Does Anyone Understand the Meaning of "Competitiveness"?

OK, I start this post by agreeing with Paul Krugman this morning that the term "competitiveness" is hackneyed and essentially meaningless. However, as I read Krugman's column today, I think that Krugman has come to believe that all that is needed to make our economy more "competitive" is for the Fed to print more money and the government to spend it.

That's right; we need to be Number One in spending. That will revitalize the U.S. economy, at least according to Krugman, who sees "jobs" in and of themselves as the sign of a truly "competitive" economy:

It’s true that we’d have more jobs if we exported more and imported less. But the same is true of Europe and Japan, which also have depressed economies. And we can’t all export more while importing less, unless we can find another planet to sell to. Yes, we could demand that China shrink its trade surplus — but if confronting China is what Mr. Obama is proposing, he should say that plainly.

Furthermore, while America is running a trade deficit, this deficit is smaller than it was before the Great Recession began. It would help if we could make it smaller still. But ultimately, we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete with foreign rivals.

This demands a larger question, which Krugman does not ask: Why did we have a financial crisis in the first place? The secondary question is this: What needs to be done in order to bring the economy into a recovery, given we have had a financial crisis?

For Krugman, the answer is simple because his view of an economy is simple: Increase government spending. He writes:

The favorable interpretation (of President Obama's new "competitiveness" initiative), as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation.

My guess is that we’re mainly talking about packaging here. And if the president does propose a serious increase in spending on infrastructure and education, I’ll be pleased.

He further adds:

The financial crisis of 2008 was a teachable moment, an object lesson in what can go wrong if you trust a market economy to regulate itself. Nor should we forget that highly regulated economies, like Germany, did a much better job than we did at sustaining employment after the crisis hit. For whatever reason, however, the teachable moment came and went with nothing learned.

In both cases, Krugman employs the non sequitur as his rhetorical device. In the first quote, he assumes that if the government suddenly starts more public works construction jobs and showers new money on government schools, that the economy will regenerate itself (or at least start on the path to regeneration).

In the second quote, he creates the syllogism:

• Germany's economy has more regulation than that of the USA
• German employment losses have not been as great as those in this country
• Therefore, a more heavily-regulated economy creates more prosperity.

This ignores the particular areas of regulation, as it makes a blanket statement about regulation but fails to deal with any specifics. Furthermore, throughout the column, Krugman has only one standard for prosperity: employment.

It reminds me of a television debate that a Marxist "economist" had with a "free-market" economist about 30 years ago. The second economist had just come back from Romania and he was pointing out how poor the people were and how badly things worked there.

The Marxist replied (as though this statement trumped everything else), "But there is no unemployment there." In other words, having an official "job" as named by the government was the ultimate sign of prosperity and "competitiveness," and while Krugman is not claiming (at least I don't think he is claiming) that Romania under Nicolai Ceaucescu's tyrannical government was superior to whatever we had in this country, nonetheless he uses the employment standard as though nothing else matters.

In fact, he contrasts his ideal government policy with private business, writing:

Consider: A corporate leader who increases profits by slashing his work force is thought to be successful. Well, that’s more or less what has happened in America recently: employment is way down, but profits are hitting new records. Who, exactly, considers this economic success?

Again, we are seeing the non sequitur at work. According to this statement, Krugman seems to believe that workers are pure cost, and that the more layoffs a company has, the greater its profitability will be. Thus, he reasons, a "competitive" private economy will have high unemployment AND high profits, which means that a "competitive" private sector actually is BAD for an economy and for human welfare in general.

Krugman demonstrates the typical macroeconomic view of an economy, seen through aggregates and the false belief that all factors of production are homogeneous and that there is no connection between production and consumption. However, no company becomes more profitable simply by having mass layoffs. Layoffs are a response to changes in consumer choices for the final products made by the firm. Labor is a factor of production, a heterogeneous factor; labor is meaningful as it applies to production, and if its discounted marginal revenue product falls to less than its marginal cost, then a company is wise to jettison that factor, just as it jettisons other factors that become cost burdens.

Furthermore, an economy cannot grow unless entrepreneurs find ways to make more final goods while using fewer resources. At the same time, a growing economy finds ways to take the temporarily unused resources and apply them to other productive uses.

Krugman, however, sees no connection between resources and economic growth. For example, he has written that we can "rebuild" our economy via "green energy," yet none of those industries are able to survive without government mandates, special tax breaks, or outright subsidies.

To an economist, there is a fundamental difficulty with a so-called green economy: it cannot stay afloat without cannibalizing the healthy and profitable areas of production. To Krugman, however, it is all just a matter of spending, and if government borrows and taxes and regulates in order to force Americans to purchase products they don't want, then that is good for the economy.

True, I have used a non sequitur, but that is what Krugman seems to be saying. In his view, the only thing that matters is employment. If government spends and hires people to engage in "jobs," then prosperity will follow, as all that matters are aggregates.

That makes no sense, economically speaking. If Krugman is right, and if the primary issue is simply "creating jobs" so that people can have an income, why do we need production at all? Wouldn't it be even better if the Federal Reserve System just printed zillions of dollars and left bags of money with each person? Since "spending" magically leads to everything else, why wouldn't that be a perfect solution to our problems?

To Krugman, an economy is a mass of numbers and nothing else. There are no relative prices and no interrelationships between factors of production. Thus, to him, "competitiveness" is based on the rate of unemployment, which means that there is nothing in his viewpoint that would have refuted the Marxist I heard 30 years ago claim that Romania's economy -- under which most people in that country lived in poverty -- was superior to that of the United States.