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02 american competitiveness_brainard

  1. 1. February 2009 Brookings Competitiveness Initiative STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE FOUR PRIORITIES AND 20 NEW IDEAS Jason Bordoff, Lael Brainard, Carola McGiffert and Isaac Sorkin
  2. 2. About the Brookings Competitiveness Initiative Brookings Competitiveness Initiative draws from the full breadth and depth of research at the Brookings Institution to deliver new ideas and policy recommendations aimed at ensuring America can compete effectively, and that all Ameri- cans have the opportunity to thrive in the global economy. Directed by Lael Brainard, who holds the Bernard L. Schwartz Chair in International Economics, the initiative brings a wide spectrum of high-quality and priority research on competitiveness issues to bear. Research topics range from off shoring, trade, and worker adjustment programs to education, infrastructure and development policies, and technology and human capital development. At the core of competitiveness research lies Brookings’s work on globalization. This research draws on the cross-cut- ting work of our Global Economy and Development and Economic Studies programs, and explores the impact of off shoring as well as policies—in the U.S. and internationally—that help countries address the unprecedented shifts in the global distribution of power, resources and population that globalization has delivered. Brookings Global also examines how traditional arenas for international rule-setting, such as World Trade Organization, are increasingly bypassed in favor of bilateral and regional arrangements, and explores how nations must focus on the burgeoning global middle class, strains and opportunities in the international financial system and the emerging powers. The annual Bernard L. Schwartz Forum on U.S. Competitiveness brings together business executives, entrepreneurs, policymakers, labor leaders, and academics to identify forward-looking solutions to the challenge of maintaining U.S. economic competitiveness. Each forum features an open-minded discussion of critical issues related to the long-term economic health of our nation, including investments in infrastructure, innovation, education and R&D, job creation, and the influence of international monetary policies and institutions on the U.S. economy. The Metropolitan Policy Program emphasizes the ways in which U.S. competitiveness depends on the success of its metropolitan areas. The assets that drive American productivity—innovation, infrastructure, and human capital—are highly concentrated and leveraged in metro areas. The program’s Blueprint for American Prosperity has and will con- tinue to produce bold new federal policies to help local and state leaders, with the private sector, build on those assets in ways that advance the nation’s prosperity. More information about competitiveness research at Brookings is available at http://www.brookings.edu/topics/competitiveness.aspx
  3. 3. About the Authors Jason Bordoff is the Policy Director of the Hamilton Project, an economic policy initiative housed at Brookings. Lael Brainard is Vice President and Director of Brookings Global Economy and Development, and the holder of the Bernard L. Schwartz Chair in International Economics. Brainard leads the Brookings Competitiveness Initiative. Carola McGiffert was a consultant to Brookings Competitiveness Initiative for this report, and is a Senior Fellow at the Center for Strategic and International Studies. Isaac Sorkin is a Research Assistant in the Global Economy and Development program at Brookings.
  4. 4. Contents Introduction ................................................................................................................................................ 1 Taking Stock: The Central Challenge in Context of the Financial Crisis.................................................... 2 A New Course for the U.S. Economy.......................................................................................................... 4 Competitiveness in a New World Order ..................................................................................................... 5 A Four-part Competitiveness Agenda: Investing in America’s Future ........................................................ 8 1. Investing in Infrastructure ................................................................................................................. 8 2. Investing in People .......................................................................................................................... 10 3. Investing in Ideas ............................................................................................................................ 15 4. Investing in Green Transformation ................................................................................................. 16 Conclusion: Getting the Job Done ............................................................................................................ 18 Competitiveness Agenda Resources .................................................................................................... 18
  5. 5. STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE Jason Bordoff, Lael Brainard, Carola McGiffert and Isaac Sorkin Introduction This paper addresses this central challenge for the United States. We begin by discussing the economic The United States is in the midst of the most seri- downturn and financial turmoil facing the coun- ous economic downturn since the Great Depression. try and how policymakers should respond to both Policymakers are understandably preoccupied with boost our economy in the short-run and also build applying the right mix of fiscal and monetary policy the foundations for long-term competitiveness. responses to stanch and eventually reverse the de- Second, the competitiveness agenda is motivated by, cline. At the same time, policymakers need to build and must therefore be responsive to, at least three a foundation for sustainable, long-term prosperity changes in the fabric of the global economy: the that can drive our economy once we move beyond increase in global integration; the attendant shift the present crisis. Going forward, the economy will in economic power to rising powers such as Brazil, no longer have the technology boom of the 1990s or China and India; and the realization of the existen- the housing bubble of the 2000s to sustain its growth. tial threat that climate change poses. Finally, we lay And it is unlikely that debt-driven consumer spend- out the fundamentals of a competitiveness agenda ing or Wall Street will provide the same boost as in through descriptions of specific policy proposals by the past. If we are going to provide opportunities for leading experts on how to invest more robustly in all Americans going forward, we need to make the infrastructure, people, ideas and green transforma- right investments today to rebuild American com- tion. petitiveness by investing in our people, infrastruc- ture, ideas, and green transformation. BROOKINGS COMPETITIVENESS INITIATIVE 1
