America can rise to Asia's challenge

By Amity Shlaes

Financial Times

Published: February 28 2005

India, China; China, India. The only remaining question seems to be which will clobber the rest of us first. Last week, even as the dollar slid, Azim Premji of Wipro was touring the US terrifying conference rooms with his company's plans. Not only will the Indian giant continue its work in information technology, its chairman reported, but Wipro will also develop yet more software on its own. Adjust, ye alumni of Caltech.

America's big political parties are also grappling with the challenge of international competition. The Republican effort this month focuses on Social Security, whose reform would lead to a more competitively priced workforce. Democrats, too, are thinking about foreign competitors - especially Democrats who served on the economics side of the Clinton administration. Indeed, two recent books out of Clinton-land put forward valuable models for changing the future.

The first, The Two Percent Solution*,comes from Matt Miller, columnist, radio commentator and former Budget staffer for Bill Clinton when he was president. Mr Miller targets - correctly - three big problems in the US economy: the despair of unskilled workers, the perversity of the healthcare system and the damage done by mediocre schools. Is it not time, he asks, for the US to combine public and private sector experience to improve matters? Mr Miller wants a living wage for all workers. He wants a system of universal healthcare- albeit via market methods. And he wants to offer teachers hefty financial incentives - make them millionaires - to deliver pupils who can meet a series of objective standards.

These are all appealing ideals, especially the millionaire teacher. After all, US school-leavers would have a better chance of competing with the brains of Indian call centres if US schools taught two things they have omitted in recent decades: grammar and long division.

Mr Miller points out that US federal tax revenues these days represent about 16 per cent of gross domestic product, down from the 18, 19, 20 per cent or more considered inevitable only a decade ago. If the US spent 2 percentage points more, he posits, it could fix all three big problems. And federal tax revenues as a share of GDP would still be only 18 per cent, far less than the rates that obtain in European counterparts. The Two Per Cent Solution sounds like a bargain: a smarter, healthier, better paid nation, all for less than the old mean.

Slightly different is The Competition Solution, by Paul A. London.** Mr London, deputy undersecretary of commerce under Mr Clinton, argues that the 1990s were prosperous not so much because of manly fiscal discipline (sorry, Secretary Rubin) but rather because they were a period of fierce competition. Competition permitted by the Clinton administration's policy of liberalising trade barriers. Competition made possible by vigorous antitrust enforcement in the old American progressive tradition. And competition fostered by actions that preceded the 1990s - the break-up of AT&T in the 1980s, for example. Mr London even goes so far as to praise junk-bond pioneer Michael Milken for fostering innovation in areas that traditional financial markets left underfunded, such as telecommunications. (True enough, but not a truth normally advertised by Democratic appointees.) To succeed in future, Mr London posits, the US will have to internalise these 1990s lessons.

There are a few things to quibble with in Mr London's argument. He thinks it is OK for "businesses and taxpayers" to subsidise the modernisation of healthcare. This idea looks nice on paper - more new computer networks. But it ignores the fact that industrial policy usually fails. (Ask India: as Harjiv Singh of the Fortex Group, an economic scholar and one of Mr Premji's hosts, pointed out last week, "the reason the IT service sector came about in India was that government didn't really take much interest in it.") As for antitrust enforcement - the jury is out on whether it lifts productivity.

Nonetheless, the competition thought is key. And the added value in both books is that they work hard to find common ground with Republicans. The ideal here, therefore, would be to take up the policy agenda as identified by Mr Miller. And then deploy Mr London's solution. Mr Miller is right when he focuses on using market forces to improve government, but his 2 per cent spending notion, nifty as it sounds, cannot work. It might have done half a century ago, when Bangalore's economy was a backwater operation. Today, however, it is just as well that US taxes are not 18 or 19 per cent of GDP. That level cannot keep up with Bangalore software writers - or the breweries of Harbin.

Real GDP in the US grew 4.4 per cent last year, the government reported on Friday. To continue that success the US must work harder to cut spending. And it must sustain its current ratio of taxes to GDP, or go even lower. The most humane target in today's scenario is not the 2 per cent but the 16 per cent solution.

* The Two Percent Solution: Fixing America's Problems in Ways Liberals and Conservatives Can Love (PublicAffairs); ** The Competition Solution: The Bipartisan Secret Behind American Prosperity (American Enterprise Institute)

amity.shlaes@ft.com