Learning to compete again.

• Author: Cortright, Joseph
• Position: States and US market competition

States can encourage and assist businesses to use more effective management methods to meet today's global competition.

State economic policymakers face a formidable challenge in the 1990s: making sure their states can compete effectively, not simply against neighboring states, but against workers and firms throughout the world. The traditional policy tools that states have employed in an era of domestic competition are ill-suited to the changed circumstances that American businesses and American workers now face. Lawmakers need to understand the changes in the global economy and the rapid changes in the nature of competition, in order to fashion effective policies to better their economic prospects.

The Economic Challenge

For most of the 20th century, the United States has been the world's unquestioned economic leader. Our economic dominance was based on our invention and perfection of systems of mass production and mass marketing, systems which, when coupled with America's vast domestic market, laissez-faire economic system and abundant resources, gave the United States the largest and richest economy in the world.

Companies could tap huge economies of scale in production that were simply unavailable to foreign rivals confined to smaller and poorer domestic markets. As U.S. firms grew bigger, they made technical progress faster, and with access to world-class research and development, pioneered and dominated new industries like aerospace and electronics.

But over the last several decades, the huge U.S. lead has diminished as Western European and Japanese industries have emulated and sometimes surpassed U.S. accomplishments. Experts differ on whether U.S. businesses are ahead of or behind their international competitors. Data from the Organization for Economic Cooperation and Development show that U.S. workers rank fourth in output per worker among the major industrial powers, behind Japan, Germany and France. Other studies show that U.S. workers are still more productive in some industries like food processing and computers. Even so, American companies that once dominated global markets in automobiles, steel, banking, chemicals and textiles no longer do so.

While the lead may change from year to year and industry to industry, it is now clear that the rest of the industrial world has virtually caught up technologically and economically to American firms and workers. What may be more important is that the erosion of America's economic lead has been accompanied by a profound impact on American living standards: During the decade of the 1980s, real earnings for the average U.S. worker declined by nearly 10 percent.

The most desirable policy choice would, of course, be to turn back the clock to the period of American economic supremacy. Not only is this not possible, but the adoption of the North American Free Trade Agreement and the signing of the new General Agreement on Tariffs and Trade signal our continuing commitment to sink or swim in a global marketplace. And, more to the point, the old model of mass production is daily being copied in the developing nations of the world, whose labor costs are a...