  6. 6. Taking Stock: The Central Challenge Another central component of a successful economic in Context of the Financial Crisis recovery plan is enhancing economic security. Work- Currently, President Barack Obama and congres- ing Americans have inadequate safety nets during sional leaders from both parties are rightly focusing today’s economic downturn or periods of transition their attention on the financial crisis and recession —only 40 percent of eligible citizens use unemploy- at hand—and the tens of millions of Americans ment insurance and it only replaces about a third struggling to keep their jobs and their homes. As of their pay. Fifteen percent of Americans—46 mil- the new administration and Congress continue to lion people—have no health insurance, and millions work through the specifics of a fiscal stimulus that more are underinsured. And for those Americans will truly jumpstart the U.S. economy, they should with employer-sponsored health coverage, losing a use this opportunity to tackle the longer-term chal- job too often means losing health care. Indeed, the lenges to American competitiveness by focusing social safety net erodes during economic downturns, on programs that could enhance the nation’s com- precisely at the time it is most needed. petitiveness in the long-run and also provide effec- tive stimulus in the short-run by boosting aggre- Washington must provide safety nets for work- gate demand quickly. Two kinds of spending have ers hurt by the economic downturn while prepar- the potential to be effective if well-designed and ing them for new jobs in an increasingly competi- well-implemented: spending for infrastructure and tive global economy. Doing so is not only good for spending for economic security. workers, but also good for the economy. Expanding the safety net, such as by extending unemployment Federally funded infrastructure development, par- insurance benefits or increasing food stamps, would ticularly for “shovel-ready” projects, has the potential provide money to those who need it most and are to be smart policy in the face of what is expected to most likely to spend it quickly. Boosting funding for be a long and deep recession: it not only creates jobs, Medicaid and providing aid to states in other ways but also builds the highways and ports of tomor- would prevent cut-backs in state programs that both row. Without federal support, states and localities the economy and struggling families can ill afford. (which generally may not run deficits) are likely to cut spending on infrastructure projects, at precisely More broadly, although we urgently need to focus on the moment government spending needs to stimu- stimulating the economy, we should not lose sight of late the economy by boosting demand. Investing in the broader challenges to American competitiveness infrastructure can promote U.S. competitiveness. and respond with policies for future growth. Our bridges and railways are crumbling, our ports are overwhelmed, and our communities are not fully For example, education and skills training must fac- wired for advanced communications. In fact, the tor into any longer-term effort to rebuild the Amer- American Society of Civil Engineers gives the cur- ican economy. Almost a quarter of American youth rent U.S. infrastructure an overall grade of D. drop out of high school; and more than a third of 2 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  7. 7. minorities do not receive a high school diploma. of life, individuals, firms and governments have not And we are also failing in higher education. For ex- begun to make the changes that will be necessary to ample, only a third of American 24-year olds hold a reduce greenhouse gas emissions. If we do not act bachelor’s degree; while worldwide at least 13 other now, not only will we face potentially grave environ- countries have a higher share of 24-year olds with mental consequences, but the subsequent economic bachelor’s degrees than in the U.S. adjustment will be even more costly to our workers. Increasing innovation will also be central to longer- In short, the American people, the bedrock of the term efforts. One of the many areas that we have U.S. economy, must be empowered to fully par- neglected for too long is energy. After a boom in ticipate in a globalized economy and to nimbly re- spending following the 1973 oil crisis, energy R&D spond to dynamic changes that we cannot predict has declined over the past 25 years—indirectly wors- but know will come. How could we do anything ening global climate change when we need to tackle less? Yet, the temptation to do less is what we face it with full force. today. We must support the productive capacity of our people by providing them with a 21st century In addition, despite a sea change in environmental infrastructure, and investing in innovation, research, awareness, emissions have continued to grow in the green transformation and advanced information and U.S. Across the economy and through every facet communications technologies. BROOKINGS COMPETITIVENESS INITIATIVE 3
  8. 8. A New Course for the U.S. Economy For years, record current account surpluses in Asia, notably China, and among oil exporting nations fi- In his inaugural address, President Obama was clear nanced unsustainable spending in the United States and forceful in calling for renewed focus on the and around the world. The widespread availability competitiveness of the U.S. economy: “The state of of cheap credit, combined with weak financial over- the economy calls for action, bold and swift, and we sight, enabled households to take on large amounts will act—not only to create new jobs, but to lay a of debt, contributing to a housing bubble. Inad- new foundation for growth.” To achieve this goal, equate U.S. banking standards led to the collapse of President Obama must lay the foundations to en- the global credit system, with calamitous effects that sure that America does not lose its historical com- some economists consider the worst since the Great petitive edge. In recent years, Washington’s attitude Depression. toward the American worker has too often been one of neglect—and without the cutting-edge tools re- quired to compete in a dynamic global marketplace, In these perilous economic times, the federal govern- our workers have been falling behind. In one of the ment must help those struggling to make ends meet. most troubling economic signs, workers with pro- Americans are anxious and scared: Will they be able fessional degrees were the only group to see income to keep their jobs or find new ones? Will they be increases between 2000 and 2007, according to the able to keep their houses? Will their children have Census Bureau. Workers with other educational access to a good education? Can they afford health backgrounds—from high school drop-outs to those care? Can they retire? These urgent questions call for with PhDs—saw their salaries decrease in real terms immediate answers. during this period of economic expansion. A new agenda for action begins with a presiden- Any competitiveness agenda, of course, will be of- tial vision for how the United States can regain its fered in the context of a broader set of issues any competitiveness by making a major investment in president must address, and this president inherits the American people, the tools they need to succeed no shortage of even more urgent crises: two wars, and the safety nets that will help them manage tran- a depleted and demoralized military, a yawning sitions. Health care reform, education, job training, budget deficit, and the most challenging economic innovation, infrastructure, and economic security environment in decades. Priorities that have been are all critical components of a forward-looking, ignored for too long demand attention and dollars. integrated competitiveness agenda. Addressing our In short, the new administration is expected to fix climate change challenge is also critical to long- what has been broken and to meet the real needs term competitiveness, and indeed our efforts in of Americans who have been struggling in the face every other policy area need to be consistent with of declining house prices, plummeting retirement meeting our climate objectives. portfolios, lost jobs, and a global financial crisis. 