Rethinking Competitiveness HHassett.indbassett.indb i 111/8/121/8/12 99:27:27 PMPM HHassett.indbassett.indb iiii 111/8/121/8/12 99:27:27 PMPM Rethinking Competitiveness Kevin A. Hassett, Editor The AEI Press Publisher for the American Enterprise Institute WASHINGTON, D.C. HHassett.indbassett.indb iiiiii 111/8/121/8/12 99:27:27 PMPM Distributed by arrangement with the Rowman & Littlefield Publishing Group, 4501 Forbes Boulevard, Suite 200, Lanham, Maryland 20706. To order, call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries, please contact AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036, or call 1-800-862-5801. Library of Congress Cataloging-in-Publication Data Rethinking competitiveness / Kevin A. Hassett, Editor. pages cm Includes bibliographical references and index. ISBN 978-0-8447-7250-9 (hbk.) — ISBN 0-8447-7250-X (hbk.) — ISBN 978-0-8447-7251-6 (pbk.) — ISBN 0-8447-7251-8 (pbk.) — ISBN (invalid) 978-0-8447-7252-3 (ebook) — ISBN (invalid) 0-8447-7252-6 (ebook) 1. Competition. I. Hassett, Kevin A. HF1414.R48 2012 338.6'048—dc23 2012031415 © 2012 by the American Enterprise Institute for Public Policy Research, Wash- ington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not neces- sarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. Printed in the United States of America HHassett.indbassett.indb iivv 111/8/121/8/12 99:27:27 PMPM Contents LIST OF ILLUSTRATIONS ix PREFACE xiii 1. TIEBOUT AND COMPETITIVENESS, Kevin A. Hassett, R. Glenn Hubbard, and Matthew H. Jensen 1 Charles Tiebout, Foot Voting, and Competition among Localities 5 Tiebout and a New View of “Competitiveness” 17 Conclusion 23 Notes 23 References 24 2. COMPETITIVE TAX POLICY, Joel Slemrod 32 What Exactly Is Competitiveness? 32 How Can Competitiveness Be Measured? 35 Taxation and Competitiveness 37 A Short Digression on Unpersuasive Economic Arguments 40 Business Taxation 42 International Considerations 49 The Corporate Tax and Prosperity: Facts and Evidence 53 Summary 62 Notes 63 References 65 3. EDUCATION AND GLOBAL COMPETITIVENESS: LESSONS FOR THE UNITED STATES FROM INTERNATIONAL EVIDENCE, Martin West 68 Ranking the U.S. Education System: Quality and Quantity Indicators 72 The Economic Costs of Low-Quality Education 82 v HHassett.indbassett.indb v 111/8/121/8/12 99:27:27 PMPM vi RETHINKING COMPETITIVENESS Policy Lessons 86 Notes 90 References 91 4. IMMIGRATION, PRODUCTIVITY, AND COMPETITIVENESS IN AMERICAN INDUSTRY, Gordon H. Hanson 95 Immigration and Competitiveness in Theory 100 Empirical Evidence on Immigration and Competitiveness 106 U.S. Immigration Policy and American Competitiveness 122 Notes 128 References 129 5. THE ROLE OF INNOVATION AND INTELLECTUAL PROPERTY IN ECONOMIC COMPETITION, Robert J. Shapiro 132 The Economic Value of Innovation 133 The Value of Intellectual Property Rights 135 How Innovations Diffuse across Economies 139 Competition: Efficiency versus Innovation 143 Conclusions 148 Notes 152 References 152 6. AMERICAN COMPETITIVENESS AND THE HEALTH CARE SYSTEM, Michael E. Chernew and Philip I. Levy 156 Productivity versus Competitiveness 159 The Health System’s Effect on the Economy 169 Comparing International Health Approaches 178 Conclusions 187 Notes 188 References 189 7. IS THE UNITED STATES “COMPETITIVE” INTERNATIONALLY IN HEALTH CARE? Benjamin Zycher 196 Some Conventional Wisdom on the U.S. Health Care System 197 Some International Evidence on Prices and Services 202 The Comparative Performance of the U.S. Health Care System 209 Concluding Observations 215 Notes 216 References 220 HHassett.indbassett.indb vvii 111/8/121/8/12 99:27:27 PMPM CONTENTS vii 8. GLOBAL VALUE CHAINS AND THE CONTINUING CASE FOR FREE TRADE: TRADE THEORY AND ILLUSTRATIONS FROM THE UNITED STATES AND EAST ASIA, Claude Barfield and Matthew H. Jensen 225 Two Unbundlings of Trade and Shifting Policy Implications 227 The First Unbundling and the Big Ideas of Trade Theory 228 The Second Great Unbundling 239 East Asian Fragmentation and Supply Chains: The Impact on Trade Data and Analysis 245 The United States and Global Supply Chains 260 Observations and Conclusions for Policy 268 Notes 270 References 273 9. INTERNATIONAL COMPETITIVENESS, Phillip Swagel 278 Uses and Meanings of “Competitiveness” 283 Capital Markets Competitiveness 293 Policy Appeals to Competitiveness 295 International Competitiveness in the Modern Vernacular 299 Notes 300 References 300 INDEX 303 ABOUT THE AUTHORS 325 HHassett.indbassett.indb vviiii 111/8/121/8/12 99:27:27 PMPM HHassett.indbassett.indb vviiiiii 111/8/121/8/12 99:27:27 PMPM List of Illustrations Figures 1-1 Consensus Bidding and Sorting 15 1-2 Distribution of Top Statutory Corporate Tax Rates in the OECD 20 1-3 Distribution of