DOCUMENT RESUME

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TITLE A Competitiveness Strategy for America. Second Report to the President & Congress. INSTITUTION Competitiveness Policy Council, Washington, DC. REPORT NO ISBN-0-16-041703-1 PUB DATE Mar 93 NOTE 69p.; For reports of the eight subcouncils,see CE 063 487. For the first annual report,see ED 349 443. AVAILABLE FROM U.S. Government Printing Office, Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328 ($4). PUB TYPE Reports General (140)

EDRS PRICE MF01/PC03 Plus Postage. DESCRIPTORS Adult Education; *Capital; Competition; Dislocated Workers; *Economic Development; *Educational Change; Education Work Relationship; Elementary Secondary Education; Federal Government; Government Role; *International Trade; Investment; Job Training; *Labor Force Development; Lifelong Learning; *Productivity; Retraining; Vocational Education IDENTIFIERS National Education Goals 1990

ABSTRACT The Competitiveness Policy Council (CPC) concludes that the United States continues to face major competitiveness problems despite recent increases in the growth of boththe economy and national productivity. It proposes sweeping educationalreform in three areas: developing content and performance standards;ensuring that schools have the flexibility, expertise, andresources to achieve the National Education Goals; and holdingschools accountable for students' achievement. CPC's recommendations for traininghave four dimensions: lifetime learning, school-to-work transition, retraining for dislocated workers, and improvement ofworker training programs. Industry should be promoted in the followingways: enacting an innovation and commercialization tax credit; redirecting government spending to civilian and dual-use research and development; expanding federal support for cooperative projectswith private industry; monitoring by boards of directorsof corporate performance; preparing by companies of periodic analysesof long-term performance; and expanding exports. Private investmentshould be encouraged through a permanent equipment tax credit,authorization of industry consortia for joint production, andmore rapid depreciation allowances. Recommendations to improve the public infrastructure, especially the transportation system, have also beenproposed. The CPC recommends that national saving be increased byraising private saving and reducing public spending. (Members' biographiesand subcouncil member lists are appended.) (YLB)

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COMPETITIVENESS POLICY COUNCIL

March 1993

U.s. DEPAInTEENT OF EDUCATION 011ce of Educahorue Research andImprovement ATIONAL RESOURCES INFORMATION CENTER (ERIC) This document has bean reproduced as recved from the person or ceparszation onanahng it PAWN chendeS have been mode to (mprom reproduction arahtv

Pants of spew or oilman stated in this docu- ment do not netSallithi rwahsent 01 root Of Pt position M 0041ell BEST COPY AVAILABLE Competitiveness Policy Council

Appointed by the President Subcouncil Chairmen

Barbara Franklin* (Government) Capital Formation Secretary Peter G. Peterson US Department of Commerce Chairman The Blackstone Group Albert Shanker (Labor) President Corporate Governance American Federation of Teachers and Financial Markets Edward V Regan Alexander Trowbridge (Business) Appointed by the Comptroller President Bipartisan Leadership of the State of New York Trowbridge Partners US House of Representatives Critical Technologies Erich Bloch Edward 0. Vetter (Public Interest) C. Fred Bergsten, Chairman President Distinguished Fellow (Public Interest) Edward 0. Vetter and Associates Council on Competitiveness Director Institute for International Economics Education 'Resigned January 20. 1993. Albert Shanker John J. Murphy (Business) President Chairman and CEO American Federation of Teachers Appointed by the Dresser Industries, Inc. Manufacturing Bipartisan Leadership Edward V. Regan (Government) Ruben F. Mettler of the US Senate Comptroller Retired Chairman and CEO Rand V. Araskog (Business) State of New York TRW Inc. Public Infrastructure Chairman and CEO Lynn R. Williams (Labor) Gerald L. Baliles ITT Corporation President Partner, Hunton & United Steelworkers of America John Barry (Labor) Former Governor of Virginia President International Brotherhood 'Made Policy of Electrical Workers John J. Murphy Chairman and CEO William Graves (Government) Dresser Industries, Inc. Secretary of State Training State of Kansas Lynn R. Williams Bruce Scott (Public Interest) President Professor of Business Administration United Steelworkers of America Harvard Business School ACompetitiveness strategy for America

Second Report to the President Congres

COMPETITIVENESS POLICY COUNCIL

March 1993 For sale by the U.S. Government Printing Office Superintendent of Documents. Mail Stop: SSOP. Washington. DC 20402-932g ISBN 0-16-041703-1 COMPETITIVENESS POLICY COUNCIL WASHINGTON, DC

C. FRED BERGSTEN March 15, 1993 CHAIRMAN

RANI) ARASKOG

JOHN BARRY

BARBARA FRANKLIN

WILLIAM GRAVES Honorable William J. Clinton

JOHN J. MURPHY President of the United States The White House EDWARDV. REGAN Washington, DC 20500 BRUCE SCOT('

ALBERT SHANKER Dear Mr. President:

ALEXANDER TROWBRIDGE

EDWARD G. \TRITER The Competitiveness Policy Council is pleasedto deliver its Second Report to the President and the Congress. This Report fulfills the commitmentwe made a year ago to develop and deliver a LYNNR.WILLLAMS comprehensive competitiveness strategy for the United States.

Our program supports many of the initiativesyou presented in A Vision of change for America. We believe that the American people are ready for concertedaction by the government and the private sector to improve US competitiveness. The Council which has equal representation from busi- ness, labor, government (federal and state) and the public stands ready to assist the Administration and the Congress in acting on the recommendations includedin our Report.

This Report represents aconsensus of the Council members. Not every member agrees with every word in the text. But we agree that a series of steps along the lineswe propose can make a major difference to the future standard of living of the Americanpeople and we strongly commend the program to the Congress.

The Competitiveness Policy Council isa 12-member federal advisory committee. All of our meetings are open to the public. One-third ofour members were appointed by the President, one- third by the Speaker and Minority Leader of the US House ofRepresentatives acting jointly, and one-third by the Majority and Minority Leaders of the USSenate acting jointly. The Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418),as amended by the Customs and Trade Act of 1990 (P.L. 101-382), crated the Council "to develop recommendationsfor national strategies andon specific policies intended to enhance the productivity andinternational competitiveness of United States industries."

ur" BUILDINGA C0NIPETiTINT...k.MERICA HI Honorable 'William.). Clinton Page 2

As announced in our Report of March 1992, the Council established eight Subcouncils on capital for- mation, corporate governance and financial markets, critical technologies, education, manufacturing, pub- lic infrastructure, trade policy and training. These Subcouncils brought together over 200 leading Americans from across the nation. Their ideas and innovations to a large extent form the basis for the rec- ommendations which we make today.

We look forward to discussing the findings and recommendations of this Report with you as we all seek to build a more competitive nation. We hope that our Report, and the subsequentefforts of the Council as outlined in it, will make a useful contribution to this effort.

Sincerely,

C. Fred Bergsten Chairman

Enclosure

NOTE: Identical letters were sent to Albert Core Jr., President of the Senate, and Thomas S. Foley, Speaker of the House of Representatives.

h't

IV BUILDING A ComPETITivE ANIERici Table of Contents

Introduction page 1 The Problem page 1 The Council page 3 Setting National Goals page 4 Investing in Our Workforce page 7 Education page 8 Training page 12 Promoting Industry page 17 Technology page 17 Corporate Governance and Financial Markets page 21 Trade Policy page 22 Investing in Physical Capital page 27 Private Investment page 27 Public Infrastructure page 31 The Bottom Line page 37 Private Saving page 38 Public Savings: The Budget Deficit page 39 The Future Work of the Competitiveness Policy Council page 45 Conclusion page 48 About Our Members page 51 Subcouncil Members page 53 The Competitiveness Policy Council's Mandate page 61

L.)

BUILDING A CONIPETITIAT AMERICA V List of Figures

Figure 1 US National Saving page 2 Figure 2Job Recovery After Recession page 3 Figure 3 International Comparisons of Educational Performance, 1990-91 page 8 Figure 4Public Expenditures on Training, 1990-91 page 12 Figure 5 Private Investment in R&D and the Role of Manufacturing page 18 Figure 6Trade as a Share of GDP page 22 Figure 7 Science and Engineering Degrees Awarded, 1988 page 28 Figure 8 Real Growth in US Industrial Investment page 28 Figure 9 Federal Investment in Infrastructure page 32 Figure 10 The Budget Deficit and Health Care Costs page 41

VI BUILDING A COMPETITIVE AMERICA Introduction

The Problem

The United States continues to face major competitiveness problems. Productivity has grown by less than one percent annually for the last twenty years. Real average wages are lower today than in 1973. America invests only half as much in its future as other major industrial countries and only one-third as much as Japan. We have just completed four years of sluggisheco- nomic growth. Our high school students perform far worse than their counterparts abroad. Twenty percent of our adults are functionally illiterate. A country cannot compete effectively unless its human resources are world class, andours are falling toward the bottom of the league. Most of our economic growth in the 1980s was financed by debt, much of it borrowed from abroad. The national debt has reached $4 trillion. The federal budget deficit devours virtually all of the meager savings generated by the private sector, leaving few resources to fund private investments. Over the past decade, the United States hasrun merchandise trade deficits that total $1 trillion, and that are continuing to grow at an annual rate Figure 1 of close to $100 billion.These trade US National Saving deficits must be financed with foreign 9.5 9.8 capital, and the United States has shifted -0.7 8.4 from the world's largest creditor to the world's largest debtor. Total Private Saving To be sure, there is some good news as well. Productivity growth seems to have (minus) rebounded strongly in 1992. Economic Budget Deficit recovery is clearly underway. The equity markets have hit record highs. The new (equals)

Administration is moving quickly to Net National Saving address some of the fundamental prob- lems identified in this report. 1960s 1970s 1980s 1990 -91 But three sobering conclusions still SOURCE: US Department of Commerce, Pureau of Economic Analysis emerge. First, it will take some time to restore America's competitiveness. The problem has been developing for two to Our national saving rate is even In relative terms, we spend only two- three decades. It cannot be solved lower: less than half that of Japan and thirds as much as our competitors on overnight. The Council believes we most European countries. civilian R&D. should seek to achieve a fundamental As noted, the budget deficit eats up Our public investment in infrastruc- turn-around by the year 2000the virtually all of our national saving, ture has fallen by two-thirds over the end of the decade. the end of the leaving few resources available to past three decades. century, and the end of the next two finance private investment (Figure 1). Only by attacking these problems at Presidential terms. We already spend 50 percent more of their roots can the long term prognosis Second, the best short-term strategy our gross domestic product (GDP) of our economy be improved. We for the United States is to decisively on health care than other major believe that the American people want attack its underlying long-term economic countries; on our current path, we and will support this attack, and that problems. Every effort should be made to will spend 100 percent more by 2000, they clearly voted for such change in the promote more rapid growth and job diverting resources from more pro- election of 1992. creation, and some of our proposed ductive uses. Third, there is no single remedy for responses to the fundamental difficulties our problem. The United States must will pay off fairly quickly. But the current Our K-12 education results are below adopt a comprehensive competitiveness predicament derives from a long-term all other industrial countries (and some developing countries). strategy. Each key component of the build-up of deep structural difficulties: problem must be addressed. Among We spend only one-fifth as much of America has the lowest investment other things, this will require new gov- our GDP on training workers as rate among major industrial coun- ernmental mechanisms to formulate and other industrial countries. tries, half that of most and one-third coordinate policy across the widely that of Japan. diverse array of issue-areas. Such mecha-

2 ACONIPETEMTNESS STRATEGY FOR AMERICA nisms include the National Economic numerous outcomes of the election Our trade deficit has again increased Council inaugurated by the Clinton campaign: the early success of Paul almost 30 percent, from $65 billion Administration, but more is needed. Tsongas, the unprecedented support in 1991 to $96 billion in 1992. The Competitiveness Policy Council for independent candidate Ross Since the end of 1989, our economy discussed and analyzed America's Perot, and most of all, the victory of has produced zero net new jobs. competitiveness problem in some depth Bill Clinton. in its First Report to the President and Despite recent statistics suggesting a Congress, Building a Competitive recovery from recession, major job The Council America, which we delivered on March layoffs remain an almost daily 1, 1992. The events of the past year occurrence in numerous firms The Competitiveness Policy confirm our concern: throughout the economy, ranging Council is an independent The economy suffered a fourth from General Motors to IBM national commission created by the consecutive year of sluggish growth (Figure 2). Congress. Its mandate is to advise the President and Congress on improving (or recession). fi Real wages remain flat or declining. the competitiveness of the United The overall recovery from the recent Until recently, real long-term interest States. It is to act as a "national forum" recession has been the weakest in rates remained at historically for addressing competitiveness. postwar history, averaging less than unprecedented levels of 4 to 5 The Council's membership is one half the postwar norm to date. percent, despite four years of weak quadripartite: three corporate leaders, These developments reinforced economic performance due to the three labor union presidents, three high public concern over the country's huge debt overhang and doubts level government officials (federal and competitiveness as indicated by about the future. state) and three representatives of the public interest. The President, the joint leadership of the House and the joint Figure 2 Job Recovery After Recession leadership of the Senate each appointed four members. The group is comprised 8 of six Democrats and six Republicans. 7 The First Report of the Council 6 announced the establishment of a 5 0.".<1981-82 Recession number of Subcouncils, as authorized in

4 "*. our legislative mandate. These Sub- 3 I councils were instructed to develop 2--1 specific policy recommendations in the following areas: 1 as A990-91 / Recession Education 0 Training -1 I I i i i i i i Critical Technologies 1 2 3 4 5 6 7 8 910 11 12 13 14151617 181920 Months Following Recession Corporate Governance and SOURCE: US Department of Labor, Bureau of Labor Statistics Financial Markets

A COMPETITIVENESS STRATEGY FOR AMERICA 3 12 Trade Policy hensive competitiveness strategy for Setting National Goals Manufacturing America at a time whenfor the first Public Infrastructure time since America's competitiveness The Council believes that the Capital Formation problems began over twenty years ago United States can restore its Over 200 leading Americans partici- a national consciousness may be devel- economic vitality and world leader- pated in these eight Subcouncils, oping to address them. shipbut that time is running short preparing detailed analyses and pro- and early action to achieve these goals is posals that provide the foundation for most of the recommendations that the Council is making in this Second Report to the President and Congress. This Competitiveness and Productivity

Report selects and presents the most Competitiveness is defined as our ability to produce goods and services that important programs recommended by meet the test of international markets while our citizens earn a standard of living the Subcouncils; the complete Sub- that is both rising and sustainable over the long-run. The Council's definition council reports are presented in a focuses on four criteria.First, US goods and services should be of comparable separate volume. The Council deeply quality and price to those produced abroad. Second, the sale of these goods and appreciates the creative and diligent services should generate sufficient US economic growth to increase the incomes of work of each of these groups, especially all Americans.Third. investment in the labor and capital necessary to produce that of their distinguished chairmen, these goods and services should be financed through national saving so that the while not necessarily endorsing every nation does not continue to run up large amounts of external debt as in the 1980s. detail in their reports. Fourth. to remain competitive over the long-run, the nation should make adequate provisions to meet all these tests on a continuing basis. As indicated in our First Report, the Productivity growth is central to our ability to compete internationally while Council decided soon after its creation improving our standard of living at home. The United States is still the most effi- correctly, it now seemsthat 1992 cient economy in the world. although our productivity levels in some industries lag would be a year for debate rather than behind those in other countries. On the other hand, productivity growth rates in the action, while 1993 might offer a unique United States have lagged behind most other industrialized countries since the mid- opportunity for policy reform. Our First 1970s. US manufacturing productivity growth outpaces that in the services sector; Report therefore focused on highlight- the services sector brings down productivity growth for the economy as a whole ing the seriousness of the competitive- because of its large share of the total economy. ness problem, analyzing its underlying From 1973 to 1991. US productivity grew at an average annual rate of only 0.7 causes. outlining possible responses percent. Had productivity growth remained at its pre-1973 rate of 2.5 percent, each making firm recommendations, American would have increased his or her standard of living by now by more than ,ind a process to develop such one-third. .:.ridations on the basis of in- Productivity growth rates give us a sense of how well we are doing but do not depth an-iyses of the most important give any indication of what might be causing these changes. Changes in productiv- ity can come about from a variety of factors operating singly or in tandeminclud- comp,,nents of the issue. This Second ing changes in technology, capital investment, capacity utilization, size or skill level Report now seeks to fulfill the pledge we of the workforce. managerial skill, the organization of production, and the use of made at the end of our First Report: to resources such as energy and materials. submit specific proposals for a compre-

