Sunday, January 16, 2011

Are we losing our competitive advantage?

What is the cost of Washington's penchant for creating laws and regulations? Alex J. Pollock, a resident fellow at the American Enterprise Institute, says our politicians are eroding our last advantage in global competition.
Each fundamental factor of production gives rise to a potential international competitive advantage. According to Adam Smith’s classic list, these factors are land, labor, and capital. A more complete list would contain five fundamental factors or sources of possible advantage:

Natural Resources
Social Infrastructure
In today’s global competition, Pollock writes, America no longer has any special advantage in the first four factors, but continues to have an advantage in the fifth. This advantage, however, is being weakened or undermined by political and bureaucratic overreaction, and the related escalating litigation.
Social infrastructure. The political stability and safety of America has long attracted investment as a safe haven. By designing a stable political order which continued to work for an extremely large republic, the American Founding Fathers also created an economic competitive advantage. America’s infrastructure helps explain how the United States can finance its large trade and budget deficits.

The dead weight cost and bureaucrats rampant unleashed by Congress will help dissipate America's last international competitive advantage.

By making America less competitive, these new laws undermine our ability to maintain high relative wages or a high relative standard of living. The ability to pay more than other countries for the same work with the same level of education depends upon having an advantageous position in one or more of the other fundamental factors of production. We are down to one—social infrastructure—and need to protect it.

The strongest competitive advantage cannot support an indefinite amount of political, bureaucratic, and legal economic parasitism. There are numerous anti-competitive factors to work on, but immediately reforming the Dodd-Frank Act would be a good place to start. It needs to be throttled while still young, before it has grown to the bureaucratic giant its sponsors intend.

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