Association of Manufacturers, along with the Manufacturers Alliance, is scheduled to release an update of an earlier study today showing that the burdens of regulation, taxation, litigation and health care are even greater than they were in 2002, when the "cost gap" between U.S. companies and those of our largest trading partners was 22.4 percent.

The predictable response from the business community will be to use these studies to warn of impending economic ruin unless the government adopts the Republican agenda of less regulation, lower taxes, tort reform, and relieving companies of health-care and pension costs.

Don't be fooled. These reports speak to the embarrassing failure of a decade of Republican rule in improving U.S. competitiveness. Business taxes, as a percentage of anything you want to measure, are at their lowest level in decades. The Bush White House has subjected new regulations to rigorous cost-benefit analysis. Several reforms make it less attractive for shareholders, workers and consumers to file frivolous lawsuits, but not necessarily for businesses. And in case you hadn't noticed, businesses have already made tremendous strides in shifting health-care and pension costs to workers.

In fact, an alternative reading of the new reports suggests that the business community needs to do some serious thinking about competitiveness and economic policy. Let's take the legal system, a negative in both reports. It ought to be obvious to anyone who has followed the asbestos debacle or the medical malpractice issue that litigation has become an inefficient way to police the behavior of companies, executives and service professionals. But the only realistic alternative is regulation by government, which the business community opposes. You can't have it both ways.

You can't, for example, just tell smokers they have no recourse against tobacco companies that market products they know to be deadly if you don't have a Food and Drug Administration with power to regulate unsafe tobacco products. You can't tell shareholders they have no right to sue management if you oppose regulations that might give shareholders a voice in who runs the company. You can't tell workers not to sue employers for unsafe workplaces while you're busy neutering the Occupational Safety and Health Administration.

This isn't an economic argument so much as a political one. A totalitarian state such as China may be able to duck these kinds of trade-offs, and there is no doubt Chinese exporters are more competitive as a result. But that is not realistic for an advanced democracy whose citizens prefer to use some wealth, or forgo some economic efficiency, in exchange for safer products and workplaces and more responsive corporate governance.

Or consider the manufacturers' legitimate complaint that they are at a disadvantage because of health-care and pension costs that, in other countries, are borne largely by government. Having raised the issue, however, it is hypocritical for the business lobby to oppose any tax increase that might be used to socialize these costs. Their phony solution -- that average Americans should essentially fund their own pensions and health care, with no increase in wages -- is so unfair and unreliable that Americans have roundly rejected it.

Indeed, a reasonable inference from the World Economic Forum rankings is that the best way to compete is to adopt the Nordic model of high taxes, a generous social safety net and lightly regulated labor markets. Scandinavian government spending accounts for more than half the economy, as opposed to a third in the United States. But the reason the Nordic countries score higher in the WEF study is that their governments run surpluses instead of deficits, cave in to special interests less often, operate efficiently and spend their money wisely.

In contrast to the WEF study, the manufacturers' analysis is pretty lame. Comparing the regulatory and tax regimes of an advanced industrial country with those of developing Asian countries is specious. I assure you that no NAM member would have his children breathe Beijing's foul air for long. I also find it hard to believe that manufacturing executives pine for the tax and regulatory regimes of Europe or even Japan. The study's comparison of wholesale energy costs conveniently ignores the large fuel taxes imposed by European governments. And no doubt you'll be shocked to learn that the higher costs of U.S. executive compensation were left out of the analysis.

The business community's fantasy is that the United States would soar to the top of the rankings if only we had Ireland's tax regime, China's environmental controls, Singapore's legal system and Chile's social-safety net. Each policy is part of a complex social and economic model that includes features that Americans, and American business, would find unacceptable. These are package deals, not individual offerings at a dim sum lunch.

This is a crucial moment for the business lobby. Its close allies in the Republican Party may soon lose their exclusive grip on Washington's policy levers. Business leaders can stick with a reflexive anti-government, anti-tax, anti-regulation agenda that has hit a brick wall lately. Or they can move toward the bipartisan center, where they might actually strike a deal or two that could make their companies, and the country, more competitive.

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