4 A COMPETITIVENESS STRATEGY FOR AMERICA 3 BEST COPY MAME essential. America's competitiveness erosion of our competitiveness. NATIONAL GOALS strategy should thus seek to achieve A modest pick-up in productivity several ambitious but feasible goals. and overall economic growth, perhaps Increase national The central objective should be to on the order of one-quarter to one-half productivity growth increase the growth of national produc- percent per year, can be expected to from less than 1 tivityfrom less than 1 percent result from corporate restructuring percent to 2 percent annually to at least 2 percent annually. efforts over the past decade and the annually. Higher productivity is the only way to beginning of constructive policy raise the national standard of living. change. Manufacturing productivity Increase national Meeting the target of 1 percent growth accelerated rapidly in the 1980s, investment by annually would raise family incomes although less rapidly than initially 4 to 6 percent by one-third in a single generation. thought. Service sector productivity of GDP. America achieved such productivity could also do so in the 1990s, and there growth in the first postwar generation is evidence, including from the aggre- Finance new and must achieve it again by the start of investment gate results for 1992, that some services through increased the twenty-first century, reversing the industries have already made impressive domestic savings. trends of the last two decades. The strides. apparent increase in productivity But much more is needed. There are growth in 1992 is an encouraging sign two ways to spur productivity and that this goal is within reach. economic growth: by devoting more Faster productivity growth is not resources to the effort and by getting a enough, however. Companies can higher return from those resources. become more efficient simply by laying Both are essential. off workers, as many are currently Economic models suggest that doing. To achieve and maintain full doubling productivity growth will employment, the economy must grow require increasing national investment by at least 3 to 31A percent annually, by at least 4 to 6 percent of GDP, or combining our targeted productivity about $300 billion annually at current growth of 2 percent with the expected prices. Most of the expansion must annual growth of 1 to percent of the come from the private sector. Such nation's labor force. increases would still leave us far short of Even full employment is not Japan but would match or supersede the enough, however. The quality as well Europeans. as quantity of jobs is of critical We should finance this increase in importance. America must create a investment domestically. The United high-income as well as a high- States is already the world's largest employment economy. The stagnation debtor country and cannot prudently of real wages over the past decade is continue to depend on foreign capital. one of the clearest measures of the Another national goal is thus elimina- tion of the net inflow of capital from economic pie. This in turn requires that with educated, trained workers. Firms abroad, which requires elimination of we save more now to finance the must be encouraged to adopt new our current account deficit. necessary investment. Since all income world-class business practices typified The national saving rate will have is either consumed or saved, the share of by "lean production" and "total to rise by 5 to 7 percent of GDP to income that is consumed must drop quality management" approaches. We fund both the targeted increase in temporarily. A reduction in the growth need more modern public infrastruc- national investment (4 to 6 percent) of consumption now will produce a ture to galvanize, and the trade improvement (about 1 higher level of consumption in the and elicit the full contribution of, percent). This would restore national future. private investment. Adroit commer- saving to the level that prevailed prior America can restore its competitive- cialization of the latest technology is to 1973. As with investment, America ness only with achievement of these essential to improving the country's would then compare favorably with targets. Hence this report makes specific performance. most other industrial countries, and proposals for reaching them. The central In addition, effective corporate would halve the gap with Japan. thrust of our recommendations is a sharp governance is needed to utilize all these Increases in private saving are highly increase in private investment and a resources with maximum efficiency. In desirable but difficult to achieve; cutback in the growth of consumption, an interdependent world economy, hence most of the improvement may especially by the public sector. international economic and trade have to come from correcting the We will focus primarily, however, policies must be oriented towards federal budget deficit. on how to better deploy America's achieving market growth and access It is crucial to understand the resources to achieve the needed for American firms abroad and defend- importance of increasing national acceleration of productivity and ing them against unfair practices in our saving. The ultimate goal of a higher growthon getting a bigger bang for domestic ifiarket. We make recommen- level of consumptiona higher standard each investment buck. Our private and dations in each of these areas as compo- of livingis possible in the future only public investment both need to be nents of the comprehensive strategy if we as a nation invest more today, channeled in more productive direc- that is required to improve US thereby increasing the size of the tions. Our capital must be teamed competitiveness.

6 A COMPETITIVENESS STRATEGY FOR AMERICA Investing In Our Workforce

Investment in American workers is central torestoring the nation's competitive position. As much as one quarter of all US economic growth since 1929has been attributed to educational advances. No amount of physical capital will increase productivity unless educated and skilled workers and managers are able to use it. The figures tell much of the story. Twenty percent of our adults are functionally illiterate, compared with only one percent in Japan. Four in ten business executives saythey cannot modernize their equipment becausetheir workers do not have the appropriate skills. Only one in five firms believes that high school graduates can write adequately, while more than two-thirds consider their reading and arithmetic skills sub-standard. The ability of some Japanese firms to introduce flexible manufacturing systems twice as fast as American firms may stem from their having five times as many engineers and four times as many workers trained on numerically controlled machines. Ai. Unlike physical capital, much of which is mobile internationally, most of our workforceor "human capital"stays within national borders. Figure 3 Thus investment in human capital International Comparisons of Educational Performance, 1990-91 maximizes the national return on Mathematics investment. To survive in a highly Science competitive environment and generate high-wage jobs, a country's workers must add more value to products than other nations' workers. Our Subcouncils on Manufacturing and Technology, as well as those assigned to Education and Training, strongly endorse these conclusions. Korea Taiwan USSR' Spaln2 Canada3 US Korea Taiwan USSR1 Spain3 Canada3 US The bottom line is simple: if we want Russian-speaking schools in 14 republics 2 Spanish-speaking schools except in Cataluna Age 9 a higher standard of living, we will have 3 Four provinces

to earn it by improving the education and SOURCE: Educational Testing Service II Age 13 training of our workforce. Otherwise, we will end up competing on price alone by lowering our wages and steadily districts are achieving poorly relative to homework each week, squeezed into a depreciating the value of our currency. international standards. The fact that half busy schedule of 25 hours of television The latter is a race we probably cannot our high school graduates enroll in post- and 10 hours of employment. Mean- win, and do not want to run in any event. secondary school is less a product of high while, students from countries such as The former is a race worthy of our proud student achievement than of low Canada, Korea, Spain and Taiwan now past and holding promise for our future admission standards for higher education. surpass our students in both science and competitive success. None of our Of those students who do enroll in math proficiency (Figure 3). competitiveness strategies can be college full-time, nearly one half never Although educational attainment effective without an enlightened citizenry make it to graduation day. continues to have a substantial effect on a and a workforce that is involved in Our Education Subcouncil focused its person's long-term economic status, the continuous learning. attention on the K-12 system. Our low short-term signals given to high school expectations for student performance students by both the labor market and begin there and tend to be self-fulfilling. colleges and universities suggest that Education Most of our students are fed a steady diet high school performance simply doesn't of low-level basic skills. Textbooksare count. Almost every graduating student, (-Nur K-12 system is faring badly. The "written down" to the lowest common regardless of grades, can enter college kipoor performance ofour schools denominator. The minimum competency (though not the most elite colleges). and students is a nationwide problem. It is high school graduation requirements of Numerous state colleges are mandated to particularly acute in disadvantaged school most states and districts call for no more accept any in-state high school graduate. districts, and its solution there will need than a sixth to eighth grade level of Hundreds of other colleges are fir more strategies that go far beyond the school- knowledge and skill. The'average high concerned with maintaining enrollment house door. But even our well-off school school student in 1987 had 3.5 hours of than maintaining academic standards,

8 A COMPE. i i i tVENESS STRATEGY FOR AMERICA 17 and have no rigorous entry requirements. schoolingstandards for academic EDUCATION For the "forgotten half" of high content and student performance. We school graduates who go directly into the must change our expectations from RECOMMENDATIONS work force, there is no systematic minimum competency to high achieve- Give students a stake relationship between school performance ment both for college-bound and work- in high performance by and employment. Few, if any, companies bound students. Our K-12 students must examine transcripts of high school making school records become productive workers instead of count for both colleges graduates in making hiring decisions. entitled consumers. Six specific stepsare Only the diploma counts. A student who required to meet this goal. and employers. takes rigorous courses and works hard First, we must redirect the multiple has no competitive advantage in gettinga and uncoordinated layers of our educa- Develop content and job over a student who does not. tion system to yard achieving the performance standards Employers are isolated from schools, National Education Goals (see boxon for students. indifferent to academic excellence in next page) and becoming a standards- hiring high school graduates, and rarely based system. Without a shared under- Develop assessments hire youths under the age of 21 for full- standing of what we want schools to that measure student time jobs with promotional opportuni- accomplish with students, it is pointless achievement, not ability ties. Exactly the opposite is true inour to undertake additional education or test-taking skills. competitor nations such as Germany and reforms. As first steps: Japan. Congress, the states, and local school While all these problemsare well- Give schools the districts should formally adopt the documented, the solutions--contraryto flexibility, expertise, National Education Goals. recent rhetoricare by no means clear. and resources needed Past history offers numerous lessons but States and districts should use the to achieve the National National Education Goals, particu- there is no Golden Age of educationto Education Goals. larly those that pertain to educational which we can return. Nor canwe import the most effective education practices of achievement, as the basis for restruc- turing and coordinating curriculum Hold teachers and our competitors without figuring out how schools accountable for to adapt them to the values and con- and testing programs, textbook ditions of American society. There adoption methods, regulations, performance. are no shortcuts to thinkingand teacher licensing requirements, in- experimentingfor ourselves. service staff development programs, But the direction of change is increas- and accountability systems. ingly clear. Our Education Subcouncil Local school districts shoulduse every concluded, and the full Councilagrees, available means to communicate to that the key to improving American parents and the public the meaning of education is the establishment of rigorous shifting expectations from minimum standards for what students should know competency to high performance. and be able to do as a result of their Second, to implement the National

U Education Goals, we must develop content and performance standards for National Education Goals what students should know and be able to do in order to be prepared for demo- The idea of using National Education Goals to drive improvements in educa- cratic citizenship, higher education, and tional performance originated at a meeting of the nation's Governors in Char- productive employment. We donot need lottesville in September 1989. In March 1990, the President and Governors announced six Education Goals for the year 2000 and created an Education Goals lofty but vague goals for studentout- Panel to develop indicators for measuring progress and issue an annual report comes. Rather we need actual curriculum card on the nation's progress in meeting the goals. frameworks that will guide the work of 1. All children in America will start school ready to learn. schools and communicate,to parents and 2. The high school graduation rate will increase to at least 90 percent. the public, what schools and students are 3. American students will leave grades four. eight. and twelve having demon- supposed to be accomplishing. High strated competency in challenging subject matter including English. mathe- standards that apply to all districts and matics. science. history. and geography. Every school in America will ensure schools, rich and poor and those in that all students learn to use their minds well. so they may be prepared for between, are an essentialstrategy for responsible citizenship. further learning. and productive employment in our achieving educational excellence and thus modern economy. strengthening American competitiveness. 4. US students will be first in the world in science and mathematics achieve- They are also a means for reinvigorating ment. our pursuit of equal educational 5. Every adult American will be literate and will possess the knowledge and opportunity. skills necessary to compete in a global economy and exercise the rights and Such standards could be either responsibilities of citizenship. 6. Every school in America will be free of drugs and violence and will offer a national (but not federal)or state-by- disciplined environment conducive to learning. state. The federal government should help fund their development and encourage states to adopt them. Math exclusive reliance on multiple-choice federal tests are not desirable, the federal standards already exist. Effortsare items and toward more authentic government could fund the development underway to develop standards for the methods of assessing students' knowledge of model assessments basedon the arts, civics, English, foreign languages, and skills. Assessments should measure national standards whose developmentit history and science. A special councilof students' mastery of the curriculum,not is already funding. States could then the National Education Goals Panelor a innate ability or test-taking skills, and choose to adopt and buildon these compact of states could coordinate the students should be able toprepare for assessments, just as they can choose the development of standards, reviewthe them. nationally developed standards. The key products and certify those thatmeet the The National Assessment of Educa- is to link the standards andassessments as quality test. tional Progress--also knownas "The closely as possible. Third, educators and technicalexperts Nation's Report Card," whichtests a Fourth, we must ensure that schools must develop assessments (tests) that are nationally representative sample of have the flexibility, expertise, and based on the new standards for academic students in various subjectsshould be resources to achieve the National content and student performance. Such strengthened as a monitor of educational Education Goals. Flexibilitymeans assessments should move away from performance. In addition, although removing or restructuring the countless

10 A COMPEITTIVENESS STRATEGY FOR AMERICA 1J federal, state and local rules and message of the school choice movement ensure our future competitiveness regulations that govern virtually every must be heard. But our Subcouncil found without significant attention to the one minute of the school day. Health, safety, no evidence that private school choice out of every four American children who and civil rights requirements continue to would improve either achievement or currently live in poverty. be necessary, but professionals at the equity in education, or that competition This problem is so severe that the school site must be given substantial between public and private schools would Council proposes to establish a new autonomy to determine how best to whip public education into shape. Subcouncil to address these broader deploy their resources and design Fifth, schools and districts as a whole social issues over the next year. In the programs to enable their students to must be held accountable for the meanwhile, it is clear that federal support meet new and higher standards. progress their students make in achieving must be expanded to provide prenatal Flexibility must be accompanied by high standards. We need less frequent care and nutrition programs for women, the expertise to make it effective. Staff but far better testing; states can test a infants, and children; health care for development must be significantly sample of students at different grade children, including immunizations; expanded and improved to ensure that levels to determine progress, and hold quality Head Start programs for all teachers have the content knowledge and distri,:ts and schools accountable. eligible three and four-year olds; and full pedagogical skills to teach to new Districts or schools that need help should funding of Chapter 1, the nation's main standards. Similarly, instead of advancing get it, and improvement should be program for assisting school districts with teachers along the salary schedule on the expected by the next assessment period. large concentrations of poor children; basis of an accumulation of post-graduate Districts and schools that make progress Chapter 1 must also be brought into line course credits that may or may not be should be rewarded. Districts that fail to with the higher standards agenda we related to making them more expert benefit from additional help should be advocate for the broader education teachers, school boards and unions held accountable through measures such system. Our Subcouncil did not fully should negotiate a pay-for-knowledge as transfer or removal of offi _ials and examine the issue of how education system that rewards teachers for acquir- staff, reorganization or even closing of dollars are spent, but it was persuaded by ing knowledge and skills necessary to schools (and reopening them with new the evidence that districts with high teach to the new standards. The federal staff and programs). concentrations of poor and special-needs government should help ensure an In ddition to developing the capacity children will need additional resources adequate supply of highly qualified new of schools, we must develop the capacity including federal helpto improve the teachers by focusing its funding of of youngstersparticularly poor chil- conditions of those schools and raise the teacher preparation institutions on drento meet new standards by over- achievement of their students. getting these institutions to prepare coming out-of-school barriers to Sixth, none of these steps will succeed teachers to teach to new standards. States learning. The appalling level, and rate of if students do not assume responsibility should revamp their teacher licensing increase, of childhood poverty in this for their own learning. VTorking hard requirements according to the same nation is first and foremost a moral issue. and achieving in school must "count" for principle. But it is also a competitiveness issue. students, whether they go to college or The current interest in private school Children from impoverished and poorly enter the labor force immediately. We choice is a clear reflection of the public's educated families do not achieve as well must therefore give students a stake in disgust with bureaucratic gridlock and as children from more advantaged and high performance through the following "business as usual" in our schools. That educated families. We cannot hope to steps:

A CONIPITITIVENFSS S FR g ITGY FOR A.NIFRIC \ 11 2ti External assessments, phased in over a graduate from high school. Partial gains Figure 4 10 to 12 year period, should be given will of course come sooner. Public Expenditures on Training, 1990-91 to high school students, with the But the national proclivity to seek results serving as a major factor in short-term results has determined their qualifying for college and for outcomes here even more than in other better jobs at higher wages. policy areas. Now that we recognize the Colleges and universities should raise long-term nature of the overall competi- their admissions standards, over a tiveness problem and the cardinal role of similar 10 to 12 year period, to education reform in correcting it, we reinforce the shift to higher standards must instead treat such reform as a in elementary and high schools. matter of the highest urgency. Our Council believes that such fundamental The federal and state governments changes are central to any effective should condition their assistance to Canada France Germany UK US strategy for restoring American competi- higher education on evidence that SOURCE: Organization for Economic Cooperation and Development tiveness in the world economy. colleges and universities are raising their admission standards, and they should offer more favorable financial seek information on jobs skills. aid terms to students who meet high Training Inadequate attention is devoted to standards. connecting public delivery systems with Training is the second crucial private sector needs; virtually none is No student who meets high standards dimension of human capital. directed at evaluating results. The should be denied the opportunity for Virtually all of our competitors spend ongoing training needs of the broader higher education due to financial four to five times as much as the United workforce are left largely untouched reasons. States on training, as a share of GDP, in both by workers themselves and by Employers should be encouraged to both the private and public sectors the firms they work for. review school recordsincluding (Figure 4). We spend seven times as The most striking waste of our course grades, conduct, and teacher much on each college-educated national resources lies in the tortuous recommendationsin choosing youngster as on each non-college youth road we force high school graduates to among job applicants. A new uniform entering the workforce. Two-thirds of travel to make their initial entry into the transcript, jointly designed by employ- corporate training dollars spent in the workforce. Other nations gain a 5 to 10 ers and schools, should be developed. United States go to management; front- year head start by absorbing young Such sweeping reform of the Ameri- line workers get only eight cents of each people into the labor market with can educational system as outlined here training dollar provided by industry. extensive apprenticeship or on-the-job will obviously take time. Indeed, the The United States has no coherent training programs, and by building their payoff from investment in education will program for worker training. Workers, skills and experience to meet work take considerable time. Even if we could youth and firms face a confusing array of requirements. In that same period, reform America's schools overnight, the public training programs, riddled with young American workers are moving full benefits would be achieved only over duplication and overlap. No central from low-skill job to low-skill job, with two decadeswhen children born today "intake" center helps potential trainees periods of unemployment in between.

