SwarmPoint

There has been much discussion of U.S. competitiveness lately. Michael Porter of Harvard has had the front cover of BusinessWeek and the New York technical community is a buzz with how it needs to save the economy. This comes after the demotion of media, advertising and financial services which are all undergoing structural change that has shaken their institutions and hasn’t stopped shaking them. The Hi-Tech industry in New York is smaller than that of Boston and has had difficulty achieving economic scale, particularly when it is compared with California, Tokyo, Taiwan, Israel, Bangalore or the UK. The strongest remaining business in New York is Health Care and that is not something on which the economy can be based. The surrounding area does have significant Pharma businesses and it is noticeable how many service businesses are trying to re-orientate themselves to serve the Government and Pharma businesses. You just can’t export the Health Care services and to the extent that you can their price would not be competitive.

The call for government strategy is partly in denial of the fact that the economy makes more decisions than politicians do, but there are things over which politicians do have influence. For example there is a need to better understand the impact of the split between federal and state government. The federal and state split in the US starves the funding of education and social services, as compared to defense, due purely to which side of the government tax structure they fall under. We have competition between states which drives down our education and social programs to the extent that many children have so many issues in their homes that they can not focus in the classes that are available to them. The problem is further exacerbated by the provision of so much educational funding at the township level so that wealthier towns pay only for the education of their children and not those of the adjacent poorer town.

The strategy of a strong military to control the resources that we need, rather than a skilled workforce to provide economic strength, is a strategic decision which we would do well to re-examine. Imperialism is part of our past, as with many countries, but it isn’t acceptable as part of a modern, communicating, flat Earth.

America has enormous strengths due to scale and having the world’s reserve currency. Both of these advantages, for our industry and our government, put the US economy head and shoulders above any other. Our companies can be more specialized and more efficient in their chosen market purely due to the scale of our economy and this higher level of specialized experience puts them at a huge advantage to competitors in smaller economies. Europe, as the closest competitor in scale, is in reality a series of markets fragmented by language, media, culture and law. Europe and China are however becoming better integrated and catching up.

The use of the USD as the global reserve currency allows the US government to borrow in its own currency without devaluing it. Other countries have a limited ability to borrow without weakening their currency and having resulting difficulty in repaying loans in foreign currency. This single factor will allow America to spend its way out of a recession more cheaply and to a greater extent than any other Country can safely achieve. One strategy that US governments have consistently followed is to maintain the U.S. Dollar as the global reserve currency. It has driven policy over many spheres, from the creation of the IMF, to the support of oil rich governments. While the vast majority of global trade is valued in U.S. dollars less than 18% of it is with the U.S. itself. The largest single chunk of that global trade is due to the pricing of oil in US dollars. Much world trade is also in oil derived materials, energy and transportation which inevitably track the price of oil.

Michael Porter’s article over plays the strength of the US economy having been based on our brilliance in technology, finance and the brilliance of our institutions while it ignores the advantages of sheer scale. Even issues such as U.S. companies being able to sell almost all of their product in their own currency and not having to cope with foreign exchange risks to the same extent that other nations’ businesses do, have a significant benefit across economic cycles.

The claim that America lags so heavily in access to University education is dubious. When we compare university education in different countries and across different decades we are not comparing apples with apples. America has very broad access to university education with much better access to funding than in any other region of the world. One has to note that Michael Porter is a Harvard academic.  I would suggest that U.S. university education is probably more constrained by the educational standards of those entering university than by financial constraints. Michael Porter appears to agree with this assessment of public education. The problem with this and social investment by governments, as a strategy, is that it takes fifteen years for us to start receiving the benefits and we have been soft peddling for far too long.

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Finance education, government, strategy