Competitive Advantage


The President's Council on Competitiveness isn't the most visible Washington institution, the most glamorous, or even the most powerful. It's just the most aggravating.

That's because a lot of Democrats (and certain trendy Republicans) would love to claim the "competitiveness" label for their own policies—and the council keeps reminding them that it just ain't so. Instead of bashing the Japanese or begging for subsidies to sunrise, sunset, or high-noon industries, it watches out for new regulations, in hopes of keeping them at a minimum.

The council is essentially a lobbying group, its only power the power of persuasion—but it's persuasive enough to give regulation lovers conniptions. "They can't point to a single item that has made American industry more productive," Rep. Gerry Sikorski (D–Minn.) declared to National Journal. "What they can point to is a bunch of backdoor, secret deci:sions that bailed out special interests—business interests."

Sikorski's rant captures the problem facing a lot of "competitiveness" advocates, particularly neoliberals. On the one hand, they're all for "making American industry more productive." Some, like presidential candidate and former Sen. Paul Tsongas, even welcome the "probusiness" label. Others, like Sikorski, seem to think business is something the Godfather is in. But they all like "competitiveness." After all, they're the people who made it a buzzword.

They also like regulation. They want to tell industry whom to hire and when to fire, to dictate benefit packages and advertising content, to protect managers from takeovers and workers from layoffs. They want a safe, secure world where risk takers can't build minimills and nobody uses plastic packaging.

The younger generation of liberals talks a lot about entrepreneurship and gripes a lot about bureaucracy. Neither Atari Democrats nor high-tech Republicans are likely to propose wage and price controls anytime soon. Most of them want to cut capital gains taxes.

But these probusiness, "fiscally conservative and socially liberal" folks lump certain kinds of bureaucratic oversight in with Mom, apple pie, and the right to have an abortion. To paraphrase Gordon Gekko, they're convinced that "green is good."

That's why they find the Competitiveness Council so subversive. The council isn't against environmental regulation per se, but it has a nasty habit of raising embarrassing questions. Like how the Clean Air Act, which supposedly concerns clean air, came to require garbage recycling. Or why half of California and a lot of Midwestern puddles suddenly became "wetlands."

The council has even advanced the heretical notion that environmental regulations shouldn't redistribute wealth—that the government should pay people when its rules destroy the value of their property. Specifically, the council supported a Senate amendment requiring federal agencies to compensate property owners for regulations that reduce the value of their land.

If you think "competitiveness" equals protectionism or government-directed industrial policy, the council does seem way out of line. What, after all, does paying a farmer for the property you've declared a wetland have to do with making computer chips? How does blocking a recycling requirement make America more productive?

In part, the council's work serves simply to make people realize the costs—to real live human beings—of popular regulations. If preserving wetlands really benefits the public at large, as environmentalists aver, then we should all chip in to foot the bill. Sticking some unlucky farmer with the tab is hardly fair.

But acting as though regulation is free (no new taxes required!) is not only unfair, it's uncompetitive. The reason lies in what economists call opportunity cost. This is the deceptively simple concept that the cost of doing something isn't just the out-of-pocket dollars and cents. It's also whatever else you didn't do. The cost of going to a movie isn't only seven bucks for a ticket. It's also the time you didn't spend reading a novel or cleaning the garage or visiting your mom; in fact, it's the acts themselves—the reading, the cleaning, the visit.

Regulations impose not only direct costs—for lawyers, technicians, and tests—but also broader opportunity costs. Consider the plastic-film maker with a hot new product. Making the new film produces, at an intermediate stage, a brand new compound, one that hasn't passed EPA scrutiny. The compound never leaves the plant's property, since it's transformed into other, approved substances during later manufacturing stages. Satisfying the EPA takes money for tests, but more importantly it diverts the plant's best engineer from other projects for a whole year.

His salary is one cost of complying with the regulations. But the more significant cost isn't those tens of thousands of dollars. It's whatever the engineer doesn't do—the product innovations, quality improvements, or new applications he could otherwise dream up in that year. If you could save that year, and the tens of thousands of others similarly squandered, you would make American companies more productive.

The opportunity costs of regulation extend to the economy as a whole, through what economist Melvyn Krauss calls "Europeanization." This is the accretion of restrictions that make risk taking all but impossible. For European companies, even hiring a new employee can constitute an unacceptable risk, given all the rules governing benefits and layoffs. The result is stagnation.

Europeanization is what you get when you try to square a fondness for business with a passion for regulation. It doesn't wipe out IBM or General Motors. It just leaves the economy dependent on huge, old-line companies that can live for decades on their inherited wealth and the political clout that wins them protection from foreign competitors.

All this puts liberals—neo and otherwise—in a funny position. Without realizing it, they've become the party of big business. Bureaucracy is the comparative advantage of large organizations. They may not be nimble, but they sure can fill out forms.

The President's Council understands the connection between those forms and the elusive concept of "competitiveness." That's why it's so aggravating—and so important.