This time it’s serious

Schumpeter

America is becoming a less attractive place to do business

IS AMERICA fading? It seems an odd thing to say about a country that so dominates the industries of the future. Where else could Facebook have grown from a student prank to a $100 billion company in less than a decade? America has been gripped by worries about decline before, notably in the 1970s, only to roar back. But this time it may be serious.
There is little doubt that other countries are catching up. Between 1999 and 2009 America’s share of world exports fell in almost every industry: by 36 percentage points in aerospace, nine in information technology, eight in communications equipment and three in cars. Some loss of market share is inevitable as China and other economies emerge. But even in absolute terms, there is cause for worry. Private-sector job growth has slowed dramatically, and come to a halt in industries that are exposed to global competition. Median annual income grew by an anaemic 2% between 1990 and 2010.

The March issue of the Harvard Business Review is devoted to “American competitiveness” (by which it means the country’s ability to improve productivity and living standards). A gaggle of gurus delivers a harsh verdict. Michael Porter and Jan Rivkin of the Harvard Business School (HBS) sum up the mood: “The US government is failing to tackle weaknesses in the business environment that are making the country a less attractive place to invest and [is] nullifying some of America’s most important competitive strengths.” The Review also reports that declinism is prevalent among HBS alumni: in a survey, 71% said that American competitiveness would decline in the coming years.
America is losing out in the race to attract good jobs. Matthew Slaughter of Dartmouth’s Tuck School of Business and Laura Tyson of Berkeley’s Haas School of Business point out that multinational firms (which pay higher wages than non-multinationals) increased employment in America by 24% in the 1990s. But since then they have been cutting back on jobs in America. They have moved dull repetitive tasks abroad, and even some sophisticated ones, too. The proportion of the employees of American multinationals who work for subsidiaries abroad rose from 21.4% in 1989 to 32.3% in 2009. The share of research-and-development spending going to foreign subsidiaries rose from 9% in 1989 to 15.6% in 2009; that of capital investment rose from 21.8% in 1999 to 29.6% in 2009. In HBS’s survey, alumni reported that when their firms had to decide whether to do something in America or elsewhere, America lost two times out of three.
This relative deterioration in America’s business climate has coincided with a spectacular rise in the incomes of the sort of people who read the Review. Mihir Desai of HBS argues that the two things are related. The proportion of the total pay of senior managers that is based on stock rose from 20% in 1990 to 70% in 2007. This, argues Mr Desai, has warped incentives and fostered malfeasance. Managers have won huge payouts simply because the market has gone up, regardless of whether they personally have added value. They have also gamed the system, sometimes illegally, to hit targets that put fat sums in their pockets.
There are a few signs that America is doing something to fix executive compensation. The same cannot be said about politics. America’s political system comes in for particularly harsh criticism: 60% of HBS alumni said that it was worse than those in other advanced countries. David Moss of HBS argues that such complaints are nothing new: American politicians have been squabbling about the role of government ever since Thomas Jefferson butted heads with Alexander Hamilton. But in the past this often led to fruitful compromises. The battle between protectionists and free-traders, for example, was resolved with tariffs that shrank as industries matured. Such compromises are rarer these days. Republicans and Democrats are more ideologically divided, and less inclined to make pragmatic concessions. Barack Obama’s health-care reform squeaked through Congress without a single Republican vote.
What’s right with America can fix what’s wrong
For all this gloom, the Review’s gurus argue that, as Bill Clinton said in his first inaugural address, there is nothing wrong with America that cannot be cured by what is right with America. The country has huge strengths, from its world-beating universities to its tolerance of risk-taking. It has a highly diverse market: firms that seek cheap labour can move to Mississippi, where wages are a third lower than those in Massachusetts. Rosabeth Moss Kanter of HBS points to the extraordinary amount of innovation that is going on not just in Silicon Valley but across the country. For example, water researchers at the University of Wisconsin-Milwaukee have linked up with urban farmers who occupy abandoned factories. The fruit of this alliance is firms such as Sweet Water Organics, which produces fish and greens in a former crane factory.
Yet it is difficult to read this collection of essays without a sense of foreboding. The one thing that worries the HBS alumni more than anything else—the state of American politics—is the most difficult to fix. The political pendulum swings unpredictably, making it hard to plan for the future. Should companies assume that they will have to abide by Mr Obama’s health-care law when it comes into effect in 2014, or will the Republicans have repealed it by then? No one knows. And Washington’s aversion to compromise makes the budget almost unmendable. Without both parties’ fingerprints on a deal, no one can curb the huge entitlement programmes that grow automatically, such as Medicare and Social Security (health care and pensions for the elderly). So deficits yawn and the welfare state keeps growing, even as America’s roads crumble. That is not a recipe for dynamism.