12 ACOMPFEEEWENFISS STRATEGY Fog AMERICA 2 1 years of seniority permanently lost their High Performance Workplaces: Saturn jobs. By January 1992, more than a third

As an example of many American firms that have introduced high performance were still looking for work or had workplaces. Saturn offers a compelling story of transformation in a tough, com- dropped out of the labor force entirely. petitive market.In 1991, Saturn placed first in cars sold per dealer and beat out It is not enough simply to equip our Honda Civic and Toyota Corolla in polls of buyer satisfaction. A year later, Saturn workers with minimum skill levels, was identified by Business Week as the highest quality American car. Success in however, or to smooth their entry into the marketplace followed a revamping of Saturn's entire production process after the same kinds of jobs that have existed making customer satisfaction a top priority.Saturn also relies heavily on em- in the past. Experience both in the ployees to achieve high performance results, using a power-sharing approach to United States and around the world labor-management relations between the United Auto Workers (UAW) and General demonstrates clearly that a competitive Motors (GM). nation requires much more from its Under Saturn's power-sharing arrangement, the union's primary role has shifted workforce. Our national goal should be from bargaining over wages and benefits to acting as a full partner in running the creation of "high performance work- company. For example, under "consensus guidelines" written into the "enterprise" places"in which workers have a contract. either labor or management may block a potential decision but it must substantial role in designing work provide an alternative. The aim is to encourage creative, mutual problem-solving. Representatives from both union and management sit on the Strategic Action procedures and methods, controlling Council. Saturn's top management group. Joint labor-management teams decide much of the firm's equipment, and on marketing strategies and budgeting, select advertising agencies. and set sticker making continual improvements that prices.Power-sharing guides the production process too.Each Saturn car is boost productivity. assembled by flexible, multi-skilled work teams which autonomously operate a The payoff for both companies and work station. These units of 6 to 15 employees set production schedules, budget workers is high. One survey found that expenses. plan for quality goals. oversee hiring, and assign work schedules and increasing training from zero to 100 vacation time. Team members also rotate job functions. hours over a two-year period raised All of these changes mean that Saturn depends on workers with substantial productivity by 13 to 15 percent. Trained skills and versatility. Workers are required to spend at least 92 hours in training workers earn 10 to 30 percent more than per year. about five percent of total work time. To substantiate its commitment to their untrained colleagues. Every training. the company makes the last five percent of an employee's wages contin- company that has won the prestigious gent on meeting the training goals. Malcolm Baldrige Award for superior efficiency has had programs to enhance The government provides no help when workers with poor basic skills, little worker participation in building high they need it most. understanding of what work demands, performance workplaces. We pay a steep price for the failure to and limited grasp of how to find a good A number of major American firms better integrate school and work. Youth job or get good training. are world class bit, by some estimates, unemployment levels are reaching crisis We also pay a high price by neglecting only five percent of our nation's proportions in minority communities: the retraining of workers laid off from businesses have replaced traditional one in five American youths, and nearly declining firms or industries. In the five production with high performance one in three minority youths, are jobless. years from 1987 to 1992, 5.6 million systems. We still break tasks into their We are producing a substantial cohort of American workers with three or more smallest, most repetitive components and

A COMPETITIVENESS STRATEGY FOR AMERICA 13 BEST COPY AVAILABLE 24.# use status and bureaucracy to separate streamlining and improvement ofcurrent firms, including consortia of small workers from management,or human worker training programs. businesses, and matched bystate contri- resources departments from engineering. First and foremost, promotion of butionsfinanced from generalrevenues We reserve creativity and decision- lifetime learning is crucialto transform- or a small payroll tax. A third, suggested making for specialists andmanagers. We ing the American workplace intoa high by our Manufacturing Subcouncil (which replace workers with machines. We tend performance system. Americancompa- strongly supports the policy goal), isa to emphasize cost over quality in address- nies already devote substantial dollars to training tax credit to help induce firmsto ing consumer demand. workforce development: about $30 provide such programs for their workers. The world's high performing firms, billion annually for formal training and Whichever approach is used should including many in the United States perhaps as much as $180 billion annually incorporate joint labor-management itself, achieve impressive levels of for informal, on-the-job training. committees to design and monitor productivity and quality by breaking Averaged across the nation, US firms training and work reorganization down the walls of traditioninvestingin spend slightly more thanone percent of activities. Equitable access to training people as well as machines, openingup payroll on formal worker training. resources is essential. The emphasis decision-making, rewarding andencour- However, most of this investment is should be on transferable skills rather aging constant improvement. The concentrated among a handful of firms than skills specific toa firm, piece of world's most competitive natitns gain one-half of one percent of all employers equipment, or vendor. economic power by enhancing and spend 90 percent of the formal training In addition, individuals needto rewarding workforce performance dollars. The key requirement is to induce undertake continuous retrainingon their through coherent systems topromote more companies to devote considerably own. To encourage them, the current tax lifelong learning, world class standardsto expanded resources to continual skills deduction for job-related educational encourage mastery, strong programs to development. All firms needto partici- expenses should be broadened to cover ease the transition from school to work, pate, partly to obviate the concerns of training that improves employment skills, and vital partnerships between publicand those who already do that workers they but which may go beyond thecurrent private sectors and betweenmanagement train will go elsewhere. line of work. We should also make and labor. We have Ertoo few of these. There are three alternative techniques permanent the existing tax exclusion for Our Training Subcouncil made which could foster increased training. employer-paid training. recommendations in four major dimen- One would be a requirement that each Second, we can and must doa better sions associated with training. One is firm with more than 50 employees be job of making the transition fromschool continuous worker retraining,or required to invest 1.5percent of payroll to work less bumpy for our youths. A "lifetime learning," which has become in training (for all employees, not just top particularly attractive model is the necessary for workers to upgrade their managers as in many current cases). Such German apprenticeshipprogram: 20 skills as the demands of their jobs a requirement would representa training percent of German students who qualify inevitably increase in today's rapidly guarantee, under which the firms either for college enter thisprogram instead, shifting, internationally exposedecon- conduct the training themselves or con- and German companies contributeabout omy. A second is the school-to-work tribute the equivalent to a national 3.5 percent of payroll to nationaltraining transition. Third is retraining for adults training fund ("play or pay"). accounts which back a wide range of dislocated by technologicalor other A second option is anew program of employment and training institutions change in theeconomy. Fourth is the federal grantsaimed mainlyat smaller (including the apprenticeship program).

14 A COMPE 1VENESS STRATEGY FOR AMERICA 2 The results are stunning: two-thirds of the foundation for all these efforts. TRAINING the German workforce have completed Third, the United States needs a RECOMMENDATIONS an extensive apprenticeship program comprehensive program to ease the compared with three-tenths of one adjustment process for all workers dis- percent in the United States. Encourage firms to located by technological change, defense increase training Our Training Subcouncil recom- conversion, increased international trade through grants, mends continued experimeittation with flows and other sourcesstructural tax different types of school-to-work change. Such a program :; hould combine credits, or payroll transition programs: apprenticeship various aspects of existing programs. As in requirements. programs, compacts (as in Boston) where the current Economic Dislocation employers guarantee jobs to students Worker Adjustment Assistance Improve the school- who do well in school, cooperative (EDWAA) program, all workers in need to-work transition education where seniors work part -time would be eligible for benefits. The level through a national in areas connected to their training of benefits should go beyond those Youth service corps, specialty, and career academies where currently provided under EDWAA, and skill standards, and students develop skills around a specific be more similar to those currently youth apprenticeship field (see box on next page). Several provided under the Trade Adjustment programs. elements are essential whatever tech- Assistance (I'AA) program. The complete nique is followed: provision of mentor- set of benefits would include job search Ease the adjustment Mg and jobs by local employers, assistance, skills assessment, counseling, integration of academic and vocational burden on dislocated referral services, adequate income support workers. learning, protection against exploitation (covering at least 50 percent of lost of student-workers, and the provision of wages), payments for retraining pro- broadly recognized certificates of grams, and extended income and benefit Provide one-stop occupational skill mastery that will be (including health care) payments through shopping for training readily accepted by employers. the training period. needs. The federal government, despite its Such a program would double the historically limited role i- the school-to- amount of resources devoted to worker work area, should initiate severalsteps to adjustment, from approximately $750 launch such an effort. It should finance million to about $1.5 billion annually. pilot programs of public-private There are various means to fund this cooperation. It should create a national increase, from either general revenues or youth service corps, as proposed by a dedicated trust. Regardless of the President Clinton (and earlier by mechanism chosen, this program is a Senators Wofford and Boren). It should modest attempt to offset the huge earmark a portion of public works funds financial and personal losses which for youth apprenticeshipprograms. Most workers experience when they lose their importantly, as with education, it should jobs. It is also an investment in encourag- insist that agreed skill standards provide ing labor market flexibility, further contributing to overall productivity in the economy. School-to-Work Transition Programs Finally, we need to coordinate various Examples of successful school-to-work transition programs already exist in the worker training programs at the local, United States. Models include: state, and national levels in order to Maine's Apprenticeship Program. Maine's pilot program offers students a better serve our training needs. The joint employer-school "certificate of mastery." Students begin Maine's pro- United States needs to create a compre- gram in the 9th grade with general career exploration activities; in the 10th hensive network of local labor market grade they must pass a basic skills test to apply for entry to the apprentice- boards to provide one-stop shopping for ship program. Once accepted, 11th and 12th graders spend 20 weeks at students, employees and firms on the full school and 30 weeks working for an employer.Finally, in their 13th year, range of their needs: skills assessment, apprentices work with their employers for 34 weeks and take 16' weeks of career counselling, job placement, training at a technical college to earn a one-year post-secondary degree. recruitment, and referral assistance. The Boston Compact.In 1982, Boston's public schools signed a "compact" Local labor market boards should with the city's businesses, universities, labor unions and the Mayor's office. evaluate and certify providers of training The schools promised improved academic achievement and work preparation services, and promote the formation of in exchange for increased opportunities for employment and higher education training consortia by companies and for city youth. The Compact is seen by many as one important factor in the lower-than-national-average youth unemployment rate in Boston throughout unions. They should report to new state the 1980s and the virtual elimination of black-white differences in youth coordinating councils (as already setup unemployment rates in the city.Eligibility for jobs and financial aid are tied to in New Jersey and Oregon), which staying in school and getting good recommendations from teachers. should be required by the federal Cooperative Education. The Dauphin County Technical School in Harrisburg, government as a condition for disburse- Pennsylvania is a typical co-op program that links a student's high school ment of its training, education and program with work experience in a closely related field. Employers provide a economic development funds. part-time job to a high school senior in the student's vocational area. Two The United States is the only indus- full-time co-op teachers work with employers to develop the new job slots, trial nation without a formal system for determine the skills the employers will teach students, and include tasks that developing and disseminating skill will add complexity to the largely entry-level jobs.Participation is limited to standards. Such standards should be 12th graders with a C average and no Fs or incompletes in 11th grade. About designed for each key industry by repre- half the seniors participate. sentatives of business, labor and educa- Career Academies. California Partnership Academies were created in the tional institutions. A new National early 1980s by the Sequoia Union High School District.Each academy is organized around a specific occupation or industry theme (e.g. Workforce Development Board should health. electronics, graphic arts). Beginning in 10th grade, students develop indi- be created to standardize the myriad of vidualized academic and occupational goals and work in the industry dur- current retraining programs. Within one ing the summer. Employers also donate time as mentors and provide year, the Board should submit specific equipment to the school. The academies are highly regarded both as drop- recommendations for eliminating dupli- out prevention and as college preparatory programs. About two-thirds of cation among the 125 federal employ- academy graduates in California, for example, have continued on to post- ment and training programs currently secondary education. spread across 14 federal agencies.

16 A COMPE 111 IVENESS STRATEGY FOR AMERICA 20-

BEST COPYAVAILABLE Promoting Industry

Equally important to a competitive economy is a clear and rational approach to managing business and industry. This includes a sharp improvement in our ability to develop and, most important, to apply new technologies. It also means careful attention to the ways in which corporations are governed by internal and external decision-makers, and the relationships between corpor- ations and the financial markets on which they depend for capital. A competitive economy must also look beyond its borders to international markets for its products. Trade policy is an important ingredient in the competitive vantage point of American businesses.

Technology

For most of the past 50 years, technology has been an unquestioned American strength. US industry was the leader in virtually all key areas of civilian technology. The United States science and technology enterprise still has many outstanding strengths, including unparalleled research universities, an open and entrepreneurial climate that attracts the best minds and ideas from around the

2C world, technically advanced national vigorous foreign competition. Unfortu- Figure 5 laboratories, and strong corporate nately it remains largely correct that Private Investment in R&D and the Role research labs. "Americans are good starters while the of Manufacturing Nevertheless, in many leading edge Japanese (and others) are better finish- Private Investment I---iin R&D as Percent of GDP, 1991 areas of technology, US leadership has ers." Flat panel displays and robotics El Manufacturing ME Share of GDP, 1989 Germany declined or been lost. Studies indicate are two prime examples of this pattern. Japan that the United States still leads in Furthermore, with five of the top ten overall manufacturing productivity by recipients of US patents in 1991 being some measures but that we fall behind Japanese firms, we cannot be assured of US in machinery, electrical equipment, our lead in invention for the future. transport equipment and ground Our Subcouncil on Critical Tech- transporttechnology intensive sectors nologies concluded that US companies, that are essential for trade, national universities, and the federal government security, and economic growth. More- have undervalued the importance of over, R&D in general is underfunded. making continual improvements to In 1990, for example, the nation as a products and processes, and of manufac- 1.3% 2.0% whole invested only 1.9 percent of turing in general. As noted in our First 1.8% SOURCE: National Science Foundation. Science and GDP on non-defense R&D as com- Annual Report, federal technology Engineering Indicators. 1991 pared with 3 percent in Japan and 2.7 policy has contributed to the problem percent in Germany. by focusing primarily on esoteric economies: manufacturing's share of A major problem facing American defense technologies and on scientific GDP in 1989 in the United States was competitiveness is the lag of American break-throughs rather than on areas that 19.3 percent, but far greater in Ger- firms in converting technological will provide the greatest economic many (31.1%) and Japan (28.9%). advances into a competitive advantage in benefits and commercial follow- There must also he a renewed effort the marketplace--the "commercializa- throughs. to disseminate technological "best tion" of technology. We continue to To improve and accelerate the com- practices" throughout industrv. With lead the world (albeit by a shrinking mercialization of US technology, both proper reforms, government funding amount) in new inventions. Firms in industry and government must substan- and technical resources can provide other countries, however, seem to do tially increase the resources devoted to incentives and leverage private sector better at converting new ideas R&D, on process technologies in investment, requiring little if any net including American ideasinto the manufacturing. US manufacturing increase in government spending. third, sixth and tenth iteration of the industries currently invest about $76 The Council endorses a number of product that captures markets. Our billion annually in privately-funded technology proposals developed by our smaller firms are often unable to grow R&D, a little over 1 percent of GDP. Manufacturing Subcouncil and our successfully beyond the new venture Japanese and German industry invest Subcouncil on Critical Technologies. stage, and our larger firms often seem closer to 2 percent of their GDP First, private sector R&D should be unable to sustain the continual flow of (Figure 5). The difference shows up stimulated and expanded by implemen- improvements in process and product clearly in the relative roles of manufac- tation of a new innovation and commer- that is necessary to meet ever-more turing induwsies in the three countries' cialization tax credit (1CTC):

18 A COMPETITIVENESS STRATEGY FOR AMERICA R&D on process improvements (in almost two-thirds of all government TECHNOLOGY addition to R&D which occurs R&D went for narrow military pur- RECOMMENDATIONS before the "first article of produc- poses. That ratio has already declined to tion") should clearly be eligible for less than 60 percent and should fall to - Enact a new the credit. This will support contin- 50 percent in the coming years. As Innovation and major defense systems are delayed or ual improvements in process as well Commercialization cancelled, the reductions in develop- as product technology. Tax Credit The credit should be made perma- ment and testing budgetsa range of perhaps $4 to 8 billionshould be nent to provide a solid basis for long- Redirect term corporate planning. applied to civilian and dual-use R&D. Defense research and exploratory government spending The credit should apply to incremen- development should be kept strong but to civilian and dual-use tal expenditures, as recommended by the new R&D budget should also R&D. our Subcoun.cil on Critical Technol- emphasize generic technologies includ- ogy. Our Manufacturing Subcouncil ing new materials, biotechnology, Expand federal prefers that the credit apply to all computers and especially manufacturing support for cooperative research and development spending processes. The White House Office of projects with private at a much lower rate. Science and Technology Policy (OSTP) industry. An additional 25 percent credit should ensure that the efforts of all the should be allowed for industry- agenciescivilian and defenseare sponsored university research, in better coordinated and better inte- light of the wide benefits of such grated with those of the private sector, research and the desirability of as has been done for high-performance linking university research to computing and communications. industry needs. Most university Third, some of these funds should be research is now government funded. used to expand federal support for To help overcome corporate reluc- cooperative projects in areas of strong tance to test traditional antitrust industry-government mutual interest tenets, an additional 10 percent such as manufacturing processes, credit could be allowed for the first improving energy efficiency, developing two years of new R&D consortia environmentally benign products, registered under the Cooperative improving the national information Research Act of 1984, such as infrastructure, and technologies for SEMAIICH or the Advanced improved health care and education. Battery Consortium. Specific steps include: Second, the government should Encouraging the Defense Advanced reorient its own R&D spending from Research Projects Agency (DARPA) purely military to civilian and dual-use and the military services to actively R&D. At the height of the Cold War, promote dual use technologies. Evidence of potential commercial Requesting the Department of Corn- universities, perhaps involvinga utility should bea plus, not a minus, merce to explore ways to facilitate revision of the overhead rules. in evaluating projects thatare filing for foreign patents by American otherwise significant for national security needs. Expanding the Advanced Technology Cooperative GovernmentIndustry Technology Programs Program in the Department of A number of cooperative governmentindustry R&Dprograms were started in Commerce to an annualprogram the 1980s, aimed at developing generic industrial technologies andbuilding coop- level of about $750 million. eration across industry, academia, and government. Key characteristicsof such Allocating 10 to 20 percent of the programs are industry participation in project planning, funding, evaluation, and resources of the multi-program labs personnel exchanges. operated by the Department of The Advanced Technology Program. A key missing piece in thecommercial- Energy, of the NASA labs, and of ization of technology is the R&D that falls between basic research(often fed- selected Defense Department labsto erally-funded) and specific product development (usually industry-funded). jointly planned and jointly funded This stage is known as precompetitive or generic R&D and is thefocus of the industrygovernment R&Don the Advanced Technology Program (ATP) within the Department ofCommerce. basis of model Cooperative Research ATP was established in 1988 to support private sectordevelopment of and Development Agreements promising generic technologies.Project proposals are submitted by private (CRADAs) with private firms. Lab sector businesses and joint ventures, and awardsare made competitively directors should be ableto enter into based on an external expert review of their technical meritand business potential. these partnerships without long SEMATECH. SEMATECH is an industrygovernment funded,industry-led delays and micromanagementfrom R&D consortium created in 1987 to recapture US leadership their agencies. in semicon- ductor manufacturing technology. Member companiesset the research Modifying federalprocurement rules agenda and contribute at least half of the $200 million in annualfunding and to make the federal governmenta approximately 60 percent of the technical personnel. Arecent General better consumer of 'eading edge Accounting Office review found that SEMATECH's technicalprogress is on technologies. schedule and that SEMATECH has led to improved cooperationamong semi- Authorizing on a pilot basis DARPA, conductor makers and between semiconductor makers andtheir suppliers. the Department of Commerce,the Most observers credit SEMATECH with helping the USsemiconductor indus- National Institutes of Health and try and the semiconductor equipment industry regain globalmarket share. perhaps others, suchas the National Engineering Research Centers. The National ScienceFoundation estab- Science Foundation's Engineering lished its first Engineering Research Centers in 1985to foster an interdisci- Research Centers,to participate plinary, team oriented approach to engineering and to speedthe conversion directly in the commercializationof of advances in fundamental research in universities intocompetitive products and processes in the marketplace. There technologies they have supported, are currently 18 centers at major US universities in such critical technology fields as bioprocessingand biomedical through equity participationor loans, engineering; optoelectronics, microelectronics andcommunications: and increasing both their incentiveto manufacturing and design. The centers are jointly funded bygovernment and foster businesssuccesses and their industry and are evaluated in part on their contributionto competitiveness funding for future efforts. and degree of interaction with industry.

