Economics

Macroeconomic Policy and U.S. Competitiveness

A reformed fiscal policy is vital to renewing America’s productivity. Here’s a way forward.

by

Richard H.K. Vietor

and

Matthew Weinzierl

by

Richard H.K. Vietor

and

Matthew Weinzierl

From the Magazine (March 2012)

Summary.

In this piece, the authors examine how U.S. fiscal policy relates to three drivers of productivity: improving human capital, increasing physical capital (equipment or software, for example), and using these forms of capital more efficiently. Government spending for many public goods, such as education and infrastructure, contributes directly to one or more of them, whereas spending on health care and entitlements does little to enhance competitiveness directly. Taxes are needed to fund public goods, but they sometimes distort the allocation of human and physical capital. And large government deficits put upward pressure on the cost of borrowing for companies. The authors propose a plan—they call it “20/21 by 2021” — to reduce the deficit from 3.8% of GDP (the Congressional Budget Office’s most likely scenario) to just over 1%.

The United States is on a glide path to fiscal disaster, with experts projecting that the federal government will take in far less money than it spends—indefinitely. Although in our experience business leaders have a general sense that this state of affairs is dangerous, they’re unclear on exactly how fiscal policy shapes the competitiveness of the nation and of their companies. The current policy is eroding competitiveness in several ways, and business conditions in the United States will deteriorate if there’s no change in direction. A better understanding of how fiscal policy and competitiveness are linked may make such a change more likely.

A version of this article appeared in the March 2012 issue of Harvard Business Review.

RV

Richard H.K. Vietor is the Baker Foundation Professor of Business Administration at the Harvard Business School. He researches and teaches about the economic, political, social, and legal environment in which international business operates. He’s the author of How Countries Compete: Strategy, Structure, and Government in the Global Economy (HBR Press, 2007).
MW

Matthew Weinzierl is the Joseph and Jacqueline Elbling Professor of Business Administration at Harvard Business School and a research associate at the National Bureau of Economic Research. His teaching and research focus on the design of economic policy and the economics and business of space.

Macroeconomic Policy and U.S. Competitiveness

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