4 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  9. 9. Competitiveness in a New World Order economic security to weather tough times is the cor- nerstone for rebuilding American competitiveness. To craft a new course for American competitiveness, we must first recognize how the world has changed, and what this means for the United States and our Second, the global balance of economic influence has global role. The first decade of the 21st century has shifted dramatically. America’s traditional place as been one of global economic transformation to a de- the world’s economic leader, which grew out of gree that Washington has not yet grasped. Bretton Woods, is being challenged. The Group of Seven economies once dominated the global econ- omy, producing 65 percent of world output just five The world has fundamentally changed, but U.S. pol- years ago. By 2030, the G-7’s share of world output icies have not. We now need to catch up and begin is expected to fall to 37 percent. Perhaps even more adapting to three fundamental global changes. striking, the major emerging economies will almost match that share, with an expected 32 percent of First, we live in a global economy and it is here to stay. global output by 2030 (up from seven percent in the The global economy is significantly larger, more dy- early 2000s). The United States, Europe and Japan namic and more integrated than ever before. Since increasingly are sharing the stage with powers such 1992, for example, global output has more than dou- as Brazil, China and India. bled, to $48 trillion. From 2000 to 2007 alone, the volume of world trade increased by 80 percent. The Asia-Pacific region accounts for nearly 60 per- cent of world economic output and about half of Globalization is fundamentally altering labor mar- global trade. China alone accounts for more than kets around the world. Today, 80 percent of Ameri- one-tenth of global output. If per capita income in can workers are in services, up from 65 percent in China continues to grow by 7 percent a year, China’s 1960. And the cheap and easy flow of information average living standard will rise a hundred fold over enabled by the Internet means that many service a lifetime of 70 years—which will have a vast im- jobs can be performed from almost anywhere, rais- pact on the United States and other economies. A ing domestic fears of offshoring millions of service striking example of this major shift in the balance jobs. of power is provided by the World Trade Organi- zation’s Doha Round of negotiations to liberalize The unequal distribution of the benefits of global- international trade: For the first time in history, a ization makes many Americans anxious about their round of these negotiations cannot succeed without futures. The integration of the combined low-wage the agreement of the largest emerging markets. labor forces of India and China into global labor markets has likely exacerbated income inequality This dispersion of economic power means that na- in many of the world’s richer economies. Ensuring tions that once watched from the sidelines are now that American workers have both the skills needed production and distribution hubs, service centers to compete for the best, highest-paying jobs and the and financial headquarters. They are accumulating BROOKINGS COMPETITIVENESS INITIATIVE 5
  10. 10. wealth, moving capital and investing at home and are real and far-reaching: rising sea levels, threats abroad. Take ports, for example. Other countries to coastal areas, displacement of people, erosion of are leapfrogging past us by investing in world-class natural habitats, extreme weather patterns, and scar- ports. China is investing $6.9 billion in ports; the city of resources, like food and water, that can lead to port of Shanghai now has almost as much container famine or, increasingly, to armed conflict. Dramati- capacity as all U.S. ports combined. Singapore, too, cally reducing our greenhouse gas emissions will with a population of less than five million people, require new technologies and new policies. Though is spending well over $7 billion to increase its con- doing so will impose a cost on the economy, we can tainer capacity, and as a result, its port will have 30 minimize the adverse effects on our competitiveness percent more container capacity than all U.S. ports by making the right policy choices. combined. In many other ways, too, these govern- ments are investing in their people, ideas, and in- Within this broader political context, President frastructure, reflecting a deep commitment to the Obama needs to initiate a major strategic response long-term prosperity of their people. The U.S. gov- to the new global economy and its challenges to U.S. ernment should be similarly committed, or else we competitiveness. To do so effectively, he must invest will place our workers at a disadvantage. anew in the tools that undergird U.S. competitive- ness for the long-term: people, ideas, infrastructure, Third, climate change is a central global challenge of and green transformation. our time. Climate change has entered the global consciousness as a serious challenge that needs an The measure of our competitiveness is not solely urgent response. The Intergovernmental Panel on productivity growth, but importantly the extent to Climate Change estimates that global temperatures which all Americans are able to share in the benefits have risen by 1.3 degrees Fahrenheit over the past of that growth. It is about providing opportunities century, and it predicts an increase of 3.2-7.2 de- for Americans from across socio-economic, racial grees by the late 21st century, with potentially dire and ethnic lines to thrive. ramifications—like flooding of coastal population centers. Increased competitiveness need not come at the ex- pense of others at home or overseas. An expanding Climate change is the quintessential unintended global economy means that more nations and people negative consequence of globalization and rising can achieve higher standards of living. Indeed, the economic prosperity. Pollution, along with goods global economy has contributed to lifting hundreds and services, crosses borders—and China reportedly of millions out of poverty around the world. opens two new coal-fired power plants each week. Amazonian rain forests, one of the major carbon The threat to U.S. competitiveness is not that emerg- sinks in the world, are being depleted to make way ing economies are becoming too strong, but that po- for soybean fields, in response to booming global larization and paralysis in Washington have allowed demand. The destructive effects of this degradation the U.S. economy to become too weak. While other 6 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  11. 11. nations have been investing heavily in their people, spending down the public goods that are crucial for ideas and infrastructure (and some in their own our children’s prosperity. It is past time to invest in green transformations), the United States has been America’s society and economy. BROOKINGS COMPETITIVENESS INITIATIVE 7