20 A COMPETITIVENESS STRATEGY FORAMERICA 5

liEST COPY AVAILABLE Corporate Governance Companies should prepare periodic RECOMMENDATIONS and Financial Markets analyses of their long-term financial, ON CORPORATE strategic and organizational results in GOVERNANCE ur corporations can productively relation to goals established by manage- AND FINANCIAL 0deploy their human and physical ment and the board. The analyses should MARKETS capital, and commercialize their include non-financial measures of long- technologies only if they are managed term prospects which place greater Boards of directors emphasis on intangibles such as worker efficiently. Hence the Council decided and institutional training, quality of product, research and that one of the initial priorities of its investors must provide work would be the impact of the development, and strategic positioning more active, ongoing financial markets on management items which do not fall neatly into the decisions and the processes by which bottom line in the traditional securities monitoring of our corporations are governed. industry price/earnings multiple valuation. corporate Our Subcouncil on Corporate It is essential that these analyses be performance. Governance and Financial Markets discussed with, and assessed by, boards and concluded that many American corpora- major shareholders. A "new view" of the Companies should tions are becoming competitive in corporation can only be achieved through prepare periodic global markets but that far too many are the active involvement of boards of analyses, of still underperforming. Therefore, the directors and shareholders to vigilantly finand Subcouncil applauded the major monitor its direction. If employee changes now transpiring in the relation- development is given statusalong with ships among management, boards of return to shareholdersas a measure of directors, and shareholders in a number performance, potential management- of key companies. It believes that the employee antagonisms can be minimized. continuation of this process will resolve As workers increase their ownership many of the remaining governance through pension plans and employee stock problems and that no major new option plans (ESOPs), they (and commu- legislative initiatives are needed in this nity representatives) become increasingly area. Nevertheless, the Subcounciland valuable as patient "relationship investors" the full Council recommend a series of with a long-term interest in the health of governance initiatives that should be the company. The Council has decided to taken by boards of directors to increase pursue these issues further by creating a their ability to monitor the performance new Subcouncil on Capital Allocation. of the CEO, the corporation, and the The Subcouncil rejected the conven- functioning of the board itself. tional view that "short-termistn" and In particular, there is a need to develop excess trading in the financial markets are a whole new approach to defining the at the root of our corporate competitive- "value" of a corporaion and to measuring ness problems. Rather those may bered long-term corporate performance. herrings used as a scapegoats to avoid

7ST COPY AVAILABLE 3') focusing on the true issuepoor man- Figure 6 agerial performance. The Subcouncil Trade as a Share of GDP thus opposed proposals for transaction 30 taxes or other efforts to "throw sand in I\ the gears" of the financial markets. It \-- 25 --- ..\ "\ concluded that improved corporate \\ il EC* 1 \ performance cannot be legislated but 0.. /° must be a matter of more active monitor- 13 _---, 11 US 20 1,...... \y"--- ing and oversight both on the part of d boards of directors and institutional Japan investorswell before the corporation's 15 problems become fully manifest and plants are forced to close. 10 1970 1975 '1980 1985 1990 Estimated excluding intra-EC trade Trade Policy SOURCE: Organization For Economic Cooperation and Development

The ultimate test of America's Moreover, export-related jobs pay 17 the last decade, our exports of manufac- competitiveness is the standard of percent more than the average US wage. tured goods doubled but our imports living of its population, not the trade Export-intensive industries employmore almost tripled. The US export share balance. Nevertheless, trade isan skilled workers and do more R&D than remained stable in high-technology increasingly important component of import-intensive industries. manufactures but lost ground in our competitiveness. Exports and At the same time, our persistent trade medium- and low-technology imports of goods and servicesnow equal deficit is one of the most visible symbols manufactures. one quarter of our entire GDP. That of the economic challenges faced by An effective trade policy is thus ratio has doubled over the past twenty America. Despite major gains in the essential to any competitiveness years and is now as high as in Japan second half of the 1980s, the US trade strategy for the United States. Ameri- (Figure 6). record of the last decade is dismal. The can firms must have access to world- During the second half of the 1980s, persistent deficitwhich forces the wide marketswhich are three times export expansion became a driving force United States to borrow abroad and as large as the US market in the for the US economy and the major build up the nation's foreign debtis aggregate, and even more important in source of growth for manufacturing jobs. expanding rapidly again. A rising trade some key sectorsto maximize the Given the difficulty of achieving rapid deficit also intensifies pressures to value of their sales, their economies of correction of the domestic structural restrict imports thus further undermin- scope and scale, and hence their problems highlighted throughout this ing American competitiveness. productivity. Exports diversifycompa- report, the United States will probably Another source of bad news is the nies' market base, protecting them rely heavily on renewed trade improve- composition of the trade deficit. US against national cyclical developments ment over the next few years for manufacturing continues to face major and currency volatility. Global partici- economic growth and job creation. competitive challenges from abroad. In pation helps firms improve their

22 A COMPETITIVENESS STRATEGV FOR AMERICA 3L performance by exposing them to throughout Europe. The United States, TRADE POLICY broader and more intense competition. after launching a domestic program RECOMMENDATIONS To maximize the impact on American along the lines recommended in this trade performance of the policy changes report, should seek G-7 agreement on Develop a global recommended throughout this report, a such a global package. Success in this growth strategy with cultural change is needed in American effort would provide the foundation for our G-7 partners, business thinking. Only 10 percent of US much closer cooperation to maintain especially Japan and businesses are regular exporters. A new world growth on a continuing basis Germany. national "export mentality" must arise, with great benefits for all countries, including the United States. tapping the vast potential of small and Seek agreement in The second requirement is mainte- medium-sized businesses while encour- the G-7 to restore aging current exporters to become even nance of equilibrium exchange rates. reference ranges. stronger in international markets. The soaring dollar priced even the most Our Trade Subcouncil recommends, competitive American products out of and the full Council endorses, six major world markets in the mid-1980s. The Negotiate opening initiatives to achieve the needed results. United States should therefore seek of foreign markets to The first two focus on global growth and agreement in the G-7 to build on the American products. maintaining a competitive exchange rate reference ranges maintained during for the dollar, the cardinal determinants 1987-88. Such a system is essential to Sharply increase the of US trade performance in the short assure American exporters that the quality and quantity run. American exports can grow only if dollar will remain at competitive levels of US export credits. our foreign markets are expanding and if as called for in the Omnibus Trade and the dollar is priced at a level that permits Competitiveness Act of 1988. This in Consolidate and our firms to compete successfully. turn is necessary to foster the needed double US export We recommend that the new export mentality in American industry; promotion efforts. Administration place high priority on and to energize American firms to developing a global growth strategy investand create jobsdomestically to Reduce or eliminate with our G-7 partners, especially Japan meet demand abroad. export disincentives and Germany. Japan is running a record Third, the United States must push trade surplus, and it continues to rise. hardthrough multilateral, regional that block billions of Germany is entering a recession, and and bilateral negotiationsto open dollars of foreign sales the rest of Europe is being dragged foreign markets to American products. by American down as well. But policies are available It is essential to bring the Uruguay companies. to rectify the situation: additional fiscal Round to a successful conclusion. stimulusi Japan, where domestic Subsequent global negotiations should demand is flat and the budget is in address issues that remain unresolved, sizable surplus, and fiscal tightening in particularly those relating to foreign Germany which would promote lower investment, the interplay among interest rates in Germany itself and national competition policies, and the

32 linkages between trade and the envi- ronment. Export Promotion and Export Financing The regional NAFTA negotiations Over 50 percent of US exports are accounted for by only 100 companies. Stud- have gone further than the GATT in ies have found an enormous potential for exportsamong -infrequent exporters.- achieving agreement on such issues as such as the 50.000 US companies that make fewer than 12 overseas shipmentsper intellectual property rights, investment, year. and government procurement. In order Unfortunately, existing government export promotion programs arean ineffi- to realize the full benefits of any cient, bureaucratic maze confusing to exporters and government officials alike. Ten NM-1A agreement, as President federal agencies operate over 150 export promotionprograms: no clear strategy or Clinton has already suggested, provi- set of national priorities guides the funding of the programs. US export promotion sion will have to be made for environ- programs are also underfunded and understaffed. A recent General Accounting mental protection, labor adjustment, Office (GAO) report found that in 1990 the United States spent 50.59 forevery and enhanced worker rights. Bilateral S1000 of exports in non-agricultural export promotion. while France spent S1.99. Italy S1.71. and the United Kingdom spent S1.62. talks are especially important with Japan, An important step towards resolving problems in US export promotion and the Strucraral Impediments Initia- was the 1992 legislation making statutory the federal. Trade Promotion Coordinating Com- tive should be revised and reinvigorated, mittee with a mandate to establish a comprehensive strategy for exportpromotion. particularly with respect to antitrust and This is a step in the right direction. but further commitment is neededto integrate other competition policies. Section 301 export enhancement into an overall national competitiveness strategy. of the trade law, which has been used Export financing can also play an important role in enhancing the competitive- effectively to pursue liberalization of ness of US products and in attracting US firms to exporting. Export financingpro- foreign markets in the past, should be vides competitive financing. loan guarantees, or insurance to help US businesses deployed in the future for that same close export deals, allowing US exporters to compete with foreign exportsfinanced purpose. by foreign official export credit agencies. Fourth, we recommend a sharp However, US export credit programs too are woefully inadequate comparedwith increase in the quality and quantity of those of our major competitors. The export credit programs of the Export-import US export credit programs. Governmen- Bank of the United States (Eximbank)the primary federalagency providing export tal export finance is crucial in determin- creditsand other providers of export credits, support only 3 percent of totalUS exports. ing the outcome of many major contracts, Any significant increase in exports will also require substantially especially in the more advanced develop- more commer- cial bank involvement in export financing. ing countrieswhich are now the Smaller exporters. in particular. find it difficult to obtain export financing from commercial banks. Many American world's fastest growing markets. Tli banks have withdrawn from the field, leaving only some 45 to 50 banksstill actively annual program level of the Export- engaged in export lending. One innovative solution to this problem.recently pio- Import Bank should be increased to neered by First Interstate Bank of California and Eximbank. provideslow-interest $20 billion (with an implied subsidy of loans to small importers of American products. thereby benefitting smalIand mid- $1.2 billion). In addition, a major sized US exporters. Under this program, knownas bundling. a US bank makes a increase in commercial bank financing substantial loanguaranteed by Eximbankto a foreign bank. whicl',then makes should be encouraged through Export- smaller loans to foreign importers purchasing US goods. The packageis then Import Bank guarantees for "bundles" of securitized and sold to investors. export credits to smaller businesses.

24 A COMPFITTRTNFSS STRATEM FOR AMERICA 33 BEST COPY AVAILABLE Fifth, US export promotion efforts one-fourth to one-third that of our major 66 should be sharply increased, focused and European competitors, should be improved. Working within the frame- doubled over the next five years. new national Sixth, a major effort is needed to work of the new National Economic `export mentality' must Council, the Trade Promotion Coordi- eliminate, or at least sharply limit, our nating Committee should establish a own export disincentives that block arise, tapping the vast coherent strategy and clear priorities billions of dollars of foreign sales by among the 150 current export promotion American companies. All unilateral US potential of small and programs scattered across ten different export controls should be sharply agencies. A single budget function for limited since only multilateral controls medium-sized busi- can be effective against a target country. export support, including export finance, nesses while encourag- should be created both within the The current national security and Executive Branch (by the Office of foreign policy controls should he fused ing current exporters to Management and Budget) and for all into a single entity (and authorized by a relevant legislation (by the Congress). single law). become even stronger in Funding for export promotion, currently international markets."

BEST COPY AVAILABLE Investing In Physical Capital

The investments in human capital and technology already recommended will increase the payoff from new investments in physical capital. So will the suggested improvements in corporate governance and trade policy. All these measures can, over time, signifi- candy enhance the productivity of the American economy. Nevertheless, achieving the basic goal of doubling national productivity with growth rates of 3 to 3percent will require an increase of at least 4 to 6 percentage points in the share of GDP devoted to physical investment. With current GDP running at about $6 trillion annually, the required increase in public and private investment will be $250 to 350 billion (in 1992 dollars) per year by 2000.

Private Investment

The performance of American industry is determined

over time by the cumulative level of investment in.-, productive assets, by the allocation of that investment' among diverse opportunities, and by the effectiveness* which that investment is put to work. In recent decades the

BEST COPY AVAILABLE 3,;

`;.0 _AM* levels, patterns, and utilization of link engineering and management Figure 8 investment in American industry have schools to train manufacturing managers. Real Growth in US Industrial Investment been inadequate. Manufacturing accounts for less than Equipment Of particular concern is the nation's 20 percent of GDP and employment Plant investment in the manufacturing sector. but its qualitative impact on the econ- The United States devalues manufactur- omy is much greater. It is a crucial user ing. Our companies pay their manu- and supplier of the services sector. Its facturing engineers far less than their workers enjoy higher-than-average development and research engineers, wages. It generates the lion's share of scientists, lawyers, accountants and the nation's R&D. Its performance is other key personnel. Our universities do decisive for our trade balance. very little training for manufacturing. However, the annual rate of growth We lag behind industrialized countries of industrial investment in plant and 1950s 1960s 1970s 1980s in the numbers of science and engineer- equipment in the United States declined SOURCE: Charles Steindel. U.S. Investment Trends. ing degrees awarded (Figure 7). The steadily from the1950sthrough the American Council for Capital Formation, March 1991 status of those involved in manufactur- 1980s(Figure8).The proportion of our ing is considered second-class in many GDP devoted to private business respects. Revaluing the role of manufac- investment in plant and equipment has worldwide leadership. Many more must turing is an essential part of our invest- lagged behind that of Japan and other do so, however, if the nation as a whole is ment strategy. For example, the G-7 countries for at least two decades. to regain its competitive position. National Science Foundation should During the latter half of the1980s,this Medium and small firms, in particular, fund 20 to 30 new programs that would investment gap widened substantially, must acquire and implement the most especially in comparison with Japan. productive technologies and manufactur- Private investment in R&D is also ing processes. They face special problems Figure 7 inadequate (see previous section on in identifying, validating and implement- Science and Engineering Degrees technolog). ing best practices with respect to using Awarded, 1988 Effective use of investment capital is technology, adopting better labor- as important as levels of investment. The management practices, and working out 40 vanguard of American industry is effective customer-supplier relationships. (31 35 undergoing a revolution in the way it Their problems need special attention as ; 30 (,) does business, and this revolution offers part of any overall strategy. A "teaching IS 25 the possibility of enormous productivity factory" or manufacturing extension a 20 and performance gains with relatively center that can offer help with state-of- a15 modest increases in tangible investment. the-art manufacturing equipment and 10 A number of American firms have systems should be located within a day's al5 already adopted "global best practices" round-trip automobile travel from the 0 including the high-performance work- majority of US manufacturing France Germany Japan US place and better labor-management establishments. SOURCE Organization tor Economic Cooperation and Development relationsand hence have retained their A number of changes in government

28 A (:(tl'lI Iv xFss SIR VI EG1 FoR AMTRICA policy can make a major comribution to creating a large number of new jobs as PRINATE achieving these goals. One of the most well as improving the nation's competitive INVESTNIENT position. crucial determinants of private invest- RECONLMENDATIONS ments is the cost of capital, a major Another key element in determining corporate hurdle rates is risk. Research (though not the sole) element in deter- Institute a mining corporate hurdle ratesthe rate suggests that private investment inthe permanent Equipment of return a company must project to be United States has become much riskier Tax Credit. willing to undertake a given investment. than in some of our major competitors, Government can make a major contribu- notably Japan and Germany, because of tion to reducing the cost of capital by the greater instability of our economy as Authorize industry eliminating its budget deficit; according seen in the greater variance in our consortia for joint to some models, real long-term interest growth rate, inflation rate and exchange production. rates would fall by two to three percent- rate. We thus recommend thatAmeri- age points under such circumstances. can economic policy bestabilized in the Allow more rapid Investment would increase sharply, future on the basis of the new approaches depreciation allowances.

