05/03/2010 05:12 am ET Updated May 25, 2011

Friedman on Competitiveness: Identifies Problem, Offers Exactly Wrong Solution

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.

Americans who travel abroad will tell you about how the US is visibly falling further and further behind the rest of the world. This hurts our ability to compete economically. The cause of the problem was tax cuts; the solution is certainly not more tax cuts.

Thomas Friedman, in "A Word From the Wise" flies in from Asia and, using LAX as an example, observes how the US infrastructure is starting to fall apart because of deferred maintenance. He writes,

Walking through its faded, cramped domestic terminal, I got the feeling of a place that once thought of itself as modern but has had one too many face-lifts and simply can't hide the wrinkles anymore.

Like so many problems we have today, this one traces directly to failed conservative policies. Conservatives cut taxes for the rich, which forced the country to defer maintenance and borrow money. So we don't keep things in good shape and we certainly don't invest in new 21st-century infrastructure. Friedman writes,

We are the United States of Deferred Maintenance. China is the People's Republic of Deferred Gratification. They save, invest and build. We spend, borrow and patch.

The problem goes beyond crumbling buildings, slow trains, and potholes -- the long-term cost is that we'll fall behind the rest of the world in our ability to compete economically. Other governments are investing in 21st-century infrastructure, and we are not, because of our tax cuts:

"... a 2009 study ... measured ... 'the rate of change in innovation capacity' over the last decade -- in effect, how much countries were doing to make themselves more innovative for the future. The study relied on 16 different metrics of human capital -- I.T. infrastructure, economic performance and so on. On this scale, the U.S. ranked dead last out of the same 40 nations. ... When you take a hard look at the things that make any country competitive. ... we are slipping." (emphasis added)

So what is the solution? The column advocates engaging in a race to the bottom by lowering corporate tax rates even more! So Friedman (a billionaire) and the CEO of Intel identify the problem and then get the solution exactly wrong (in a way that enriches billionaires, CEOs and big companies at the expense of the rest of us). He starts by saying we have been deferring maintaining our infrastructure (which is the result of tax cuts) and then says we need to cut corporate taxes!

Tax cuts are the reason we are not maintaining our infrastructure and reducing our country's competitiveness -- so let's do it more? What is the matter with this guy? How are we ever going to bring our country's infrastructure and education up to 21st-century standards if we further weaken our financial position with even more tax cuts?

Another way that we are falling behind other countries economically is that other countries have strategies to take our factories and jobs but we have no strategy for fighting back. Again, this is the result of our slavery to conservative policies. Conservatives say it is wrong for our government to get involved. They say "free markets" will come up with the solution.

How is this "free-market" keep-government-out-of-it approach working out? Friedman interviews Intel CEO Paul Otellini on the advantages of building new manufacturing facilities in other countries,

... If I build [a] factory in almost any other country in the world, where they have significant incentive programs, I could save $1 billion," because of all the tax breaks these governments throw in. ... "And it wasn't because the labor costs are lower. ... when you look at it after tax was substantially lower and you have local market access."

In other words, in order to seize the manufacturing capacity from us these countries lose money on the deal, with their governments putting up subsidies in the form of tax breaks. isn't this "dumping" -- selling below cost, paid for by government subsidies -- which is illegal under trade laws? The idea is to seize the manufacturing capacity today, make us pay later.

The right solution is to fight back -- not further weaken ourselves. When other countries are cheating we have to fight back. It is time to develop a national economic/industrial strategy.

Countries that use tax breaks to subsidize products are already fighting a trade war with us -- and winning because we refuse to engage. If other countries want to play the game that way then we should play the same game back.

The US is still a huge market and companies want to sell things here. Let's use that. If they want to subsidize goods to cost less here, let's make their goods cost more here instead. Impose a border tariff that compensates for subsidies, cheap labor, lax environmental standards, etc., so their goods do not cost less here. This way we capture the revenue that other governments are pumping into subsidies. Then we use that revenue to 1) modernize our own infrastructure and maybe even 2) subsidize our own exports.

We need to stop weakening ourselves. Increase taxes so we can stop borrowing, start building a 21st-century infrastructure, and make our country competitive again.