  12. 12. A Four-part Competitiveness Agenda: The Congressional Budget Office estimates that Investing in America’s Future infrastructure spending is 20 percent below what What follows are some innovative ideas of leading would be required to avoid further deterioration, let experts affiliated with the Brookings Institution on alone to begin to repair the damage of years of ne- the fundamentals of a forward-looking competi- glect and move forward. When time is money, de- tiveness agenda. These proposals are pragmatic ap- lays associated with weak infrastructure reduce our proaches to addressing key challenges of the agenda’s competitiveness. Substandard port infrastructure, four basic dimensions—infrastructure, people, ideas for example, means that by some estimates the U.S. and green transformation. Together they suggest forgoes $10 billion in exports every year. ways to grow the U.S. economy in order to create opportunities widely accessible to all Americans. In addition, infrastructure development will be fun- damental in the shift toward the new green econo- my. The transportation sector is responsible for one- 1. Investing in Infrastructure third of all greenhouse gas emissions in the U.S. and Investing in infrastructure should be a central focus 70 percent of the nation’s oil consumption. Any ef- of any stimulus package; it will be a critical part of fort to improve infrastructure should internalize the the effort to not only climb out of today’s deep eco- associated emissions costs. nomic downturn but also boost U.S. competitive- ness over the long term. Infrastructure is a visible, Of course, the federal government can’t go it alone tangible representation of how well government on infrastructure. Around 80 percent of infrastruc- works; most Americans interact with some form of ture spending is controlled by state and local govern- government-funded infrastructure on a daily basis. ments, and the federal role is as much about coor- Poor infrastructure undermines popular confidence dinating and setting priorities as it is about actually in government. It also distorts economic activity and funding projects. So what can be done? slows down productivity. In this sense, weak infra- structure can be seen as a tax on every good pro- Triage the challenge. All too frequently, the duced in the United States. Roads, bridges, railroads, U.S. government addresses infrastructure defi- airports, information technology and ports form the ciencies with a Band-Aid, when what is needed connective tissue of our economy. They allow goods is a comprehensive medical plan, one with an ef- to move rapidly from one part of the country to an- fective triage system in place. Rob Puentes rec- other—and from the U.S. to the rest of the world. ommends establishing a strategic transportation investments commission to prioritize federal For too long, the U.S. has badly neglected invest- transportation infrastructure investments. This ments in infrastructure. The American Society of commission would focus on three specific pro- Civil Engineers has given our rail systems a C-, our gram areas of national importance: the preserva- energy infrastructure a D+, our air traffic infrastruc- tion and maintenance of the Interstate Highway ture a D, and our roads and inland waterways a D-. 8 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  13. 13. Infrastructure is a visible, tangible representation of how well government works; most Americans interact with some form of government-funded infrastructure on a daily basis. Poor infrastructure undermines popular confidence in government. System, the development of a true national in- lic modes). Anthony Downs suggests that “high termodal freight agenda, and a comprehensive occupancy toll” lanes be added to major com- national plan for passenger travel between met- muter routes, offering drivers the option to pay ropolitan areas. Investments would be selected a toll if they want to avoid congestion. He also based on a cost-benefit analysis and extensive calls for constructing new roads in growing ar- outcome measures. eas and investing in programs to encourage car- pooling and public transportation. Jason Bordoff Reduce traffic. More cars on the road mean and Pascal Noel suggest pay-as-you-drive auto more congestion, accidents, greenhouse gas insurance, based on miles driven, rather than a emissions, local pollution and dependence on lump sum, which would provide drivers with an oil—not to mention time that could have been incentive to reduce mileage: they estimate that spent on more productive pursuits. In 2005, driving would decline nationwide by 8 percent, drivers lost an estimated 4.2 billion hours in de- netting society the equivalent of $50 billion to lays on congested roads. More efficient use of $60 billion a year through the reduction of driv- existing resources could have significant ben- ing-related harms, such as congestion, pollution efits. The government should send price signals and accidents, all while saving two-thirds of to users that more realistically reflect the cost households money. of infrastructure, and it should use some of the revenue to offset adverse distributional effects. Upgrade freight efficiency. Tens of millions of David Lewis proposes charging drivers who use tons of goods, valued at tens of billions of dollars congested roads during peak hours. A portion move billions of miles on America’s intercon- of toll revenues would fund a locally-designed, nected transportation network each day, about progressive, refundable mobility tax credit to 40 percent by rail. Faster-growing volumes of compensate low- and middle-income drivers goods, physical capacity limitations, missing most burdened by congestion pricing. The rest links, equipment shortages and labor shortages of the revenue would be invested in improving are undermining the efficiency of the overall the transportation system (both roads and pub- freight network—slowing international com- BROOKINGS COMPETITIVENESS INITIATIVE 9
  14. 14. merce to a crawl when it comes inland. Martin firms should bid in a reverse auction for the low- Robins and Anne Strauss-Wieder call for a mul- est government subsidy necessary to complete timodal, systems-based approach to the nation’s a particular broadband project, defined by trad- freight needs, involving regional coordination, able milestones. public-private partnerships and federal fund- ing. Dorothy Robyn proposes improving the air Sell the wireless spectrum. Demand for the traffic control system by shifting to a cost-based wireless spectrum is soaring, as evidenced by user fee that would reduce congestion caused by the $19 billion payment for a prime chunk of smaller planes, improving the performance of the spectrum that was auctioned by the Federal the system as a whole. She also suggests shift- Communications Commission in early 2008. ing the regulatory structure of air traffic con- Philip Weiser proposes a series of policies that trol to reduce conflicts of interest and improve would reform the spectrums’ regulation to better governance. Without this strategic investment, capture its potential—including the establish- congestion and inefficiencies will continue to ment of an FCC database of spectrum licenses worsen, adversely affecting the nation’s economy and a program for identifying unused spectrum; and global competitiveness. auctions of the highly valuable spectrum cur- rently occupied by broadcast television; and a Expand access to broadband. Broadband access re-chartering of the FCC to create a regulatory could contribute greatly to economic growth system that better manages potential technical and competitiveness. A one-percentage-point interference between adjacent spectrum licens- increase in broadband penetration increases em- ees. These reforms would make more effective ployment by 0.2 to 0.3 percent — about 300,000 use of the wireless spectrum, removing a barrier jobs. We are moving in the right direction: over to economic growth. the past eight years, the broadband market has grown