Manufacturing Extension Centers Modify tax Firms learn about new production practices from various sources, including regulations to remove customers and suppliers, competitors, overseas visits. and vendors of equipment incentives to invest be it "lean production" or and training programs. No single trendy approach abroad. "total quality" will suffice as a permanent solution to competitiveness. But help in implementing new management techniques and new technologies can be crucial for small and medium businesses with limited in-house resources. In recent years, states and local interests. encouraged and sometimes aided by the federal government, have "extended" technical and business assistance to small firms to help them upgrade both their technologies and their management practices.These activities have been based loosely on the long and successful experience with agricultural extension in this country. Often such services function as brokers of information, making referrals to other experts, and complementing private and other public vendors of services. technical information, and products. At the federal level. most prominent are seven Manufacturing Technology Cen- ters sponsored and partially funded by the Department of Commerce. One of them, for example. the Cleveland Advanced Manufacturing Program (CAMP) has been in operation since 1984 and has worked directly with over 1000 regional manufactur- ers. CAMP offers on-site analysis by an engineer who assesses the firm's needs, decides what resources CAMP can offer, and assembles a team of engineers to work with the company on specific improvements. Typical assignments include improving delivery times, redesigning equipment to make it more efficient, cutting costs by reducing waste and pollution. and computerizing inventories.

BEST COPY PRUE History of the Investment Tax Credit by numerous foreign firms where competition would be enhanced by YEAR/QUARTER CHANGE IN INVESTMENT TAX CREDIT permitting consolidated efforts by

1962.01 to1966:03 7 percent instituted effective January 1962 companies in this country. Third, the tax code should be 1966:04 to1967:01 Suspended/effective October 1966 modified to permit firms to depreciate 1967:02 to1969:Q1 7 percent reinstated/effective March 1967 manufacturing process equipment, 1969 02 to1971:01 Eliminated/effective April 1969 newly installed after the adoption of this 1971:02 to1974:04 7 percent reinstated/effective April 1971 policy, at a rate such that the "tax life" of 975 01 to1985:04 Increased to 10 percent effective January 1975 the equipment would equal its "compet-

1986 01 to1992:Q2 Eliminated for property placed in service after December 31. 1985 itive life." In a rapidly changing manufacturing world, the time over Department o' Commerce and Council for Capital Formation which firms are permitted to depreciate manufacturing process equipment recommended in this report. economy and a boost to the long-term (usually five years) for tax purposes is There are six specific policy measures investment process which is so crucial to often considerably longer than the that should be adopted to promote new meeting our overall competitiveness competitive life of that equipment. It is investment, especially in manufacturing. goals. The ETC should not be covered not unusual for production equipment First, we need an incremental and by the Alternative Minimum Tax in fast-moving industries to be finan- permanent Equipment Tax Credit because such inclusion would sharply cially obsolete within two or three years. (ETC). By limiting its coverage to truncate its impact in generating new The result is that firms have tocarry the equipment, and excluding plant and real investment. (Our Manufacturing Sub- costs of equipment they are no longer estate investment, the credit can council recommends that the ETC apply using, thus burdening the profitability generate much higher payoff per dollar to all equipment investment, rather than of newer production systems they sub- of tax expenditure. (Investment in incremental investment, but at a much sequently installed. research and commercialization is also lower rate.) Fourth, Treasury regulations that important and has high payoff; it should Second, the government should require the apportionment of interest be stimulated directly by the permanent authorize industry consortia for joint expenses between domestic and overseas ICTC proposed in the technology production as well as research. There operations for US firms operating in section, all of whose recommendations may be some industries, such as semi- global markets should be modified. are complementary to those outlined conductors and machine tools, where Current US regulations require the here.) the relatively small size of American apportionment of essentially all of a US There is considerable evidence that firms places them at a significant corporation's interest expenses against the additional investment generated by disadvantage against their foreign income from domestic and foreign an ETC would offset its initial revenue competitors. Antitrust policy should operations in proportion to the value of costs within a very short period. The now view the global market as the its assets at home and abroad. No rate of the credit could be set at a higher relevant yardstick against which to judge recognition is given to the interest level for its first year or two inan effort industry concentration in relevantcases, expenses incurred by foreign affiliates in to provide both an early stimulus to the and there may be industries populated this procedure. Moreover, since interest

30 A COMPETITIVENESS STRATEGY FOR AMERICA lJ BEST COPY AVAILABLE costs apportioned to overseas income US technology, and thereby undercut INFRASTRUCTURE are not typically recognized as costs of incentives to carry on R&D activity in RECOMMENDATIONS doing business by foreign host govern- the United States. ments, they are lost to the firm as Develop an deductible costs in all jurisdictions. This intermodal strategy significantly raises the return that must Public Infrastructure keyed to exports. be earned on domestic investments, (the "user's cost of capital"), thus creating an America thrives on the efficient Reform the nation's incentive for US-based multinationals to movement of people, goods, and make new manufacturing investments information, and stagnates without it. air traffic control outside our boundaries. It also puts the From the colonial King's Highway to system. domestic operations of these companies the Wilderness Trail, from the building at a substantial tax and cost disadvantage of the railroads to rural electrification, Improve efficiency relative to US-based subsidiaries of to the spread of the telephone and and aggressively foreign competitors. construction of the interstate highway maintain surface Fifth, Treasury Regulation 861.8 on systeminnovation and advancement in transportation. the allocation of R&D expenses against transportation and communications foreign-source income should be infrastructure have brought prosperity Create a bipartisan rescinded, as recommended by Presi- and progress to our nation. National Infrastructure dent Clinton in his State of the Union Over the last 25 years, however, there Commission to remove message. Treasury Regulation 861.8 has has been a massive under-investment in the "pork barrel" the effect of creating an additional US infrastructure (Figure 9). Federal approach to incentive for firms to move R&D outlays on infrastructure in 1990 were infrastructure. offshore by enabling them to achieve half the level of 1980. Germany invests more favorable overall tax treatment by four times as much in this sector as we doing so. The Council believes that it is do. There is, of course, no absolutely Establish a capital to the benefit of the United States for "right" amount of infrastructure invest- budget for the federal firms to do their R&D here and so ment and economists differ on the government. concludes that this regulation should he magnitude of the effect of infrastructure permanently rescinded, and all R&D investment on economic growth. But Unify the federal performed in the United States should there is a widespread consensus that role in telecommunica- be attributed to US-source income. infrastructure investment and economic tions policy and end Finally, the Administration should growth are intertwined, and that well- the current regulatory reconsider its proposal to put technol- selected public investments in infrastruc- gridlock. ogy income received from abroad in a ture can play an important role in separate "basket-of-income" for foreign furthering economic growth. tax credit purposes. The net result of Americans are well aware of the this proposal would be to reduce after- effects of infrastructure disinvestment. tax income derived from foreign use of They experience it daily in the form of

BEST COPY AVAILABLE congested highways, broken water major boost to long-term competitive- our strategy of getting "more bang from mains, air traff..: delays, and reduced bus ness. But the best short-term plan is a the buck" in deploying American and rail service. The Department of concerted beginning on a coherent resources. Transportation reports that half of all long-term effort. That long-term effort Congress took an important step roads were rated "poor" or "low/fair" in should include well-selected projects forward in strengthening our trans- 1989. The nation's 21 primary airports with high positive rates of return. portation system as a foundation of experienced more than 20,000 hours of Fortunately, the returns to infrastruc- American competitiveness when it flight delays in 1990. Congestion on our ture investment are extraordinarily high. passed the Intermodal Surface Trans- highways alone has been estimated to A recent Congressional Budget Office portation Efficiency Act of 1991 cost $100 billion per year, not counting study found yields of 30 to 40 percent on (ISTEA). But more remains to be done. pollution and wear and tear on vehicles. investments to maintain the highway Our Subcouncil on Public Infrastructure Congestion, deterioration, missing system, and yields of 10 to 20 percent to identified several components of the links, and obsolescence are real and expand the system in congested areas. nation's transportation system that costly impediments to our productivity Infrastructure investments also create require particular attention. and trade competitiveness. market opportunities for American firms First, all levels of government must For too long we have ignored the in some of the cutting-edge technologies approach the national transportation economic impact of deferred infrastruc- of the futureincluding communica- system from a strategic perspective of ture investments or made them with no tions, the environment, and transporta- competitiveness. Numerous gaps now strategic plan in mind. Every $1 billion tionand can thus carry multiple exist in intermodal linkages, particularly spent on infrastructure creates benefits for American competitiveness. in rail links to highways and ports and in thousands of new jobsproviding an A major step-up in infrastructure ground access to airports. Inadequacies attractive short-term payoff as well as a investment can play an integral role in exist in major facilities in the system, particularly ports. The Depattnient of

Figure 9 Transportation must develop an effective Federal Investment in Infrastructure intermodal strategy, keyed in particular to

1.2 our export efforts. The strategy should

1.1 identify trade flows through major 1 corridors and key intermodal linkages, 0.9-- designate ports of national and regional Et0.8 co significance, establish revolving funds for 13 0.7 improvements, and examine the adequacy 0.6 of plans for airport access improvements. 0.5 In aviation, our Suhcouncil found 0.4 overwhelming consensus that the 0.3 Water and nation's air traffic control system needs 0.2 Waste Water basic reform if aviation's positive 0.1 contribution to trade and tourism is to 1960 1965 1970 1975 1980 1985 1990 be sustained. A variety of models have SOURCE Congressional Budget Office been put forward; what is needed isa

32 A ComPriinvi:NrsSTRXITG) I:()R AMFRILN 4 processwith the close involvement of the Federal Aviation Administrationto Roads and Bridges evaluate and adopt the appropriate Congestion and physical deterioration are the two central problems of our sur- organizational reforms. face transportation infrastructure. The US Department of Transportation noted in Emerging transportation technolo- its 1991 Conditions and Performance report: giesincluding intelligent vehicle and "By all system performance measures of highway congestion and delay, per- highway systems, high speed rail, and formance is declining. Congestion now affects more areas, more often, for magnetic levitation trainshold longer periods, and with more impacts on highway users and the economy

exciting potential for solving current than at any time in the Nation's history...Almost 70 percent of daily peak- transportation problems and opening hour travel on the urban Interstate System in 1989 occurred under congested new doors to efficient transport. Our or highly congested (near stop-and-go) conditions. This represents an Subcouncil recommends starting with increase of almost 30 percent since 1983." full funding of such technologiesat Highway congestion annually causes an estimated 8 billion hours of lost work levels authorized in ISTEA. Substantial and economic production and wastes over 3 billion gallons of gasoline. One study gains in efficiency could also ensue if the estimated that congestion costs from delay, extra fuel consumption, and higher insurance premiums on major freeways and arterial roads in 39 large metropolitan federal government would helpstates areas totaled over $41 billion in 1987. and localities in the wider deployment The deterioration of road conditions appears to have stabilized in recent years of off -the-shelf transportation technolo- although a large backlog of poor roads exists. Congestion and deterioration are gies such as ramp metering and traffic interlinked; roads deteriorate faster as the volume of traffic on them increases. signalization. Many roads today are being pushed beyond the capacity for which they were Given its importance, surfacetrans- designed in terms of both the volume and technology of modern vehicles. Par- portation received the most attention ticular attention needs to be paid to bridges that are structurally deficient (i.e., they from our Subcouncil. The nation's are unable to handle the normal vehicle loads or speeds). Since 1984 the number interstate system is virtually complete of structurally deficient bridges on arterials and collectors has increased by 25 per- and, by and large, America's days.of cent; 25.000 interstate bridges will reach the end of their design lives in the 1990s. building whole new systems of roadsare over. Attention must turn now toward an made eligible for federal funding under person rather than building new roads aggressive program to update, maintain, ISTEA. In turn, we need to sharply and capacity. Methods include establish- and manage our existing system. increase the incentives to state and local ing HOV (high-occupancy vehicle) As a first principle, the Subcouncil officials to stress maintenance. Requir- lanes during commuting hours; reduc- emphasizes efficiency. We need toget ing public reports on the status of ing or eliminating auto and parking the most out of our infrastructuretax maintenance activities is one approach; subsidies; offering more frequent dollars. US highways are designedto another is to have bonds andgrants "paratransit" service using minibuses, last 20 years; European roads last 40or carry "covenants" that lay out a schedule taxis, and vans to enhance the attractive- 50 years. Higher standards of road of maintenance. ness of public transport; and implement- design and use of life-cycle costing will Techniques that focus on the efficient ing congestion pricing wherever produce savings i.i the longrun. use of our transportation system can feasible. Efficiency will also be served ifmore also reduce congestion. The aim isto Such techniques will offerus a way preventive maintenance activitiesare decrease vehicle miles traveledper out of the conflicts between environ-

BEST COPY AVAILABLE 41 A COMPE.111 tVENTESS STRATEGY FOR AMERICA 33 mental and transportation goals that intermodal Connections have stymied many communities in the last decade. Our Subcouncil recom- All aspects of the nation's transportation system affect our ability to engage mends offering incentives to states to effectively in international trade. as well as to move goods and services efficiently implement such congestion reduction within tne US economy.Fast, reliable, and inexpensive transportation reouces methods aggressively, factoring state costs and delays. and can provide a competitive edge. For transportation to meet performance in this area into state the goals of competitiveness. not only must each mode of transport work well. but allocation formulas. the different modes must be connected in such a way as to provide a seamless net- work of working parts. Our Public Infrastructure Subcouncil ISTEA. the landmark 5155 billion federal transportation legislation. encouraged recommends a two-step program for an intermodal approach as a means of making the United States more internation- expanding transportation investment, ally competitive. Nevertheless. problems continue to exist in the physical linkages which the Council endorses: across our modes of transport as well as in our basic infrastructure related to trace Immediate full funding of the and commerce. spending levels authorized in 1991 Road/rail links: Problems include congestion, lack of adequate maintenance. by ISTEA, an increase of about $4 bridge and ramp design problems, lack of adequate rail gateways. gaps inrail billion over FY 1993. and highway links to seaports and airports, and inadequate rail routes to serve US/Mexico/Canada trade. Over and above ISTENs authorized Ports:Full participation in international commerce requires expensive harbor levels, raising the current level of dredging of channels and berths to expand our major ports in order to infrastructure spending by up to accommodate large and efficient ocean vessels. On the land side. double- $12.5 billion to keep US roads, stack access to ports is often constrained by clearance obstacles along key rail routes: congested roads and inadequate rail linkages to marine terminals bridges, and transit in good working cause delays and raise costs. order and to keep America moving Airports: Congestion is a problem. particularly in terms of ground access to safely and reliably. This level would airports. in over half the major airports in the country. include $1 billion for intermodal An excellent example of improving intermodal connection is the Virginia Inland improvements; $1 billion for bridges; Port in Front Royal. VirginiaLocated 220 miles from the seagoing port of Norfolk $1.5 billion to stop endlessly defer- this facility sharply improves intermodal connections between rail and truck trans- ring maintenance on our public portation. saving costs and time for shippers. motor carriers, and steamship lines

transit systems; and $9 billion for In operation since 1989. the facility handles over 16,500 containers whichare necessary capacity expansions and off-loaded from trucks to daily rail runs along Norfolk & Southern's main track pavement repairs on the National lines. directly into the port of Norfolk. The facility increases access to port facilities Highway System. The NHS is a of goods from midwestern states. reduces waiting time for truck operators. and system of 155,000 miles of high- eliminates truck traffic in urban areas. For incoming cargo. the inland port provides traffic roads (including the inter- access to inoustrial northeast markets without an extra port call or transfer of cargo state), to be designated under via barge ISTEA, that forms the basis for the federal-aid program. series of procedural steps to ensure the tion is needed in the Congress where efficiency of new (and all continuing) three or four committees maintain juris- The Subcouncil also recommends a infrastructure spending. First, consolida- diction over transportation matters in

34 ACOMPETITIVENESS STRATEGY FOR AMERICA 4

BEST COPYAVAILABLE each house; the Subcouncil recommends believe that infrastructure investment, reorganization of the transportation and building on the tradition of the High- 66 public works functions under a single way Trust Fund, should be financed or too long we committee to incorporate systematic directly by earmarking the proceeds consideration of intermodal and compet- from any increase in the national have ignored the itiveness concerns. gasoline tax. economic impact of Second, the federal government's Our Subcouncil also took a prelimi- pork barrel approach to infrastruc- nary look at telecommunications deferred infrastructure turewhich has bred so much cynicism infrastructure. This is an area where about infrastructure spending in this decisive action by US policymakers is investments or made country-must be turned around. The critical in the short term if the nation Subcouncil recommends creation of a is to take advantage of dynamic them with no strategic bipartisan National Infrastructure opportunities and advances in technol- plan in mind." Commission to evaluate proposals for ogy such as HDTV, fiber optics, and earmarking federal funds for demon- personal communication services. stration projects, modeled after the The federal government's role in this Base Closing Commission. area is different from traditional Perhaps most importantly, the fed- transportation infrastructure. The eral government should establish a government is not being asked, nor capital budget. Every state government should it offer, to pay for new telecom- has one. Most foreign governments do. munications infrastructure. Instead, the It is essential to rationalize the go%exn- federal government has two responsi- ment's investment process by distin- bilities: first, to replace the current guishing clearly between current and melange of conflicting government capital expenditures. The latter should opinions with a single, authoritative be accounted for, and could be financed, federal policy voice; and second, to on a long-term rather than current define new "rules of the game" as basis. Infrastructure investment would of swiftly and soundly as possible so as to course be included in such a capital end the current regulatory gridlock, budget. promote equitable treatment of Nevertheless, it is crucial that such companies, and safeguard the public's investment, like all new spending access to reasonably-priced telecom- programs, he financed responsibly. We munications services.

