America’s Lost Competitiveness

Earlier this week we had a bathtub installer come to the house and measure our current tub for a replacement. The measurement only took a couple of minutes, but our conversation took about an hour. Because we live in the county the cost of a permit to remove and replace the tub is, according to the business owner, excessive. The gentleman then began to tell me how much it costs to do business in Clark County. It was an enlightening conversation.

This phenomenon is not just a Clark County problem; it is involves our whole country. As a result, indicators that have been developed to measure business growth, etc. display the fact that the United States has fallen in the realms of new business growth and competitiveness. The question in my mind is why? In the book, “The Great Degeneration: How Institutions Decay and Economies Die,” the author argues that excessive litigation, taxes, and government bureaucracy are the main causes of lost competitive ability.

The author describes his experience, “As an academic, I’m just an amateur Capitalist. Still, over the last fifteen years I’ve started small ventures in both the U.S. and the U.K. In the process I’ve learned something surprising: Its much easier to do in the U.K.” So, quantitatively how do we know this is the case? Ferguson, the author, lays out some pretty clear indicators of the degeneration of the U.S. ability to compete.

Developmental Economists say that good institutions, legislatures, courts, administrative agencies, are crucial to economic advancement. Corruption leads to commercial stagnancy, but when corruption is eliminated, via the improvement of institutional integrity, the ability of business to thrive emerges.

There is a measurement for this institutional integrity. The World Bank and International Finance Corporation have developed a measurement that looks at how quickly a small business can get a construction permit, register a property, pay taxes, get an export or import license, and enforce a contract. This data has been collected for seven and demonstrates that most countries have reduced the total number of days it takes to do all of these activities. However, the United States has moved in the opposite direction. In 2006 it took 368 days to do these activities; the number now is 443. Our institutional effectiveness has degenerated.

One of the reasons for this is this is the increased number of regulations affecting business. Ferguson makes a very interesting point. “Who benefits from the growth of complex and cumbersome regulation? The answer is: lawyers, not forgetting lobbyists and compliance departments. For complexity is not the friend of the little man. It is the friend of the deep pocket. It is the friend of cronyism.”

Another indicator of our loss of competitive ability comes from the Fraser Institute in Canada. Fraser has been compiling data for years using it to report its Economic Freedom index. It looks at a country’s legal system and its law concerning property rights. In 2000 the U.S. received a 9.23 out 10, while in 2010 our score was 7.12. If we add to this the World Justice Project measure of a country’s legal system, we see the U.S. is ranked “17th in the world for limiting government, 18th in the world for the absence of corruption, 19th for regulatory enforcement, 22nd for access to civil justice, 25th for fundamental rights, and 26th for the effectiveness of our criminal system.”

We have slipped a bit, which is an understatement, and maybe it is time to rethink our political, legal, and economic system a bit. This week’s Economist has a great article on the U.S. relationship with China. It argues that China is the up and comer, and we as the incumbent is resting a bit too much on our laurels. I really think the urgency is there, and if we don’t pay attention to this a 7.8% unemployment rate will be nothing.

And that is my thought for the day!

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