Effective Average Corporate Tax Rates in the OECD 21 3-1 Math and Science Achievement in OECD Countries 74 3-2 Math Achievement vs. Educational Expenditure across OECD Countries 75 3-3 Science Achievement vs. Educational Expenditure across OECD Countries 76 3-4 Share of Adults in 2008 with Postsecondary Degree in Select OECD Countries, by Age Range 80 4-1 Share of U.S. Employment by Education Group 107 4-2 Immigrant Share of U.S. Employment by Education and Experience 109 4-3 Immigrant Share of U.S. Employment for Highly Educated Workers 110 4-4 Student Visas Issued by the U.S. Government 115 4-5 Foreign Graduate Students in U.S. Universities 116 4-6 Annual Cap on New H-1B Visas for Skilled Labor 119 4-7 Distribution of Legal Permanent Resident Visas, 1999–2008 121 4-8 Composition of U.S. Foreign-Born Population by Legal Status, 2007 123 4-9 Percent of Foreign Born in the National Population 124 4-10 Percent of Immigrant Population with 13-Plus Years of Education, 2000 125 ix HHassett.indbassett.indb iixx 111/8/121/8/12 99:27:27 PMPM x RETHINKING COMPETITIVENESS 4-11 Change in Working-Age Population 2005–2020 with Zero Immigration 127 8-1 U.S./UK Export and Productivity Ratios by Industry, 1950–1951 231 8-2 Trade Types, 1989–2002 234 8-3 Components of a Supply Chain 240 8-4 Share of Parts and Components in Total Exports 251 8-5 Complex Network for Hard Disk Drive 252 8-6 Proportion of Processing Trade in China’s Total Trade, 1988–2007 254 8-7 The Dominant Role of Foreign-Invested Enterprises in China’s ATP Surplus 259 8-8 Value Added Percentages for iPhone 4 263 8-9 Apparel Global Supply-Chain Process 264 8-10 Share of U.S. Multinational Parents in Employment, Output, Capital Investment, and R&D 265 Tables 1-1 Empirically Supported Implications of the Tiebout Model 18 2-1 Tax Rates and Growth Rates, Selected OECD Countries 59 7-1 Public Health Expenditures as a Percent of Total Health Expenditures, 2009 200 7-2 Fees for Physician Office Visits, 2008 203 7-3 Fees for Orthopedic Surgery, 2008 204 7-4 Relative Prices for Hospital Services, 2007 205 7-5 Health Care Resources, 2009 205 7-6 Life Expectancies at Age 80, 1987 212 7-7 Annual Compound Growth Rates in Real per Capita GDP, 1970–2010 213 7-8 Five-Year Survival Rates for Cancer of Different Sites, 2000–2002 214 7-9 OECD Five-Year Survival Rates, 2004–2009 215 7-10 CONCORD Study Rankings 216 8-1 Parts and Components (P&C) in Manufacturing Trade 246 HHassett.indbassett.indb x 111/8/121/8/12 99:27:27 PMPM LIST OF ILLUSTRATIONS xi 8-2 Domestic and Foreign Values Added: Normal vs. Processing Exports 254 8-3 Share of China’s Processing Imports by Country of Origin, 2007 255 8-4 Share of China’s Exports by Destination Country, 2007 256 8-5 Chinese ATP Exports to the United States by Trade Regime, 1996–2006 258 8-6 Most Expensive Inputs in the 30GB Third-Generation iPod, 2005 262 8-7 Country or Regional Sources of Value Added in U.S. Imports, Selected Sectors, 2004 266 8-8 Country or Regional Sources of Value Added in U.S. Exports, Selected Sectors, 2004 267 HHassett.indbassett.indb xxii 111/8/121/8/12 99:27:27 PMPM HHassett.indbassett.indb xxiiii 111/8/121/8/12 99:27:27 PMPM Preface Kevin A. Hassett It is an unwritten law that no politician shall give an economic policy speech without mentioning the word “competitiveness” at least once. Yet, despite the ubiquity of the term, there is little if any agreement concerning its mean- ing. In particular, academics have been appropriately slow to embrace it, tending to evince a healthy skepticism regarding political utterances that are often reminiscent of the most objectionable assertions of the mercantilists. A politician might hold a treatise on competitiveness aloft, while an economist might prefer to disguise it in a brown paper bag. While scholarship on competitiveness has stagnated, the world has continued to evolve into a flatter, more intertwined marketplace, and vast literatures have emerged that document that competitions between nations, be they over the location of people or machines, have heightened in their ferocity. Against this backdrop, the American Enterprise Institute (AEI) brought together experts from a variety of fields to breathe new life into the competitiveness debate. The experts were asked to think creatively about the extent to which competition between nations may influence outcomes in their area of expertise, with a focus on a simple question: If “competi- tiveness” were to have a rigorous and relevant meaning in your field, what might that be? The authors presented their findings at a series of three conferences hosted at AEI’s headquarters in Washington, D.C.: “Is Competitiveness Worth Defending?” on September 29, 2011; “Nation vs.