BEST COPY AVAILABLE 4:; The Bottom Line

The increases in investment required to double national productivity growth can be financed in only 4107- two ways: by increasing domestic saving in the 7 United States or by borrowing from abroad. However, the United States has already borrowed $1 trillion from the rest of the world over the past decade, making it the world's largest debtor nation. Almost one half of all American investment in the 1980s was financed by foreignerswho will therefore reap much of the payoff from those investments. The Council rejects the view that America's future growth should be financed by other coun- tries. We rather believe that the current account deficit, which continues to run at about $60 billion annually, should be eliminated, ending the continual build-up of foreign debt. Hence the national saving rate will need to rise by 5 to 7 percentage points of GDP: 4 to 6 percent to finance the requisite rise in domestic investment and another 1 percax to compensate for elimination of the net capital inflow from abroad. Our target is thus to increase national saving by about $40 to 50 billion per year (at current prices) over the eight-year transition period. Private Saving and are likely to cut public saving as much Net national saving in the United States or more than they add to private saving. It dropped below 2 percent of GDP in There are two ways to increase must be noted that private saving dropped 1991the lowest rate in the postwar national saving: by raising private sharply in the 1980s despite the institution period. \Are have been below 4 percent (household or corporate) saving and by in the early part of the decade of a of GDP for the last seven years, in reducing public dissaving (the budget number of such "incentives." contrast to saving rates of 8 percent of deficit of the federal government). Our The Subcouncil did consider one GDP from the end of World War II to Capital Formation Subcouncil examined idea that might be promising: manda- 1980. Successful achievement of the a number of proposals, and previous tory pension plans funded jointly by proposed target would bring American policy initiatives, to promote private employers and employees. The idea is to saving back up to our national level of saving. Some would aim to stimulate require pension plans for all employees, the 1960s, and almost up to the current such saving directly: Individual Retire- including the half of the labor force level in Europe. ment Accounts (IRA), cuts in the capital which now carries no such plansand There are major advantages to such gains tax, elimination of taxation of generates little or no saving. There an increase in domestic. saving. The interest and dividend earnings (a la would be no favorable tax treatment for most tangible is likely to he a sharp Japan's recent marup system), and these plans so no offsetting loss of decline in interest rates, particularly mandatory pension plans for all Ameri- government revenues would result. long-term real rates. These rates were can workers. Some would seek to raise Institution of such plans would thus ipso recently running at 4 to 5 percenta private saving by changing the incentive facto :.tcrease private and overall nominal rate of 7 to 8 percent compared structure of our existing tax system to national saving. Even though many with inflation of about 3 percent. This is discourage consumption: a general members were attracted by the idea of extremely high by historical standards, consumption tax (which would exempt expanding pension coverage, others especially after four years of sluggish all saving from taxation), taxes on were concerned about the costs this economic growth. The proposed specific components of consumption would levy on employers. The Council increase in national saving could cut (especially energy, tobacco, and alcohol), thus decided not to propose the idea at these rates in half. This would sharply or a value-added or national sales tax. this time. reduce the cost of capital to American Other anticonsumption options include One other idea was considered by business, one of the major impediments limiting interest deductions for individu- our Capital Formation Subcouncil that to competitiveness identified by our als (notably on housing) and/or corpora- might merit further development: a lanufacturing Subcouncil. Lower tions (notably on their borrowings). moral suasion campaign led by the interest rates would also spur a pick-up The Subcouncil concluded that most President to persuade Americans to of growth in the short run, perhaps well of the proposals that aimed to increase save more. Few Americans know how before the increase in saving actually private saving directly were unlikely to much they save, relying wholly on took effect because of the anticipatory produce any net increase in national Social Security and (in some cases) their tendencies of the financial markets. saving. Some of the devices, such as company pension plans. In fact, liberalized IRks, lead mainly to switches relatively few Americans save anything in the form of private saving rather than at all outside these channels. The to any significant net increase. Moreover, government could develop saving norms all of them reduce government revenues for different income groups, to imple-

38 A Comm: FrinlArssSTR1TRN FOR ANIFRR 4r ment the national saving goal recom- public dissaving, should simultaneously mended in this report and inform every seek to tilt private incentives in favor of 44 citizen of the implications for his or her saving and away from consumption. We Our target is personal situation. The Social Security now turn to the budget program in Administration now provides all which such tax changes must play a part. to increase national participants with full information on saving by about $40 -SO their contribution and prospective benefits but only upon request; it could Public Saving: billion per year do so annually on its own initiative as a The Budget Deficit basis for providing every adult, or at over the eight-year least those who seek it, a recommenda- Given the lack of reliable policy tion for the level of additional saving tools to directly increase private transition period..." needed to meet normal retirement and saving by any substantial amount, it is other objectives. essential to considerably alter the fiscal In addition, the Treasury Depart- position of the federal government in ment could look into other ways to order to raise national saving by 5 to 7 increase the propensity to save. For percent of GDP by the end of the example, special programs could be decade. The budget deficit (even crafted to inculcate the habit of saving including the surplus in the Social in young people. It is in:cresting to note Security Trust Fund) has eaten up over that the "Saving Stamp" program in two-thirds of all private saving through schools was abolished in the early 1970s the 1980s, leaving few domestic at about the same time that the national resources available to fund private saving rate began to fall. The federal investment. A full elimination of the government could also work with the deficit over the eight-year transition banking industry to assure that no-cost period has been proposed to provide savings accounts for small savers are enough resources to fund our full available. competitiveness program. An even An indirect way in which policy can more comfortable outcome, from the promote private saving is to discourage standpoint of assuring the needed private consumption, primarily by improvement in national competitive- increasing the taxation of consumer ness, would be to convert the deficit into goods and services. A dollar decline in a surplus of as much as 2 percent of consumption, at any given level of GDP by 2000. Any deficit reduction income, automatically becomes a dollar program must of course be consistent increase in saving. Hence the Council, with our goal of reducing unemploy- in its First Report, indicated that any ment over the relevant time period. future increases in tax policy, enacted to The Council's recommendations for cut the federal budget deficit and thus improving American competitiveness

4 G PrIT POPY. 1.* I AB(.E will require additional expenditures, national debt. Restoration of budget Productivity growth based on including tax expenditures, in several balance would permit fiscal policy once existing investment could rise as a areas: incentives for private investment, again to be used to counter cyclical result of the corporate restructuring public infrastructure, education and slowdowns in the economy. The of the late 1980s and aggressive use training, research and development. We inability to use fiscal policy has clearly of improved corporate governance estimate that these costs will total about prolonged the recent slowdown. procedures; encouraging preliminary 1 percent of GDP. Achievement of our On the other hand, it is extremely data for 1992 (productivity growth of overall target for budget correction will difficult to foresee the course of the 2.7 percent or more) suggest this may thus require additional correction of economy over a period as long as eight already be occurring. that amount, bringing the gross total of years. This will be especially true in an New policy actions, including those required budget deficit cuts to about 6 era of fundamental transformation such emanating from our own proposals, to 8 percent of GDP over the next eight as we are advocating. Moreover, it must could generate even more "bang for years. be recognized that the initial impact of the buck" than we anticipate and thus It might be prudent to target the reducing the budget deficit could be to reduce the increased level of invest- higher end of this range in light of the dampen growthwhich is no remedy ment (and hence saving) needed to historic tendency of the deficit to come for America's competitiveness problem. achieve our basic targets. in higher than expected, the inevitable We do not advocate budget correction slippage in implementation of any for its own sake but rather because we Private saving could rise auto- program, and the critical importance of believe it is essential to provide the nomously, as it fell autonomously raising national saving and investment resources needed to fund an expansion in the 1980s, reducing the needed as part of any comprehensive competi- of investment. That investment, in turn, reduction in public dissaving via tiveness strategy. Current declining is central to achieving our fundamental budget correction. long-term interest rates, resulting from goals of sharply increasing national In light of all these uncertainties, we the credibility given to the President's productivity growth and achieving a rate have decided to split our budget deficit reduction program, will provide a of economic expansion that will create recommendation into four parts. First, strong economic stimulant. But this high-wage jobs. we list a wide variety of options for credibility could be f:asily eroded if the It must also be recognized that the cutting the deficit as developed by our program falls short of its goal or if large benefits that offset the dampening effect Capital Formation Subcouncil. This spending programs are not tightly of budget correction will depend not menu should provide a useful guide for controlled. only on full implementation of the pro- the Administration, the Congress, and Moreover, there are significant competitiveness (and hence pro-growth) all others who want to assess the range benefits to budget correction that range measures proposed in this report, but of possibilities. beyond providing resources for a more also on market reactions, international Second, we support the basic thrust of competitive economy and reducing events, and other developments that lie the program proposed by President long-term interest rates. On fairness beyond the reach of policy and anyone's Clinton as a good start toward dealing grounds, each generation should pay for ability to forecast. In addition, favorable with the problem. If fully implemented, its own spending rather than pass on developments could occur that would that program would cut the deficit from those costs to future generations, in the reduce the magnitude of needed budget over 5 percent of GDP to about 2'A form of huge interest payments on the adjustment: percent of GDP over the next four years

40 A COME-ITT-INT:NESS STRATEGY FOR AMERICA 4 Figure 10 the problem later and because of the The Budget Deficit and Health Care Costs inevitable implications for immediate 7 budget action of any potential second- Medicare 0040. & Medicaid stage effort. Our Capital Formation Subcouncil CB0 developed a list of options both for Baseline 4 , Deficit cutting government expenditures and

Revised raising new revenues. The Subcouncil 3 Baseline did not make specific programmatic Deficit

2 recommendations to the Council, however, and we spent a good deal of time addressing the issue ourselves. Clinton Plan 0 Additional possibilities for cutting the 19901991 1992199319941995199619971998 19992000200120022003 deficit emerged during those discus- sions. SOURCE: Congressional Budget Office and the Office of Management and Budget The largest items identified in our (Figure 10). It would increase national growth by enhancing the returns to process as potential contributors to a saving by almost 3 percent of GDP by national investment in both human and budget correction package include: 1997. It would provide a good founda- physical capital. Firm decisions for the further defense spending cuts, changes tion for achieving the sharp increase in remainder of the decade would he based in the Social Security retirement age. investment that is needed to achieve our on the outcome of this reassessment of limits on COLAs for non-means tested fundamental goals. the results to date and the future pension programs, Medicare reforms, The third element is the conduct of outlook at that time. further cuts in discretionary spending an intensive "mid-course review" of the Fourth, our best present guess is that programs, and reductions in farm aid. entire situation as the initial four-year further deficit reduction will he needed. Additional revenue could come from period comes to an end. The budget The need may arise to replicate in the new taxes on cigarettes and alcohol, a picture will of course remain under second half of our eight-year period the value-added tax, limits on itemized constant surveillance, including by the proposed outcome for the initial four deductions, further raising marginal Competitiveness Policy Council. But yearsby further reducing the deficit income tax rates, reducing or eliminat- we recommend a particularly intensive that will remain even upon successful ing the home mortgage interest deduc- review in two or three years that would execution of the program proposed by tion, further increases in energy taxes (a assess the evolution of the key variables President Clinton for 1993-97. Given gas tax or carbon tax), limiting the to that point: productivity and all the uncertainties, we have decided employer health exclusion, and further econorr::: 61u, di themselves, changes not to make detailed proposals for that taxing Social Security benefits and in the revels of national investment and second phase of the effort at this time. Medicare insurance value. The totals saving (both public and private), Nevertheless, we will suggest several involved could far exceed the ci its progress in implementing a comprehen- illustrative possibilities in an effort both required to raise national saving even by sive competitiveness strategy as pro- to help the evolution of thinking that the maximum amounts that would be posed here, and its payoff in speeding may be necessary to deal with the rest of needed to achieve our investment and

4. A Co \WrITI-RTNrstiSTRATI- ( a FOR AMFRIc\ 41 productivity targets. tax credit should be made permanent in candor, finding it difficult to reconcile Some of President Clinton's pro- order to increase the share of invest- strongly divergent views of some of our posals appear on this list, and the ment in the economy on a lasting basis). members on both the size and shape of Council believes that the first step We particularly applaud the inclusion of the package. toward raising the national saving rate a new energy tax in the package because When President Clinton delivered should he early adoption of his program. it will encourage more efficientand his proposals on February 17, we No member of the Council agrees with therefore more productiveuse of therefore decided to put our personal every specific element of the President's energy by American consumers and differences aside, in the interest of proposals. Some Council members businesses. An energy tax also provides forging a national consensus on this believe that the overall program should additional incentives for private saving crucial issue, and to register our support be considerably larger. Some would by discouraging consumption; several for the basic thrust of his program. We prefer that a larger share of the reduc- Council members strongly prefer a suspect that modifications will be made tion in the deficit derive from cuts in considerably larger magnitude for that in specific components thereof and, as government expenditures. Others component of the program. Any such indicated, some Council members expressed doubt that such reductions program would have to include signifi- would support some of those changes. could be achieved without causing cant offsets to help low-income groups, The Council concludes unanimously, serious short-run dislocations through- such as energy assistance and earned however, that a substantial attack on the out the economy. We unanimously income tax credits. deficit is absolutely crucial to a lasting agree on the need for new revenue, in In the aggregate. however, we restoration of American competitiveness the context of a spending cut program, to applaud the President's effort to begin and that the President's proposals achieve these goals but there are differ- putting the country's fiscal house in constitute a major initial step in that ences of opinion on what size and form order. The Council knows, from its direction. those revenue measures should take. own experience, the difficulties of If the "mid-course review" that we Given our mandate, we are particu- crafting a budget program that is both advocate for 1995-96 reaches a conclu- larly concerned that the specific ele- effective in correcting the deficit and sion that additional budget action is ments of the programalong with its fair in distributing the resulting costs needed beyond 1997, more difficult overall contribution to raising the throughout society. Our group was able actions will probably be required. At national saving ratework toward to reach full consensus on the First that point, sizable expenditure cuts in improving the nation's competitive Report that we delivered to the Presi- domestic programs could probably be position. We are therefore gratified that dent and Congress inlarch 1992. We achieved only by addressing the non- the main components of the "short-term achieved unanimity on all of the means-tested entitlement programs, stimulus" part of the President's pro- recommendations contained in the notably health care. On health care gramthe investment tax credit and previous sections of this report, which reform, the Council has made no acceleration of public infrastructure constitute by far the largest part of our independent estimate of budget impact. investmentsare fully consistent with effort, despite the existence of sharp We simply assume that reform, includ- the recommendations for long-term differences of view at the outset of our ing its revenue component, will by FY competitive improvement presented in debates on a number of topics. We were 1997 trim costs below the rapidly the previous sections of this report striving to develop similar agreement on expanding baseline figure of the Con- (though we believe that the investment our budget proposals but were, in all gressional Budget Office by enough to

42 A C)MPFIFERTNESS Si RATEGI FOR AMERICA finance coverage of the population Another possibility, which we noted currently without health insurance. in our First Report and would restate Thus we assume no net impact on the here as a possibility to be seriously f we have the budget during our first four-year period considered, is an across-the-board from the impending changes in the consumption tax or a value-added tax vision, the will and the health care program. Beyond FY 1997, (VAT). Either would have the dual net savings might become possible and advantage of potentially raising sub- heart to make the would have to be considered in any stantial amounts of revenue while changes we must, we further budget efforts. simultaneously tilting the nation's On the revenue side, one future incentives toward saving and away from can still enter the 21st possibility, of course, would be to consumption. further increase the specific tax rates Definitive judgments on these steps, century with (at the same time cutting spending) or others that would extend the process included in whatever program emerges of cutting the budget deficit, should possibilities our from the current debate for the coming await the results of the initial phase of parents could not even four-year period. For example, each the effort and an evaluation of the additional cent per gallon in a gasoline situation in two or three years. The have imagined, and tax would raise an extra $1 billion of urgent step now is to begin the process revenue. Extending the increases in with a sizable, fair, and effective package enter it having secured marginal income tax rates for individuals such as that proposed by the President. the American dream not currently included in the President's American competitiveness cannot be plan would raise about $20 billion per restored without a firm commitment to for ourselves and percentage point. budget correction. future generations."