dramatically. The number of subscribers 2. Investing in People has increased nearly 300 percent since 2000, The United States has long underinvested in its peo- prices have declined and service is getting faster ple. Its workers—of today and tomorrow—are the and faster. Robert Crandall, Robert Hahn, Rob- bedrock of its economy and the best tool to rebuild ert Litan and Scott Wallsten advocate federal its competitiveness. America must reinvest in its policies focusing on incentives for broadband workers, at every phase of their lives, in three basic suppliers to invest in network upgrades that ex- ways: by providing affordable health care, lifelong tend service and continue to improve quality and learning opportunities, and economic security. speed. Regulations that deter new market entry should be eliminated. Jon Peha suggests that The first basic way to invest in people is to build an subsidies may have a role in expanding broad- affordable, flexible health care system. The facts are band access to underserved rural America. He shocking: 46 million Americans are uninsured, and argues that in communities without broadband, about 9 million of these are children. Tens of millions 10 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  15. 15. The first basic way to invest in people is to build an affordable, flexible health care system. The facts are shocking: 46 million Americans are uninsured, and about 9 million of these are children. more are underinsured. The lack of good, affordable dignity; all Americans deserve access to quality and portable health care has serious costs for the health care. Lamentably, the fragmented U.S. health productivity and competitiveness of the American care system does not reflect this principle. President worker and economy at large. Healthy workers are Obama and his administration need to implement productive workers. Healthy children miss fewer a comprehensive reform of health care that ensures days of school, meaning fewer days of missed work high-quality, cost-effective and portable care for all for parents. Workers with portable insurance can Americans at all stages of their lives. choose jobs that are good for them—and hence the economy—rather than jobs that have good benefits. Comprehensive health care reform must start with They can also start businesses without worrying the reality that there is no cost-free panacea, and about imperiling their health care coverage. Washington will almost certainly have to spend money in the short-term to achieve long-term goals. Without bold action, the health care system is head- But to fail to do so would be worse for American ed for a collapse, because its costs are rising at an un- families, workers and economic competitiveness. sustainable rate. Over the past 30 years, total nation- As Joseph Antos and Alice Rivlin have observed, al spending on health care has more than doubled as making health care more affordable while maintain- a share of gross domestic product. According to the ing the highest quality of care will require multiple Congressional Budget Office, that share will double policy interventions and persistent effort. Only a again by 2035, claiming more than 30 percent of the combination of market and regulatory strategies economy. will move the current system toward both greater efficiency and equity. Here are highlights of some In addition to lowering costs, we also must expand of the issues that must be addressed and some pro- coverage. Providing health care is a moral responsi- posed solutions: bility for any society. It is fundamentally a question of human decency, and it has the benefit of mak- Spend smartly. Getting the most bang-for- ing good economic sense over the long term. Health the-buck in our health care spending is a crucial care is about treating our people with fairness and part of reforming the health care system. As BROOKINGS COMPETITIVENESS INITIATIVE 11
  16. 16. part of a broader reform package, Jason Furman pools to provide affordable access to health care has recommended a system of progressive cost- for all. sharing in health insurance that would encour- age individuals to choose their health care more Ensure portability and expand coverage. Tra- wisely. All families would have affordable caps ditional employer-sponsored health care plans on their out-of-pocket health expenses, protect- do not fully take into account that today’s work- ing them from major risks. This approach could ers are more mobile, part-time, self-employed or make health insurance more affordable, reducing employed by smaller firms; health care coverage premiums by 22 to 34 percent and total health for this growing part of the American work- spending by 13 to 30 percent. Jeanne Lambrew force is unpredictable and often expensive. To has proposed creating a wellness trust to focus address this gap, Stuart Butler has proposed es- attention on the chronic and preventable dis- tablishing a health exchange plan, which would eases that account for most of the costs in the complement (not replace) the traditional em- system. The trust would take preventive services ployer-sponsored system by offering portable, out of disparate parts of the health care system universally available coverage options through and assemble them under a single agency, which state-chartered “insurance exchanges,” convert would prioritize, fund and deliver preventive non-sponsoring employers into facilitators of services. Because prevention is cheaper than employee coverage and reform the tax treatment the cure, this could deliver major savings in the of health care to promote efficiency and fairness. long-run. A system like this could enhance the health and economic security of all working families. Expand access. Every American deserves ac- cess to a comprehensive package of health ben- The second basic way to invest in people is to encour- efits. Ezekiel Emanuel and Victor Fuchs have age lifelong learning. Our schools are graduating proposed a universal health care voucher system too many children and youth who are unprepared that would seek to correct the incentives facing for the global job market, and they are failing to private insurers to exclude some individuals and provide both teachers and workers with lifelong harness the efficiency of the market while ad- learning. Demographic trends suggest that by vancing fairness and choice. They recommend 2020, roughly 30 percent of the working-age pop- funding the system with a value-added tax to ulation will be Latino and African American. We replace the premiums currently paid by employ- cannot afford a system that risks allowing these ers and families. Gerard Anderson and Hugh groups, along with low-income students, to fall Waters argue that universal care can be achieved behind academically. by allowing everyone to buy access to Medicare. Jonathan Gruber draws on the Massachusetts Education is critical in generating opportunity for model to suggest a combination of vouchers Americans of all ages and backgrounds; it is also a and mandates and the creation of new insurance major contributor to long-term economic growth. 12 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  17. 