Macroeconomic Policy and U.S. Competitiveness
The United States is on a glide path to fiscal disaster, with experts projecting that the federal government will take in far less money than it spends—indefinitely. Although in our experience business leaders have a general sense that this state of affairs is dangerous, they’re unclear on exactly how fiscal policy shapes the competitiveness of the nation and of their companies. The current policy is eroding competitiveness in several ways, and business conditions in the United States will deteriorate if there’s no change in direction. A better understanding of how fiscal policy and competitiveness are linked may make such a change more likely.
How does fiscal policy affect competitiveness? To answer, we need a clear definition of “competitiveness”—which is, in our view, the extent to which a nation’s companies can succeed in the global marketplace while its people enjoy a high and rising standard of living. Companies compete on the basis of production costs for a certain amount of output. The only way to lower those costs while sustaining and raising workers’ standard of living is to increase productivity, or output per worker.
Raising productivity requires improving human capital, increasing physical capital (equipment or software, for example), or using these forms of capital more efficiently. Let’s look at how the spending side of fiscal policy relates to these three drivers. Many public goods provided by the government contribute directly to one or more of them. Spending to improve public education, for instance, can increase human capital. Spending on infrastructure can increase physical capital. Publicly funded R&D, effective regulation, and incentives for private-sector innovation can lead to a more efficient use of human and physical capital. In contrast, some spending, like that for health care and other