President Clinton Address to Joint Session of Congress February 17, 1993

5j The Future Work of the Competitiveness Policy Council

This is the Second Report of the Competitiveness Policy Council. The Congress intended the Council to be an ongoing operation. Some of our own members were initially skeptical about the value of the Council. All now feel strongly, however, that the quadripartite (business-labor-government-public interest) and bipartisan features of the Council enable it to play a uniquely constructive role in helping to shape both the national debate and policy alternatives in the wide array of competitiveness issues. Former Secretary of Commerce Barbara Franklin, who represented the Bush Administration on the Council in 1992, concluded from her experience with the group that "the Council represents a remarkable opportunity for sustained high-level bipartisan deliberation on the Nation's most pressing economic questions." We have spent considerable time considering the future role of the Council and how it can contribute most effectively to American competitiveness. We envisage a three-part program of work for the Council in 1993. First, on the basis of the detailed proposals made in this report, we intend to actively participate actively in the national

5i debate on specific competitiveness issues That Act requires the President and recommend changes in organizing the as they come before the Administration, agency heads to include a statement on Executive Branch. The Commission the Congress and the nation. the impact of relevant legislative pro- delivered its report, Harnessing Process to The legislation establishing the posals "on the international trade and Putpose, to then President-elect Clinton Council, the Omnibus Trade and Com- public interest of the United States" and on November 4 and publicly released the petitiveness Act of 1988, directs us to the ability of US firms to compete in report a week later. The new Administra- "provide policy recommendations to the foreign and domestic markets. No such tion has adopted the "three council Congress, the President, and the federal statements have been submitted, system" recommended by the Commis- departments and agencies regarding however, and the Congress has not sion, including a National Economic specific issues concerning competitive- insisted on them. We note the failure to Council that could coordinate and help ness strategies." In our initial delibera- do so and reiterate our proposal. direct the comprehensive competitive- tions in 1991, we concluded that we A second suggestion in our First ness strategy that we are advocating. should not comment on specific issues Report has been more successful. We To help our Council monitor and until we had studied the whole question concluded that the present governmen- promote implementation of our recom- thoroughly and developed our own tal structure of the United States "was mendations, we will maintain the eight proposals for reform. With eighteen not designed to help this country Subcouncils that played such a months of work and the release of this compete in a global economy" and crucial role in c. program overthe past set of recommendations, we now feel recommended designation of an agency year. The Subcouncils will not need to prepared to play the role of "competi- to begin assessing the likely course of meet as frequently in 1993 but will play a tiveness ombudsmen" assigned to us by key American industries, to provide a role in helping us track responses to their Congress. baseline against which to judge specific proposals and related developments. Second, we intend to monitor competitiveness problems in the future. Third, we will create five new closelyand actively campaign for We are pleased that the International Subcouncils to address key additional implementation of the proposals made Trade Commission (ITC) has now competitiveness iss, les during 1993. On in this report and in our First Report. In created an Office of Competitiveness to the basis of their work, the Council each of our future reports, we will institute such analyses. The Council and hopes to make recommendations in present our analysis of the progress the ITC have been working closely these areas in its Third Report in early made during the previous year in together in developing this idea and we 1994. The new Subcouncils will address: putting into practice both our own ideas look forward to continue to cooperate Creating High-Performance on competitiveness and those emanating with them in the future. Workplaces from other quarters, including the In addition, the conclusions in our government and private groups such as First Report that the government is not II Capital Allocation the Council on Competitiveness. presently organized to promote Ameri- Health Care During 1992, for example, no action can competitiveness was primarily Social Problems has been taken on the proposal in our responsible for a decision by the First Report for immediate implementa- Carnegie Endowment for International Tort Reform tion of the Competitiveness Impact Peace and the Institute for International 1. Creating high -pet formance Statements called for in the Omnibus Economics in mid-1992 to create the workplaces. It is clear from all of our Trade and Competitiveness Act of 1988. Commissi .n on Government Renewal to work to date, particularly in the Manu-

46 A (:( )MITITIRTNTSS STR VITGY FOR AMERICA facturing and Training Subcouncils, that social illsdrugs, crime, family break- 1. Services productivity. Services account for about 75 percent ofGDP the creation of "high performance down and the likehave a pervasive workplaces" is central to improving impact on our ability to compete. These and most of the sector has lagged badly American competitiveness. Doing so issues are not usually addressed by econo- in improving its productivity. However, requires intense and innovative collabo- mists or in the competitiveness context. it is difficult to address the problem generally because "services" cover such ration between labor and management. Yet they critically affect the country's industries 2. Capital allocation. New research, capabilities. We have therefore decided a wide range of different particularly as conducted at the Harvard to create a Subcouncil on thetopic. including airlines, banking, computer Business School under the sponsorship of 5. Tort reform. It is widely argued software, railroads, tourism, trucking and the like. We are already addressing the private sector Council on Competi- that excessive resort to the courts is tiveness, has raised fundamental ques- levying several hundred billion dollars some of the most important com- ponents of the sector, notably education tions about the efficiency of America's of "unproductive costs" on the economy system of capital allocation in supporting annually. This includes a significant and health care. 2. Banking reform. The health of the competitiveness of our economy. portion of the nation's medical costs. 3. Health care. In its First Report, The Council has been criticized for the American financial system is the Council identified health care costs failing to address this issue in its initial important for the economy's overall competitiveness. Our legal and institu- as one of the six most important work program. One reason we did not is competitiveness issues facing the United that it was being actively pursued at the tional framework is nevertheless a States. We decided not to create a time by the President's Council on carryover from the 1930s and compre- hensive banking reform failed in 1992. Subcouncil on the problem during Competitiveness in the Bush Adminis- Our Subcommittee on Capital Alloca- 1992, however, because plans for tration. That Council no longer exists, addressing it were still at an early stage however, and tort reform clearly offers tion will consider parts of this topic. and were being developed in a number important possibilities for reducing 3. Energy policy. Americans consume of forums. That work is now being done business and personal costs. about twice as much energy per capita as and it is clear that health care reform A number of other issues have been Europeans and Japanese. We now will now be at the top of the national suggested for consideration by the depend on foreign sources for more agenda until a new program can he Council. All have important implica- than half of our energy consumption. devised and implemented. The Council tions for American competitiveness and That ratio is expected to climb sharply believes that it is critical to be sure that we plan to keep them under review.We over the coming decade. Oil imports already account for about half the total any new program, becauseof its have resolved throughout our work, enormous impact on the economy,take however, to prioritize the many ele- trade deficit. (We have introduced the fully into account its effect on the ments of the competitiveness problem issue by including increased energy country's overall competitiveness. and devote attention to those which taxation as part of the budget package Hence we have created a Subcouncil to appear most important. Wenevertheless suggested in this report.) assess that aspect of the question. list the other issues that have been cited 4. Antitrust policy. Some believe that 4. Social problems. Throughout our to us most frequently, as an indicationof both present antitrust legislation, much work over the past year, especially on national concern over them and in the of which dates from a century ago, and the top priority issue of human capital, hope that others may choose to address its present implementation dampen the we confronted the fact that America's them in their own work: competitiveness of American industry in

A COMPETITIVENESS STRATEGY FOR AMERICA 47 a global economy. Our Trade Subcouncil people, who lie at theroot of our galvanizes itself to doso. We know from addressed several aspects of the issue and competence as a nation.It would some of the encouraging developments recommended a comprehensive analysis sharply increase investment inour in recent years that the underlying by the full Council. physical capital, both through higher strengths of this country remain intact. 5. Regulatory refrnin. Beyondtort private investment and throughrestora- We also know, however, thatwe are reform, it is widely asserted that other tion of the public infrastructure. It would competing with countries thatare forms of governmental regulation devote a much greater effortto develop- moving ahead rapidly in today's highly concerning the workplace, the environ- ing and, particularly, to commercializing interdependent worldeconomy. The ment and other central elements of the technology. It proposesa more effective urgency of launching the reform process economyare generating hundreds of trade policy to support the restoration of is greater than ever. billions of dollars of "unproductive our competitive strength. The Council is greatly encouraged costs." After declining in the middle The Council's program calls fora that the new Administration is movingin 1980s, these costs apparently beganto sharp alteration in America's national many of the directions advocated a year rise again in the last fewyears. As with priorities: from consumption and ago in our First Report and in far greater "services productivity," however,a major borrowing to investment and saving, in specificity in this report. We deeply problem in addressing the issue is the both the private and publicsectors. It appreciate the strongly positive reaction vast numberand widely different seeks to promote a shift in the allocation to our First Report in the Congress, and of investment, from natureof the components of theissue. some of the less its constant encouragement ofour work. We have already lookedat some of them, productive avenues of the 1980sto We believe that our effortto reach out to sectors that are central to our long-term such as export controls and other trade the business, labor and othercommuni- competitiveness. It recommendsa regulations, and will be consideringa ties in the course ofour effort has been program to pay for these shifts respon- number of others in our Subcouncilson exceedingly fruitful, and fully justifies the tort reform, health care, high perfor- sibly, particularly by beginning the diffi- judgment of the Congressto create our cult but crucial mance workplaces, and capital allocation. process of restoring fiscal Council as a unique quadripartite body. stability to the government itself. Only We hope that thisreport will help by making the needed investmentsnow, advance both public understanding of and by generating the Conclusion resources to do so America's competitiveness problem and responsibly, can the United States look promote the adoption of a comprehen- The United States continuesto face a forward to a bright economic future. sive policy strategy to major competitiveness problem correct it. We Our bipartisan, quadripartite Council believe there is a goodprospect that, with despite the recentlymore favorable urges early adoption of the program such understanding and effort, the economic and productivitynews. The presented in this report. We believe that United States can becomea fully new Administration and Congress havea the American peopleare not only ready competitive nation again by 2000the historic opportunity to deal with it. This for such a program but in fact are end of the decade, the end of thecentury, report offers a comprehensive strategy insisting on it. Political leaders have and the end of two Presidentialterms. for doing so. everything to gain from instituting the Our fundamental goal isto restore Our strategy would address each effort and much to lose if they shrink American competitiveness for the major component of America'scompeti- from doing so. twenty-first century andwe look forward tiveness problem. It would sharply We know from past history thatthe to working closely with the new Admin- increase national investment inour United States can meet the challenge ifit istration and the Congressto that end.

48 A Court l'ITIVFNESS STRATE(N FORAMERICA March 5, 1993

Dr. C. Fred Bergsten Chairman Competitiveness Council 11 Dupont Circle, N. W. Washington, D. C. 20036

Dear Fred:

I have previously indicated to you that I have serious problems with the "Public Saving: The Budget Deficit" section of the Second Annual Report of the Competitiveness Policy Council. These serious differences are not over the very real need for deficit and debt reduction --we allagreeon this. The differences are over the fact that the plan proposed by the Administration will cause the national debt to increase by another trillion dollars over the next four years, with essentiallyno meaningful reduction in government expenditures. The plan, as proposed, essentially reduces the rate at which the national debt increasesby raisingtaxes significantly. The problem is government spending, not taxes. I am very disappointed that the Competitiveness Policy Council chose to spend so much of its resources on formulating multiple techniques to raise taxes, which are counter-competitive, rather than tackle the difficult task of identifying spending programs that should be significantly reduced or eliminated.Delaying these spending cuts another two to four years is not in the best interest of the nation and its people.

John J. Murphy

50 BUILDIM. A (:0\IPVIT11\1:.A.\11.R1(.1 About Our Members

RAND V. ARASKOG has been Secretary of the Treasury for Interna- the U.S. Chamber of Commerce and the Chairman, President and Chief Exec tional Affairs from 1977-1981 and served U.S.-China Business Council. utive Officer of the ITT Corporation on the senior staff of the National since 1980. He is also chairman of the Security Council from 1969-1971. Dr. EDWARD V. REGAN is the New York Supervisory Board of Alcatel N.V, MT's Bergsten is the author of 19 books on a State Comptroller. Ile was first elected joint venture with Alcatel Alsthom of wide range of international economic to this position in 1978 and is now serv- France, the world's largest telecommuni- issues, most recently America in the ll'orld ing his fourth term. Among his many cations manufacturing company. Mr. Economy: A Strategy for the 1990s. duties is the trusteeship of New York Araskog is a director of several corpora- State's pension funds, whose assets now tions, the New York Stock Exchange, WILLIAM GRAVES is the Secretary of total over S50 billion. He was a member and the Federal Reserve Bank of New State of Kansas. He was first elected in of the President's Commission on Indus- York. He is a member of the Business 1986 and is now serving his second term. trial Competitiveness in 1983-85. Mr. Roundtable and author of The ITT He is a member of the board of the Regan teaches at the Stern Graduate He spent five years at the Department of National Association of Secretaries of School of Business (NYU) and writes Defense during the late 1950s. State and of Leadership Kansas. He is and lectures frequently on municipal also a member of the American Council finance, pensions, and corporate gover- JOHN J. BARRY is the International of Young Political Leaders and has nance issues. President of the International Brother- served as an election observer in Taiwan. hood of Electrical Workers, a position he Mr. Graves is active in numerous civic BRUCE R. SCOTT is the Paul \V has held since 1986. He started as an organizations including the Kansas Cherington Professor of Business apprentice in the electrical construction Chamber of Commerce and Industry. Administration at the Harvard Business industry in 1942 and has held numerous School, where he has taught since 1962. elected positions in organized labor since JOHN J. MURPHY has been Mr. Scott teaches a course in compara- 1962. He is a Vice President and Chairman, President and Chief tive economic strategies of countries and Executive Council member of the AFL- Executive Officer of Dresser Industries, has co-authored a study of industrial pol- CIO. He serves on many boards includ- Inc. since 1983. He serves on the boards icy in France, an analysis of the Vene- ing the U.S. Council for Energy of PepsiCo, NationsBank Corporation, zuelan economy, and more recently a Awareness and the American and Kerr-McGee Corporation. Mr. study of the prospects for transition in Productivity Center. Murphy is also Chairman of the Board of South Africa. He is co-author (with Trustees of St. Bonaventure University, George Lodge) of US. Compethinwessin C. FRED BERGSTEN, Chairman of and U.S. Chairman of the Trade and the Trorld Economy. the Council, is Director of the Institute Economic Council. He serves on the for International Economics, which he Board of Trustees of Southern Methodist founded in 1 QR- 1I-Iewas Assistant University and the Board of Directors of

BLII.DINC,:\CO\II'l 1111\ I.1\11 \ 51 ALBERT SHANKER is President of the 1976-77, Ener2v Adviser to the American Federation of 'leachers. a post Governor of Texas from 1979-83, and he has been elected to since 1974. He has Chairman of the Texas Department of taught in the New ibrk City public Commerce from 1987-91. He is a direc- schools and at the graduate level. He is a tor of the A.\ IR Corp., advisor to several vice president and Executive Council venture funds, and a trustee of The member of the AFL-CIO. Mr. Shanker Massachusetts Institute of Technology. serves on numerous boards including the National Academy of Education and the LYNN R. WILLIAMS is the National Council on Education Standards International President of the United and Testing. His weekly column, "Where Steelworkers of America, a position he We Stand," has appeared regularly for has held since 1983. He is a Vice over 21 years. President and Executive Council Member both of the AFL-CIO and of its ALEXANDER B. TROWBRIDGE is Industrial Union Department. Mr. President of 'Frowbridge Partners, Inc. Williams is a member of numerous orga- which he founded in 1990 following ten nizations including thCollective years as president of the National Bargaining Forum, the National Association of Alanufacturers. He has Committee for Full Employment, the held a number of positions in the public Committee for National Health and private sectors including U.S. Insurance, the National Planning Secretary of Commerce from 1967-68, Association, the National Institute for President of the Conference Board, and Dispute Resolution and the Economic Vice Chairman of Allied Chemical Corp. Policy Institute. Iie serves on ten corporate boards and is a charter trustee of Phillips Academy in Andover, Massachusetts.

EDWARD 0. VETTER is President of Edward 0. VetterAssociates. Ile previously held a number of positions at Texas Instruments including Executive Vice President and (lief Financial Officer. Since retiring from Texas Instruments Air. Vetter has served as Undersecretary of Commerce from

r tri 52 Bt. (Lnimi :1C:oNti,L it 111 I A \II RI(1, Capital Formation Subcouncil

Chairman Peter G. Peterson Chairman, The Blackstone Group Neil Howe, Staff Director

Membership Barry P. Bosworth Robert Pollin Senior Fellow, Brookings Institution Professor, University of California, Riverside Charles A. Corry James M. Poterba Chairman and CEO, USX Corporation Professor, MIT Benjamin Friedman Edward V. Regan William Joseph Maier Professor of Political Comptroller, State of New York Economy, Harvard University Barry Rogstad James Galbraith President, American Business Conference Professor, University of Texas at Austin Warren B. Rudman Joseph T. Gorman US Senate Chairman, President and CEO, TRW, Inc. Raymond C. Scheppach William Gray Executive Director, President and CEO, United Negro College National Governors' Association Fund John B. Shoven George Hatsopoulos Director, Center for Economic Policy Research, President, Thermo Electron Corp. Stanford University Yolanda Henderson C. Eugene Steurele Economist, Federal Reserve Bank of Boston Senior Fellow, The Urban Institute David G. Mathiasen Lawrence H. Summers Special Assistant to the Assistant Comptroller Vice President and Chief Economist, General, General Accounting Office The World Bank Robert S. McIntyre Margo Thorning Director, Citizens for Tax Justice Chief Economist, American Council on Capital Formation Paul H. O'Neill Chairman and CEO, Alcoa Brian Turner Vice President, Industrial Union Department, Van Doom Ooms AFL-C10 Senior Vice President and Director of Research, Committee for Economic Development John White Vice President, Integrated Systems, Rudy Oswald Eastman Kodak Company Director, Economic Research Department, AFL-CIO

A COMPHITIVFNESS STRATEGY FOR AMERICA 53 Corporate Governance Subcouncil

Chairman Edward V. Regan Comptroller, State of New York Carolyn Brancato, Staff Director

Membership Bruce Atwater Betty K. Krikorian John Pound Chairman and CEO, General Mills, Inc. Attorney & Associate Director, Professor and Director, Corporate Voting florin Center for Banking Law Studies, Lewis W. Bernard Research Project, John F. Kennedy School Boston University School of Law of Government, Harvard University Advisory Director, Morgan Stanley & Co., Inc. Martin Lipton Bruce Scott Attorney.achtell, Lipton, Rosen & Katz Professor, Harvard Business School W. Gordon Binns, Jr. President, General Motors Investment Patricia Lipton Jack Sheinkinan Management Corporation Executive Director, II 7sconsin Investment President, Amalgamated Clothing and Board Textile Workers Union Joseph Blasi Professor, Institute ofIanagement & Philip Lochner Christopher Steffen Labor Relations, Rutgers University Senior Vice President. Time Ii "timer, Inc. Chief Financial Officer, Honeywell. Inc. Richard C. Breeden Jay M. Lorsch Chairman, Securities and Exchange Professor, Harvard Business School Kathy Utgoff Commission Economist, Groom & Nor dberg Claudine B. Malone Tullio Cedraschi President, Financial & .Management Harold M. Williams President and CEO, Consultants, Inc. President and CEO, CN Investment Division The J. Paul Getty Foundation Ira \Iillstein Jonathan Charkham Attonuy, I Veil. Gotshal 6- .1 langes Lynn R. Williams Advisor to the Governors, International President, Bank of England John Neff United Steelworkers of America Senior I 'ice President, James L. Cochrane Wellington Management Company Nancy Williams Chief Economist and Senior l'ice Deputy Executive Director and General PresidentVriv York Stock Exchange Donald S. Perkins Counsel, Public Employees Retirement Former Chairman, jewel Industries William H. Donaldson Association of Colorado Chairman and CEO, New York Stock Exchange, Inc.

