One day an Army
friend of mine was assigned to KP duty, peeling potatoes by tossing
them into a rotating, barrel-shaped grater. His sergeant made it clear
that if even one speck of brown skin spoiled his mashed potatoes, KP
duty would become death by KP. So my friend -- no fool -- grated sacks
of brick-size Idaho potatoes into handfuls of pure white golf balls
-- oblivious to the waste of time, money, and carbs.
The machine was
efficient, but the sergeant's policy wasn't. And so the Army had a most
unproductive day.
Similarly, America,
while also an efficient "machine," is letting poorly conceived
economic policies erode its vast productive capacity at a dangerously
competitive moment. Unfortunately, these policies are based on an inadequate
understanding of wealth creation.
Real wealth emerges
only when we discover ways to produce something vital for less. That
means, for example, selling higher-performance computers, which once
cost $3,000, for $300. Or it could entail using half as much coal to
refine the same ton of steel.
GOOD, BAD, AND
STUPID. Such transformations work almost magically as they free
scarce resources and raise the average standard of living. People who
would have spent $3,000 for a computer now have $2,700 to invest in
something else, say, in their savings or toward improving early childhood
nutrition.
But the goal has
to be vital as well. Merely halving the cost of shipping bottled water
from Hawaii to New York may be efficient, but drinking local tap water
is a much more productive use of resources.
Unfortunately, most
of America's current governmental incentives don't encourage wealth
creation. They confuse spending money with creating value. Not all jobs
are equally productive, and not all subsidies are equally vital.
What governmental
incentives do I include in this category? The list covers farming subsidies,
enterprise zones that encourage locating factories or apartments in
blighted neighborhoods, mortgage deductions, and even R&D tax credits.
Such policies merely kidnap economic activity from one region to another
or foolishly reward effort instead of results.
"PHANTOM
PRODUCTIVITY." A new stadium may entice a team across state
lines, but for every new job and new box seat created, it leaves a perfectly
good stadium and perfectly good jobs behind. A crop subsidy keeps the
family farm alive, but reduces the incentive to raise the yield per
acre, thus increasing the price of food for everyone and making imported
food even more attractive. A mortgage deduction encourages home ownership,
but does nothing to make housing more affordable or reduce onerous real-estate
fees. And it certainly does nothing to improve energy efficiency.
These kinds of subsidies
only encourage what I call "phantom productivity."
But what if the
government were to institute genuine productivity-enhancing incentives?
Such incentives could kick in, for example, whenever a company demonstrates
that it could profitably make and sell a product with the potential
for broad economic impact for 10% less that one that is already on the
market. The greater the productivity improvement, the greater the subsidy.
A RISING CHALLENGE.
This is, of course, is a radical proposal. Instead of taxing the increased
profitability that often flows from better productivity, we would be
reinforcing success -- giving creative innovators a double boost of
profits, plus subsidy. Companies that boost productivity significantly
could grow faster. Marginal companies that still manage to enhance productivity
would survive and have a better shot at long-term profitability. Overall,
real wealth would expand, and our society would become more vibrant.
But what could possibly
induce us and our various governmental bodies to abandon decades upon
decades of the unproductive, but politically satisfying policy fostering
phantom productivity? Only the recognition that U.S. economic competitiveness
faces what is probably the greatest threat in its history. As I have
argued in previous columns (see BW Online, "Getting America's Groove
Back" and "America Needs Unchained Spectrum"), we're
U.S. is in serious danger of losing our entrepreneurial and technological
edge to faster growing economies.
There are nations
whose citizens routinely work 6 days a week, 12 hours a day, who are
turning out several times the graduate scientists and engineers we are.
These countries are not shying away from adopting the latest in genetic
engineering to lower the cost of food. And they remain largely unburdened
by supporting a superpower-style military, and they certainly don't
have to repair an aging infrastructure.
SOME MODEST PROPOSALS.
Facing up to this challenge would require enlightened, energetic political
leadership. But given that, I think we would find that a policy of promoting
genuine productivity would prove easier than we might, at first, imagine.
The goals of such
a policy would be straightforward and clear, and it would encourage
a spirited public debate, one less distorted by politics. It's one thing
to distribute a military program across 17 states and 50 companies.
It's quite another to reward any contractor that brings in a product
under budget and over spec.
The evaluation process
for rewarding productivity could be relatively transparent:
• An energy
incentive, for example, could be awarded if the energy used to manufacture
a product declined by 20% every year, something that would be easy to
measure.
• A construction
incentive could be awarded if apartments of similar or better quality
could be built for $10 less per square foot than what's currently on
the market. This would make housing more affordable because it really
is less expensive, rather than subsidized.
The government wouldn't
be "picking winners." It would reward winners picked by the
market and would do so by using transparent criteria. And those that
fail would do so on their own nickel, not the government's.
No country can long
afford to squander precious resources, even cheap potatoes and buck
privates. But America's incumbency can be our strength -- if we leverage
today's economic engine into tomorrow's productive enterprise.
