Trade, education, public infrastructure, fiscal policy pose biggests challenges for U.S. global competitiveness

WASHINGTON, DC, December 15, 2008 — The incoming Obama Administration and the new Congress should invest in worker training and education, pursue trade liberalization, accelerate public and private infrastructure investment, and take steps to rein in exploding health care costs to ensure that America maintains its competitive leadership in the global economy, according to a new study released today by the Private Equity Council.

The study was authored by Martin Baily, chairman of the White House Council of Economic Advisers during the second Clinton Administration, and Matthew Slaughter, associate dean and professor of international economics at the Tuck School of Business at Dartmouth College and a CEA member during the second George W. Bush Administration. The paper examines the forces shaping America’s global competitiveness and identifies policy prescriptions to ensure continued U.S. leadership in the changing global economy. The PEC commissioned the paper to contribute to a debate on competitiveness policy issues and stimulate action on a competitiveness agenda in 2009.

The authors cite major threats to U.S. global economic leadership in the decades ahead: trade barriers, declining graduation rates, deteriorating roads, bridges and other public facilities, scatter-shot tax and spending policies, and the unchecked growth in health care costs.

According to the paper, after a century of development that created the world’s largest economy, the United States since 2002 has experienced significant declines in its productivity growth. The current capital markets crisis and economic recession have exacerbated concerns about U.S. economic strength — in capital markets, financial institutions and the manufacturing sector, with particular concerns raised about U.S. automakers.

Although many factors have contributed to the slowing rates of U.S. productivity growth, Baily and Slaughter identified several key areas that they believe lawmakers can address to reverse the declining trend. Their recommendations include:

• Continue to promote liberalized international trade and investment and encourage appropriately structured regulation.

• Invest in education and worker retraining, including federal programs designed to encourage more Americans to graduate from high school and earn college degrees; improve worker safety net programs; amend immigration laws to admit more highly-skilled technical workers from abroad.

• Deploy more private capital and raise new public funds to rebuild public infrastructure.

• Create a fair and equitable tax system that raises more revenue to pay for critical federal programs; create a research program to address the skyrocketing costs of Medicare and Medicaid.

“As they address the immediate financial crisis gripping the nation, policymakers must not lose sight of the serious underlying problems that are eroding our country’s long-run competitiveness,” said Baily. “By taking steps today to improve upon our existing economic strengths, we will not only weather the current financial storm but also lay the groundwork for countering the competitive threats that, left unaddressed, will harm our economy,” Slaughter added.

Private Equity Council President Douglas Lowenstein said the competitiveness study is part of a larger, long-range effort by the PEC to produce new research by respected scholars to stimulate debate among policy makers over issues of critical national importance.

“While we at the Council do not necessarily endorse every conclusion in the Baily-Slaughter study, we believe it represents an important opportunity to jump-start a dialogue on how we as a nation can enhance our economic leadership and strengthen our competitive position in this rapidly changing global economy,” Lowenstein said.

“Choosing this subject for study is particularly appropriate because productivity and competitiveness are at the core of the private equity business model,” he added. “Private equity firms focus on acquiring companies with significant growth potential and improving their operations to make them stronger and more competitive in the global marketplace.”

Because competitiveness is largely determined by productivity levels, Baily and Slaughter’s research focuses on ways to strengthen domestic productivity. They also focus on the ability of our economy to compete in international trade, given concerns about persistently large U.S. trade deficits.

The study identifies four areas that will need to be improved to strengthen U.S. competitiveness:

International Trade Policy and Regulation

• Continue to promote policies that encourage international trade and investment, including restoration of the President’s Trade Promotion Authority.

• Improve regulation and oversight without returning to the era when regulation discouraged competition or micromanaged industries.

Education and Training

• Develop safety net programs to enhance the skills and opportunities of American workers, including wage loss insurance for workers 45 years and older; continued health care coverage for those on unemployment; extended eligibility for federal training programs; and expansion of tax preferences to encourage workers to seek additional training and education.

• Expand support for pre-school health and education interventions such as Head Start; expand incentives for high school students to graduate; and expand and consolidate federal financial aid for college students.

• Eliminate current U.S. caps on H1-B visas for highly skilled workers, or as an alternative, increase the caps substantially.


• Increase public revenue available for repairing and improving the public infrastructure by increasing the federal gasoline tax over time and putting in place congestion pricing for urban roads and airports.

• Encourage more private investment in public infrastructure, both directly and in partnership with the public sector through vehicles such as the proposed National Infrastructure Bank, including mass transit, bridges, tunnels, toll roads, airports, water and waste water systems.

• Increase deregulation in more segments of the public sector; remove regulations that limit operational flexibility.

• Charge the Government Accountability Office with determining best practices in the provision of public services.

Tax Policy

• Commission a bi-partisan presidential commission to undertake a long-term study of how to restore budget discipline by curbing the growth of federal spending and increasing the collection of federal tax revenue while maintaining a tax code that rewards enterprise, skill and effort without creating adverse incentives.

• Initiate a high-level federal research program to address the issue of curbing dramatically increasing health care costs.

The study is available in PDF format on the PEC web site at

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy.PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; THL Partners; and TPG Capital (formerly Texas Pacific Group).