17. At every stage of life—from early childhood to con- children effectively. More than a fourth of fourth tinuing education and job training—Americans de- graders cannot read at a basic level and an esti- serve access to the best education and the best teach- mated 30 percent of ninth graders fail to gradu- ers. Like health care, failure to provide good-quality ate. The lowest-performing schools are heavily education not only puts the individual student or concentrated in minority and low-income com- worker at a major disadvantage but also impairs the munities. To address this negative trend, Isaacs long-term competitiveness of the U.S. economy. recommends focusing federal funding on the Specific ideas for improving education include: early years of elementary schools in low-income neighborhoods. Robert Gordon, Thomas Kane Start early. Investing in early childhood learn- and Douglas Staiger argue that public education ing is, like preventive health care, perhaps one ultimately succeeds or fails based on the abilities of the most important actions that Americans of America’s 3.1 million public school teach- can take, as parents, as educators and as a gov- ers; they propose reducing barriers to entry for ernment. Cost-benefit analyses show that early teachers and making job tenure more difficult to childhood education has proven, measurable attain. Hugh Price similarly advocates a system pay-offs over the long-term for children them- of carrots and sticks to improve the educational selves as well as their communities and the soci- outcomes at schools where a substantial portion ety where they will work. Children participating of the students score below the basic level on in early childhood education have a higher rate standardized tests. Research suggests that some of high school graduation, are less likely to com- students from poorer families do not attend col- mit crime, and are more likely to get good jobs. lege because of insufficient funds. Hugh Price, Julia Isaacs proposes providing federal funding Amy Liu and Rebecca Sohmer propose expand- for high-quality, half-day, center-based pre- ing access to college by increasing the value of school programs for both three- and four-year Pell grants, which has not kept pace with infla- old children, with subsidies based on a sliding tion; they also argue for more financial aid for scale and curricula in the hands of the center part-time and nontraditional students. Under directors. Such a program would include “wrap any proposal, the financial aid system must be around” care for the rest of the working day and made transparent so students can easily find out the summer and would contribute over time to how much financial aid they are eligible for be- the national bottom line: according to William fore deciding to apply to college. Susan Dynar- Dickens, Isabel Sawhill and Jeff rey Tebbs, a fed- ski and Judith Scott-Clayton propose radically eral policy that mandates high-quality univer- simplifying financial aid so that a student’s eligi- sal preschool could annually add $2 trillion in bility and level of financial aid can be calculated today’s dollars to the nation’s GDP by 2080. on a postcard. Close the gap. There is broad agreement that, as Retrain workers. The dynamic nature of the a whole, U.S. public schools are not educating our global economy means that American work- BROOKINGS COMPETITIVENESS INITIATIVE 13
  18. 18. ers must be ready for natural structural shifts in nancial situations and acquire the skills to get job markets. Jobs are lost in one sector or one back into the job market. Yet the U.S. job-sec- geographical region, while jobs are created in tor safety net remains one of the weakest among others. Workers move from job to job, seeking advanced economies. Today, only about 40 per- better opportunities. In 2007, for example, 54.6 cent of jobless workers receive benefits under million workers (39.6 percent of the labor force) federally mandated unemployment insurance. left their jobs. More than half voluntarily quit Benefits vary from state to state and are often their jobs, while slightly more than a third were not available under the same roof, despite “one- laid off or discharged. At the same time, there stop-shopping” principles. Even if eligible, a dis- were 57.7 million new hires, absorbing 42 per- placed worker receives an average of only $260 cent of the labor force. The good news is that in unemployment insurance a week, well below opportunities abound in the still-dynamic U.S. the poverty line for a family of three. Perma- economy. The bad news is that transitions can be nently displaced workers face earnings declines difficult; but the federal government can—and of between 14 and 20 percent. Jeff rey Kling has should—help. Americans willing to work hard proposed overhauling the unemployment insur- and take on new challenges will be rewarded ance system to better protect workers against throughout their careers, but need opportunities the long-term effects of involuntary unemploy- to gain new skills and learn new technologies. ment, more progressively allocate benefits, re- Bob Giloth and Bruce Katz call for the expan- duce incentives for firms to lay off workers, and sion of private workforce intermediary orga- encourage reemployment. Lael Brainard has nizations, which help connect employees and emphasized the importance of more flexible, potential employers. Harry Holzer proposes a longer duration and more accessible training new federal funding stream to identify, expand opportunities and increased unemployment and and replicate the most successful state and local earnings insurance for those permanently dis- worker advancement initiatives, under which the placed from their jobs—along with rapid assis- federal government would offer up to $5 billion tance for communities suffering major employ- annually for state, local and private worker ad- ment losses. vancement programs, job placement assistance and other support, such as wage supplements. Reward work. Providing greater incentives for This program would target at-risk youth, hard- people to work makes better use of our people to-employ individuals, and low-earning adults. and strengthens incentives for people to ac- quire the skills they need to find work. Increas- The third basic way to invest in people is to provide economic ing household income also complements early security. This can be done in several innovative ways: childhood education as it increases the resources available to children growing up. Alan Berube, Strengthen insurance for jobless workers. David Park and Elizabeth Kneebone propose Part of economic security is about ensuring that expanding and revising the Earned Income Tax workers have the means to weather difficult fi- Credit by increasing its size for childless work- 14 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  19. 19. ers, working families with three or more children many. This patent thicket means that in many and married couples. They also propose chang- areas the costs of patent litigation exceed the ing the way it is administered so that eligible value of the patents themselves. Doug Lichtman tax filers receive the benefit throughout the year, argues for extending a strong presumption of va- rather than all at once. lidity only to patents that have been adequately reviewed, and making applicants pay the cost of the review. This will enable only worthy innova- 3. Investing in Ideas tions to receive patents, thus leaving open the America has been losing its historical dominance possibility of greater innovation in those areas in science and technology because Washington has where patents have not yet been granted. failed to invest in R&D, while other nations have been doing just that. Because growth is largely the Invest in blue-sky R&D. Almost two-thirds product of innovation, the U.S. must stay on the of total spending on research and development cutting edge of innovation to ensure that its people comes from the private sector. Though the pri- can find opportunities and achieve prosperity. Fail- vate sector should continue to take the lead ing