54 A CONITTII IININESS ST12\111,1 Ft )12 ANIF RI( Critical Technologies Subcouncil

Chairman Erich Bloch Distinguished Fellow, Council on Competitiveness David Cheney, Staff Director

Membership Eleanor Baum Edward B. Fort William D. Phillips Dean, Albert Nerken School of Chancellor, North Carolina Agricultural Former Associate Director of Industrial Engineering, Cooper Union and Technical State University Technology, Office of Science & Technology Policy Frederick M. Bernthal John S. Foster Deputy Director, National Science Consultant, TRIV, Inc., and Chairman, Lois Rice Foundation Defense Science Board Guest Scholar, Brookings Institution Sherwood L. Boehlert William flapper Nathan Rosenberg US House of Representatives Director, Office of Energy Research, Director of Program for Technology US Department of Energy Economic Growth, Stanford University Michael G. Borrus Co-director, Berkeley Roundtable on Joseph S. Hezir Howard D. Samuel International Economics Principal, EOP Group, and former President, Industrial Union Department, Deputy Assistant Director, Energy and AFL-CIO Rick Boucher Science Division, OMB US House of Representatives Hubert J.P. Schoemaker Richard K. Lester President and CEO, Centocor, Inc. Lewis M. Branscomb Director, Industrial Peljb rm a nee Center, Professor, Harvard University MIT Charles Shanley Director of Technology Planning, Daniel Burton John W. Lyons .Motorola Executive Vice President, Council on Director, Vational Institute fir Standards Competitiveness and Technology Richard H. van Atta Research Staff Alen/her, Institute for Dennis Chamot Daniel P. McCurdy Defense Analyses Executive Assistant to the President, AM/Jager, Tffhnology Polley, I13.11 Department of Professional Employees, Robert M. White AFL-CIO Joseph G. Morone Under Secretary for Thchnology, Professor, Rensselaer Polytechnic Institute, US Department of Commerce John Deutch School of'llanagement Professor, 111T Eugene Wong Al Narath Associate Director of Industrial Technology, John W Diggs President, Sandia National Laboratories Office of Science & Technology Policy Deputy Director for Extramural Research, Department of Health and Human Richard R. Nelson Services Proftssor. Columbia University Craig Fields President and CEO, .l

6: A Cowl:1111yr rss STR_vivm A.N1ERICA 55 Education Subcouncil

Chairman Albert Shanker President, American Federation of Teachers Bella Rosenberg, Staff Director

Membership Paul E. Barton Lydia Marshall Director, Policy Information Center, Senior Vice President, Marketing Division, Educational Testing Service Student Loan Marketing Association John Bishop Richard P. Mills Professor, Cornell University School of Commissioner, Department of Education, Labor and Industrial Relations State of Vermont Alan K. Campbell Diane Ravitch Visiting Executive Professor, Wharton School Assistant Secretary for Education Research and Improvement, US Department of Education Linda Chavez Senior Fellow, Manhattan Institute Isabel V. Sawhill Senior Fellow, The Urban Institute and Constance Clayton Columbia University Superintendent of Schools, Philadelphia School District Kurt Schmoke Mayor, City of Baltimore, Maryland Chester E. Finn, Jr. Professor of Education and Public Policy (on Dorothy Shields leave), Vanderbilt University, and Founding Director, Department of Education, AFL-CIO Partner, The Edison Project Paul Simon William D. Ford US Senate US House of Representatives Marshall S. Smith Keith Geiger Dean, School of Education, Stanford University President, National Education Association Harold W. Stevenson Joseph T Gorman Center for Human Growth & Development, Chairman, President and CEO, TRW Inc. University of Michigan Steven Gunderson Susan Traiman US House of Representatives Program Director, Education Program, National Governors' Association Sylvia Ann Hewlett Author Harrison B. Wilson President, Norfolk State University Joe A. Howell President, Central Methodist College Alan L. Wurtzel Chairman, Circuit City Stores, Inc. Ira Magaziner President, SJS, Inc.

6 56 A Co, PEITIWENESS STRATEGY FOR AMERICA Manufacturing Subcouncil

Chairman Ruben F. Mettler Former Chairman and CEO, TRH' Inc. Christopher T. Hill, Staff Director

Membership R. Darryl Banks Richard F. Gaertner Thomas J. \Iurrin Director, Program on Technology and the Director, Center for Advanced Technology Dean, Business and Administration, Environment, World Resources Institute Development, Iowa State University Duquesne University Jeff Bingaman Nancy L. Johnson Ian M. Ross US Senate US House of Representatives President Emeritus, AT&T Bell Laboratorie H. Kent Bowen George J. Kourpias Professor, Harvard Business School International President, William V. Roth, Jr. International Association of US Senate W. Dale Compton Machinists and Aerospace Il'orkers Lillian .11. Gareth Distinguished Claudine Schneider Professor of Industrial Engineering, Karl J. Krapck Senior 1'ice President, Purdue University Chairman and CEO, Carrier Corporation Energia Global International Malcolm R. Currie John J. LaFalce Robert J. Schultz Chairman and CEO, emeritus US House of Representatives 1 'ice Chairman, Genetwlktors Hughes Aircraft Company Colportition Carl Levin George David US Senate Laura D'Andrea Tyson President and COO, Director, Institute of International United Technologies Corporation Trent Lott Studies, University of California, Berkeley US Senate Don H. Davis, Jr. Robert M. White President, Alen- Bradley Company Walter E. Massey Under Secretary* Technology, Director, L'S Department of Commerce Donald E Ephlin National Science Foundation Vice President, Daniel Yankelovich United Auto Workers, retired Jeffrey L. Mayer Chairman. MG, hie. Director, Office of Policy Analysis, Martin Feldstein US Department of Commerce John L. 'Zabriskie President and CEO, Senior ['ice President, Merck Co., Inc. National Bureau of Economic Research Lee L. Morgan Chairman and CEO, Caterpillar Inc., retired

6`; A (; o\ipl [III\ \ I ss SI\ II(,) 1:1)1; A \II RI(\ 57 Public Infrastructure Subcouncil

Chairman Gerald L. Babies Partner, Hunton 6 I{ rllinms and former Goz:ernor of 177:ginia Gilah Langner, Staff Director

Membership David Alan Aschauer Emil H. Frankel Kenneth Olson Elmer Campbell Professor of Commissioner, Department of I'ice President, Municipal Finance Economics, Bates College Transportation, State of Connecticut Department, Goldman, Sachs & Co. Kay Braaten Frank Hanley Clyde V Prestowitz, Jr. Commissioner, Richland County, General President, International President, Economic Strategy Institute State of North Dakota Union of Operating Engineers Robert A. Roe Conrad Burns Charles R. Hulten U.S House of Representatiz.es US Senate Professor. University of Maryland Felix Rohatyn Sarah Campbell Herbert Kelleher Senior Partner. Consultant CEO, Southwest Airline., Company Lazard Freres 6- Company Patrick Choate Thomas D. Larson T. Peter Ruane Managing Director, Administrator, President and CEO. Ameriain Road Manukruring Policy Project Federal Highway Adminiomtion and Transportation Builders Assn. William F. Clinger, Jr. David A. Levy James R. Thompson US House ofRcpresentatiz'es Director. Partner, If 7nston c?Strazvn and The Lezy Institute Forecasting Center former Governor of Illinois Nancy Rutledge Connery Consuhant Lillian C. Liburdi Richard H.K. Vietor Director, Port Department, The Port Profrssor, Harcard Business School Mortimer L. Downey Authority of Neu. York jersey Exrculiz.e Director and CFO. Erwin von den Steinen Metropolitan Transportation Ray tabus President, International Transport Authority, .State of .Vezz. York' Former Goz..erno, Mississippi Policy Analysis Thomas Al. Downs Dee Maki James A. Wilding Comissione, Department of National President, General .1lanager and CEO, I an:pot-ration. State of New.7ersey Associatica Hight Attendants Aletropolitan II'ashington Airports Authority Barbara Dyer Richard P. Nathan seaior Research ..1y;ociate, National Pmz...o.o, Rockefeller College Robert B. 'Wood of Public Admidistnnion Director. Research Economics. Carol O'Cleireacam International Brotherhood q. Jeff Faux Commi.gioner, Nez:: York City Electrical -orkers Peshk nt, Lymomic Policy Institute Department of Pittance

58 \ cmiri SIR \(,1 FoR .111R1( Trade Policy Subcouncil

Chairman John J. Murphy Chair nan and CEO, Dresser Industries Paula Stern, Staff Director

Membership Morton Bahr Robert Johnson J. David Richardson President, Chairman and CEO. The Johnson Professor, Syracuse University, and I'isiting Communications TI'orkers of America Company Fellow, Institute for International Economics Dexter E Baker Julius Katz Chairman and CEO-Iir Products Deputy US Trade Representative Jay Rockefeller US Senate Theodore H. Black George Landegger Chairman, President and CEO. Chairman, Parsons frhittemore Howard D. Samuel Ingersoll-Rand Company President, Industrial Union Department, John D. Macomber APL-C10 James Bovard President and Chairman, Export-Import Consultant Bank of the United States Susan C. Schwab Director General of the US and Foreign John Danforth Robert L. Mallett Commercial Service, US Department of US Senate City .-Idministrator Government of the Commerce District of Columbia Donald V. Fites Richard P. Simmons Chairman and CEO, Caterpillar Inc. Irene \V. Meister Chairman, Allegheny Ludlum t icePresident, Corporation Sam Gibbons American Paper Institute, ble. US House of Representatives Paula Stern David Mulford President, The Stern Group Gary Horlick Under Secretary for International Affitirs, Partner, 0'.11elveny & Myers 1..7S Department of the Treasury Alexander B. "Trowbridge President, Trowbridge Partners Amo Houghton Robert Neimeth US House of Representatives President, Pfiz:er International Lynn R. Williams President, United Steelworkers qf. America Jerry Jasinowski Clyde V. Prestowitz, Jr. President, President, &mom c Strategy Institute Alan Wm. Wolff National Association of Alannfircturers Attorney, Demy Ballantine

A(:( ivl m.ssSI R 111 (.)1:0It. All RIC \ 59 Training Subcouncil

Chairman Lynn R. Williams President, United Steelworkers of.-Imerica Leslie Loble, Staff Director

Membership Dave Barram Larry INIishel I 'ice President, Corporate Affaits, Apple Computer Research Director, Economic Policy Institute Anthony Carnevale Paul Osterman President, -Imerican Society for Training and Profrssor, .1117' Development Arnold Packer Badi Foster Senior Fellow, johns Hopkins University I'ice President, -letna Life and Casualty Joan Patterson Frank Goldsmith -Evecutive Co- director, Profissor, Empire State College 7 'Wining System Mary Rose Hennessey AJ. Pearson Evecutive Director, Northern Illinois Executive Director, International Univeisity Brotherhood of Electrical I-I'm-kers Louis Jacobson Don Pease Project Director, Irestat, US House of Representatives James M. Jeffords Markley Roberts US Senate Assistant Director, Economic Research Department, AFL-CIO Richard Kazis Director of If 'ork-Based Learning Programs, Joel Rogers Jobs for the Future, Inc. Professor, University of Ii "isconsin, Madison William K. Kolberg Ernest J. Savoie President and CEO, National Alliance of Director, Employment Development Office, Business Ford /oto Company Malcolm R. Lovell, Jr. Audrey Theis President and CEO, National Planning Assistant Secretary, Maryland Department of Association Economic Development Ira Magaziner James Van Erden President, SJS, Inc. Administrator, OfficeOfII ark -Based Ll7111ing, CS Department of Labor Ray Marshall Professor, University of Texas I I a rris vofford US Senate Lenore Miller International President, Retail, II'bolesale and Department Store Union

0 A compril n S F()R The Competitiveness Policy Council's Mandate

The Competitiveness Policy Coun- making in government and industry; (8) identify cil was created by the Omnibus (4) create a forum where national Trade and Competitiveness Act of 1988. (A) Feural and private sector leaders with experience and background It is charged with making recommenda- resources devoted to increased com- in business, labor, academia, public tions to the President and Congress on petitiveness; and interest activities, and government shall how to improve the nation's competi- identify and develop recommendations (B) State and local government tiveness. The Council's objectives, as to address problems affecting the eco- programs devised to enhance com- stated in Public Law 100-418 (Section nomic competitiveness of the United petitiveness, including joint ventures 5204), are to: States; between universities and corpora- (1) develop recommendations for tions; (5) evaluate Federal policies, regula- national strategies and on specific poli- tions, and unclassified international cies intended to enhance the productivi- (9) establish, when appropriate, sub- agreements on trade, science, and tech- ty and international competitiveness of councils of public and private leaders to nology to which the United States is a United States industries; develop recommendations on long-term party with respect to the impact on strategies for sectors of the economy (2) provide comments, when appro- United States competitiveness; and for specific competitiveness issues; priate, and through any existing com- ment procedure, on (6) provide policy recommendations (10) review policy recommendations to the Congress, the President, and the developed by the subcouncils and trans- (A) private sector requests for gov- Federal departments and agencies mit such recommendations to the ernmental assistance or relief, specifi- regarding specific issues concerning cally as to whether the applicant is Federal agencies responsible for the competitiveness strategies; implementation of such recommenda- likely, by receiving the assistanceor tions; relief, to become internationally (7) monitor the changing nature of research, science, and technology in the competitive; and (11) prepare, publish, and distribute United States and the changing nature (B) what actions should be taken reports containing the recommenda- of the United States economy and its tions of the Council; and by the applicant as a condition of capacity such assistance or relief to ensure (12) publish their analysis and rec- that the applicant is likely to become (A) to provide marketable, high ommendations in the form of an annual internationally competitive; quality goods and services in domes- report to the President and the tic and international markets; and (3) analyze information concerning Congress which also comments on the current and future United States eco- (B) to respond to international overall competitiveness of the American nomic competitiveness useful to decision competition; economy.

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4' Acknowledgments

The Council expresses its deep Glakas, Ardon Judd, Jeff Mayer, Bella appreciation to our Subcouncil Rosenberg, Jack Sheehan, and Robert Chairmen and Staff Directors: Pete Wood. Helpful guidance was also con- Peterson and Neil Howe (Capital tributed by Robert Greenstein, Kent Formation), Erich Bloch and David Hughes, Ken Jarboe, Ed McGaffigan, Cheney (Critical Technologies), Edward Warwick McKibbin, Van Doom Ooms, Regan and Carolyn Brancato (Corporate Greg Principato, Bill Reinsch, Dorothy Goverance and Financial Markets), Albert Robyn, Robert Reischauer, John White, Shanker and Bella Rosenberg and Dan Yankelovich. (Education), Ruben Mettler and Most of all, we are grateful to the tal- Christopher Hill (Manufacturing), ented and hard-working Council staff Governor Gerald Baliles and Gilah and others for their assistance through- Langner (Public Infrastructure), Jack out the year and in particular in produc- Murphy and Paula Stern (Trade Policy), ing this report. The Council recognizes and Lynn Williams and Leslie Loble the tireless efforts of: Jeannine Atalay, (Training). They were assisted by: Brian Blackstone, Chris Coleman, Kevin Crum, Penny Gibbs, Ted Jones, Angela Cromartie, Martha Hall, Julie Julie Kimmel, Scott Kleinberg, Julia Kimmel, Gilah Langner, Richard Levy, Morgan, Amy Petri and Jonathan Coleen McGrath, Frances Melvin, Rick Whittle. All these people skillfully Samans and Alda Seubert. Special shepherded a great deal of work and thanks goes to Steve Charnovitz, the diverse opinion through to a successful Council's Policy Director. conclusion in a short timeframe. The report was designed and Valuable input and advice were typeset by Studio Services: the cover received throughout the year from was designed by Supon Design Group. numerous individuals. Members of the Photographs were provided by Council have been assisted by Nicholas LINIPHOTO.

C. Fred Bergsten Howard Rosen Chairman Executive Director COMPETITIVENESS POLICY COUNCIL 11 Dupont Circle, NW Suite 650 Washington, DC 20036-1207

TEL: (202) 387-9017 FAX: (202) 328-6312 65