The United States has not lost international economic power because of China. Or Germany, or Mexico, or Turkey, or any other country. It’s losing because it’s bloated and rigid, which inflate US companies’ costs and make them lose business to lower-cost competitors abroad. The current administration is attacking the bloat, but until Congress tackles the deeper structural problems the nation will not be able to sustain gains in international competitiveness brought about by the recent corporate tax cuts and government downsizing. Campaign finance reform, electoral reform, and job retraining are needed to reduce the economic drag caused by dying industries and poorly structured entitlements.
The US is bloated. Its burdensomely high healthcare costs drive American companies’ prices uncompetitively high in international markets. The country spends almost three times the world average on healthcare. This factor alone puts the country at a 10% price disadvantage compared to not only developing countries but also its peer group of mature, industrialized, wealthy, and developed countries. Bureaucratic environmental and social regulatory requirements inflate corporate costs. And, until the tax reform of late 2017, the U.S. corporate tax rate was the highest in the world. Although Americans tend not to think of it this way, the United States is a welfare state like Sweden was and Germany is. However, atypical of most welfare states, high defense spending is driving unprecedentedly high debt levels and is squeezing out arts, education, and welfare budgets.
In addition, the US has even deeper structural problems which hinder its agility and resilience. The “young-pay-in/old-take-out” social security system, which at the current rate will go bust by 2034, has been politically untouchable for generations and has caused credit agencies to downgrade US debt, which increases the cost of borrowing. The ballooning national debt, which has doubled since the 2008 financial crisis and at $16 billion now exceeds GDP, is close to its World War II levels. The combination of a huge debt payment obligation and rising future interest rates could be crippling. The economy is also inflexible – neither federal nor state governments offer much in the way of job retraining for displaced workers. Immigrants, even skilled ones, are currently locked out.
These problems force US companies to charge at least 20% higher prices than their international counterparts, and far higher compared to some countries. This is not the total differential between American and overseas companies. In addition to the 20% differential, American companies sometimes price higher than their counterparts due to productivity improvements and superior intellectual property. But while price premia for efficiency and unique intellectual property can justify higher prices, inefficient structural costs cannot, so US companies frequently lose international tenders to more aggressive overseas competitors.
The Trump administration has been taking an axe to the “bloat.” The corporate tax cut, which allows companies to price lower, is a first step toward the United States regaining international trade competitiveness (although it was lowered so much as to produce a large and perpetual budget deficit that will be caused by a shortage of tax revenue). The regulatory purge, particularly in the EPA, is also making US business more cost-competitive (although it is being done to the benefit of cronies). The administration’s practice of leaving positions vacant (e.g., in the Department of Commerce) is crudely executed but has cut both fat and muscle (although this has been to some extent offset by scandalous spending by some agency heads).
The bigger and harder task will be restoring agility and innovation. To do that, we will need to overhaul social security, develop job retraining, and reform the electoral progress. The social security system needs to be replaced with one where taxpayers pay into their own personal accounts, to avoid the difference between the number of payers-in and payees-out. Job retraining needs to be offered to those in transition, especially in dying industries such as coal (the US should be building knowledge-intensive technology industries, not engaging in trade wars over its coal, soybean, or steel industries). The U.S. legislature is unlikely to come to negotiated agreements on structural issues such as healthcare or social security until: 1) there is a total financial meltdown or crisis, which would most likely be precipitated by a large-scale war; or 2) Congress acts in the interest of the broad middle of the US population.
There is hope. The spread of electoral reform at the local level is encouraging new candidates who are not beholden to the immutable extremist positions of the established party duopoly, and can confront the big issues. Ranked Choice Voting, sometimes with multi-party winners, is currently used in 11 cities and one state (Maine), and for military and overseas ballots in five additional states, and is gaining in popularity.
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David S. Jacoby is the author of Trump Trade, and the End of Globalization (Praeger / ABC-CLIO 2018), From Bogota to Beijing: Development and Life After Globalization (Lexington Press, 2018), and The High Cost of Low Prices: A Roadmap to Sustainable Prosperity (Business Expert Press, 2017).
The views represented above are the author’s alone and do not represent the opinions or positions of Boston Strategies International.