to do so puts at risk the flow of new ideas and in funding R&D, the U.S. government has a technologies, and undermines U.S. competitiveness. critical role to play; because businesses do not President Obama must put in a place a system that capture all the benefits of their research, they protects and encourages innovation by enabling the tend to underinvest in R&D, especially the ba- U.S. to: sic research that might have the biggest long term pay-offs to society. And firms capture less Provide incentives for innovation. For centu- than one-quarter of the value of their innova- ries, governments and individuals have offered tions, reducing their incentives to invest in any financial prizes to encourage innovation; under R&D that is not immediately commercially the right conditions, this is money well spent. marketable. Bordoff, Michael Deich, Rebecca Thomas Kalil suggests that the U.S. government Kahane, and Peter Orszag argue for refocusing make greater use of inducement prizes to spur federal investments in R&D on blue-sky basic more innovative solutions to a range of scientific research. Litan, Lesa Mitchell and E.J. Reedy challenges. He cites five areas—space explora- recommend reforming the system of technology tion, African agriculture, vaccinations, energy transfer from research universities to the mar- and climate change, and learning technolo- ketplace so that universities focus on the volume gies—where prizes could help generate effective of transfer rather than profitability, to support new ideas and technologies. the commercialization and diffusion of as much basic research as possible. Patent only the best. The U.S. patent system is broken; it hinders innovation not because it pro- Promote innovation clusters. Regional indus- vides too few patents but because it issues too try clusters, through their agglomeration effects, BROOKINGS COMPETITIVENESS INITIATIVE 15
  20. 20. Because growth is largely the product of innovation, the U.S. must stay on the cutting edge of innovation to ensure that its people can find opportunities and achieve prosperity. have long represented a valuable source of in- As the world’s most energy-intensive nation and novation, productivity and job creation. The fed- a major emitter of greenhouse gases, the U.S. has eral government can help boost competitiveness a responsibility to lead the fight against climate by catalyzing increased cluster activity in U.S. change. Although taking aggressive action on cli- regions. According to Karen Mills, Elisabeth mate change now will have some economic cost, it Reynolds and Andrew Reamer, Washington is less expensive over time than doing nothing or should establish a cluster information center to delaying. Moreover, how we address climate change map the geography of clusters; maintain a regis- can have large implications for American competi- ter of cluster initiatives and programs; and con- tiveness. Poorly designed policies will be much more duct research on cluster dynamics, effects and costly—thus hurting our economy and disadvantag- best practices. In addition, a grant program to ing our workers. support regional and state cluster initiatives na- tionwide would direct financial and other assis- Serious action to address climate change can not tance to cluster initiatives. The preferred home only improve the environment and avoid more cost- for this two-part program would be a national ly consequences in the future, but can also lead to innovation foundation—which Robert At- investments in green technology research that help kinson and Howard Wial propose creating—a build a stronger, more dynamic U.S. economy. The nimble, lean and collaborative entity devoted to United States can remain the world’s innovation enabling firms and other organizations to maxi- leader; taking the lead in developing ways to make mize their innovation activities. reducing emissions cheaper can inspire innovation clusters around energy technology. Such clusters 4. Investing in Green Transformation can be a source of job growth, while also addressing climate change and increasing American predomi- An essential component of an effective long-run nance in innovation. competitiveness agenda is combating climate change. The question is whether Washington will chart a strategic approach now, or a reactive one later. In short, addressing climate change need not come at the expense of American competitiveness. With 16 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  21. 21. the appropriate policies, we can reduce emissions the cost of shifting to new kinds of energy or at low economic cost and make America the cen- reducing demand. Yet just as the private sec- ter of green innovation. But if the greening of the tor under-invests in innovation in general, it American economy is not a central part of the com- also under-invests in energy innovation. Rich- petitiveness agenda, we will reduce future prosperity ard Newell proposes doubling federal funding with one hand even as we try to build it with the for basic climate change mitigation R&D and other. Here is how we can do it correctly: using some of the additional money for prizes targeting specific technological breakthroughs Get prices right. Moving toward a green econ- to draw ideas from a broader set of innovators. omy will require large long-term investments by all sectors of the economy. To encourage these Green government decisions. Federal policy investments, the government should provide decisions affect the ability of individuals and payoffs for them by placing a price on emitting firms to reduce emissions cheaply. If develop- greenhouse gases. The price signal can efficiently ment is less dense or rail transit is not available, shift the economy to a low-greenhouse gas future then it is more expensive to choose to drive less, by providing incentives for demand reductions or to transport goods with fewer emissions. Fed- and fuel substitution, which the development eral housing policy, too, has large impacts as it of new technologies can help realize. Gilbert affects where people locate relative to public Metcalf proposes placing a tax on greenhouse transit. Federal policy currently favors highway gas emissions. Robert Stavins proposes placing over rail spending, and public housing decisions a cap on the amount of greenhouse gas emis- do not take into account their emissions impact. sions and then introducing tradable permits so Marilyn Brown, Frank Southworth, and Andrea that emitting carries a cost. Warwick McKibbin, Sarzynski lay out the myriad ways in which fed- Adele Morris and Peter Wilcoxen propose a hy- eral policy choices in seemingly unrelated areas brid system that combines features of both pro- exacerbate climate change. They propose a new posals to ensure a modest but credibly increas- federal agenda to reduce emissions by promot- ing price for greenhouse gas emissions. All three ing more transportation choices, introducing proposals provide mechanisms for mitigating more energy-efficient freight operations, and the adverse distributional impacts of these pric- using federal housing to promote energy-ef- ing schemes. ficient location decisions. They also propose simple regulatory changes to make the energy Invest in green R&D. Moving toward a green efficiency of residential housing more transpar- economy requires increasing our investment in ent so that individuals can take this into account new energy ideas. New technologies will lower when making housing decisions. BROOKINGS COMPETITIVENESS INITIATIVE 17
  22. 22. Conclusion: Getting the Job Done Jon Peha, Bringing Broadband to Unserved Com- munities, July 2008, http://www.brookings.edu/ Our nation’s policies have failed to keep pace with papers/2008/07_broadband_peha.aspx. the rapidly changing global economy, and today American workers and students are inadequately Rob Puentes, A Bridge to Somewhere: Rethink- prepared to compete effectively. We can take back ing American Transportation for the 21st Cen- the competitive edge by investing in America’s tury, June 2008, http://www.brookings.edu/re- ideas, infrastructure, people and green transforma- ports/2008/06_transportation_puentes.aspx. tion. Martin Robins and Anne Strauss-Wieder, Competitiveness Agenda Resources Principles for a US Public Freight Agenda in a Global Economy, January 2006, http://www. Investing in Infrastructure brookings.edu/reports/2006/01transportation_ Jason Bordoff and Pascal Noel, Pay-As-You- robins.aspx. Drive Auto Insurance, July 2008, http://www. brookings.edu/papers/2008/07_payd_bordoff- Dorothy Robyn, Air Support: Creating a Safer noel.aspx. and More Reliable Air Traffic Control System, July 2008, http://www.brookings.edu/papers/ Lael Brainard, Infrastructure: Time to Compete 2008/07_air_traffic_robyn.aspx. to Win, July 2008, http://www.brookings.edu/ opinions/2008/0722_infrastructure_brainard. Bernard Schwartz and Sherle Schwenninger, aspx. Public Investment Works, Democracy Journal, Is- sue #6, Fall 2007. http://www.democracyjour- Anthony Downs, Traffic: Why It’s Getting nal.org/article.php?ID=6546&err=1&err1=1& Worse, What Government Can Do, January err=1&err1=1 2004, http://www.brookings.edu/papers/2004/ 01transportation_downs.aspx. Philip Weiser, The Untapped Promise of Wire- less Spectrum, July 2008, http://www.brookings. Robert Crandall, Robert Hahn, Robert edu/papers/2008/07_wireless_weiser.aspx. Litan and Scott Wallsten, Bandwidth for the People, May 2004, http://www.brook- Investing in People ings.edu/papers/2004/05_bandwidth_litan. Gerard Anderson and Hugh Waters, Achiev- aspx?rssid=crandallr. ing Universal Coverage through Medicare Part David Lewis, America’s Traffic Congestion Prob- E(veryone), July 2007, http://www.brookings. lem: A Proposal for Nationwide Reform, July 2008, edu/papers/2007/07useconomics_anderson.aspx. http://www.brookings.edu/papers/2008/07_ Joseph Antos and Alice Rivlin, Slowing the congestion_pricing_lewis.aspx. Growth of Health Spending, August 2007, 18 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  23. 23. http://www.brookings.edu/papers/2007/0815_ 2007, http://www.brookings.edu/papers/2007/ healthspending_rivlin_Opp08.aspx. 04useconomics_furman.aspx. Stuart Butler, Evolving Beyond Traditional Bob Giloth and Bruce Katz, Wanted: New Employer-Sponsored Health Insurance, May Ideas for the Jobs Debate, September, 2004, 2007, http://www.brookings.edu/papers/2007/ http://www.brookings.edu/opinions/2004/ 05healthcare_butler.aspx. 0924labormarkets_katz.aspx. Alan Berube, David Park, and Elizabeth Knee- Robert Gordon, Thomas Kane and Douglas bone. Boosting the Earned Income Tax Credit to Staiger, Identifying Effective Teachers Using Per- Help Metropolitan Workers and Families, June formance on the Job, April 2006, http://www. 2008, http://www.brookings.edu/reports/2008/ brookings.edu/papers/2006/04education_gor- 05_metro_raise_berube.aspx. don.aspx Lael Brainard, New Economy Safety Net, Spring Jonathan Gruber, Taking Massachusetts Nation- 2008, http://www.brookings.edu/articles/2008/ al: An Incremental Approach to Universal Health spring_economic_security_program_brainard. Insurance, July 2008, http://www.brookings. aspx. edu/papers/2008/07_healthcare_gruber.aspx. William Dickens, Isabel Sawhill, and Jeff rey Harry Holzer, Better Workers for Better Jobs: Im- Tebbs, The Effects of Investing in Early Education proving Worker Advancement in the Low-Wage on Economic Growth, April 2006, http://www. Labor Market, December 2007, http://www. brookings.edu/papers/2006/04education_ brookings.edu/papers/2007/12_labormarket_ dickens02.aspx holzer.aspx. Susan Dynarski and Judith Scott-Clayton. Julia Isaacs, Cost-Effective Investments in Chil- College Grants on a Postcard: A Proposal for dren, January 2007, http://www.brookings.edu/ Simple and Predictable Student Aid, February papers/2007/01childrenfamilies_isaacs.aspx. 2007, http://www.brookings.edu/papers/2007/ 02education_dynarski.aspx. Jeff Kling, Fundamental Restructuring of Un- employment Insurance, September 2006, http:// Ezekiel Emanuel and Victor Fuchs, A Com- www.brookings.edu/papers/2006/09unem- prehensive Cure: Universal Health Care Vouchers, ployment_kling.aspx. July 2007, http://www.brookings.edu/papers/ 2007/07useconomics_emanuel.aspx. Jeanne Lambrew, A Wellness Trust to Prioritize Disease Prevention, April 2007, http://www. Jason Furman, The Promise of Progressive Cost brookings.edu/papers/2007/04useconomics_ Consciousness in Health-Care Reform, April lambrew.aspx. BROOKINGS COMPETITIVENESS INITIATIVE 19
  24. 24. Hugh Price, Assuring Student Achievement: Federal Role for Stimulating Regional Economies, Strengthen America through Education Reforms, April 2008, http://www.brookings.edu/re- 2007, http://www.brookings.edu/papers/2007/ ports/2008/04_competitiveness_mills.aspx. 0228education_price_Opp08.aspx. Investing in Green Transformation Hugh Price, Amy Liu and Rebecca Sohmer, Lael Brainard and Isaac Sorkin, eds., Climate Pathways to the Middle Class: Ensuring Greater Change, Trade and Competitiveness: Is a Collision Upward Mobility for All Americans, February Inevitable?, Brookings Institution Press, forth- 2007, http://www.brookings.edu/papers/2007/ coming. 0228metropolitanpolicy_liu_Opp08.aspx. Marilyn Brown, Frank Southworth, and An- Investing in Ideas drea Sarzynski, Shrinking the Carbon Footprint Robert Atkinson and Howard Wial, Boosting of Metropolitan America, May 2008, http://www. Productivity, Innovation and Growth through a brookings.edu/reports/2008/05_carbon_foot- National Innovation Foundation, April 2008, print_sarzynski.aspx. http://www.brookings.edu/reports/2008/04_ federal_role_atkinson_wial.aspx. Warwick McKibbin, Adele Morris and Pe- ter Wilcoxen. Setting the Right Green Agenda, Jason Bordoff, Michael Deich, Rebecca Kahane, October 2008, http://www.brookings.edu/re- and Peter Orszag, Promoting Opportunity and ports/2008/~/media/Files/rc/reports/2008/10_ Growth through Science, Technology and Innova- global_economics_top_ten/200810_climate. tion, December 2006, http://www.brookings. pdf. edu/papers/2006/12technology_bordoff.aspx. Gilbert Metcalf, An Equitable Tax Reform to Thomas Kalil, Prizes for Technological Innova- Address Global Climate Change, October 2007, tion, December 2006, http://www.brookings. http://www.brookings.edu/papers/2007/ edu/papers/2006/12healthcare_kalil.aspx. 10carbontax_metcalf.aspx. Doug Lichtman, Aligning Patent Presumptions, Richard Newell, A U.S. Innovation Strategy for December 2006, http://www.brookings.edu/ Climate Change Mitigation, December 2008, papers/2006/12technology_lichtman.aspx. http://www.brookings.edu/papers/2008/12_ climate_change_newell.aspx. Robert Litan, Lesa Mitchell, and E.J. Reedy, Commercializing University Innovations: A Bet- Robert Stavins, A U.S. Cap-and-Trade Sys- ter Way, May 2007, http://www.brookings.edu/ tem to Address Global Climate Change, October papers/2007/05_innovations_litan.aspx. 2007, http://www.brookings.edu/papers/2007/ 10climate_stavins.aspx. Karen Mills, Elisabeth Reynolds and Andrew Reamer, Clusters and Competitiveness: A New 20 STRENGTHENING AMERICAN COMPETITIVENESS: REGAINING OUR COMPETITIVE EDGE
  25. 25. 1775 Massachusetts Avenue, NW Washington, DC 20036 202-797-6000 www.brookings.edu/topics/competitiveness.aspx

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