Economists are fond of telling us that America's competitive disadvantage - its inability to produce more domestic jobs - is the result of low labor costs abroad.
This argument seems to make intuitive sense.
For instance, how can we possibly compete for call center jobs? Since the cost of communicating across borders is near zero, trained workers who are willing to do the job at the least possible cost will punch clocks in the morning. Likewise, because shipping clothing or computers is so cheap, how can we possibly peal jobs away from comparably trained manufacturing and textile workers around the world.
What this view ignores is that the real cost differences between making things in America and other parts of the world has little to do with worker wages. It's primarily about infrastructure investment.
In the 1970s, no sane American company would outsource the bulk of their call center work or decide to ship off large parts of manufacturing abroad to emerging markets at the scale we see today. It's not because leaders of industry and financial institutions were more patriotic then.
Instead, it made no economic sense.
The basic infrastructure that made outsourcing, as we know it today, possible simply did not exist. Without extensive fiber optic cables, for instance, call centers could not function. Likewise, the world factories could not pump out computer chips, clothing and other products at the scale that they do today without an extensive global container port system that makes shipping so cheap.
The truth is that over the last thirty years, a tremendous investment in the physical infrastructure of the global economy has been made.
In fact, just as the Reagan-led Revolution began to divest from our own real economy, Milton Friedman and others drove investment into physical infrastructure around the world. This investment strategy - divest at home, invest abroad - has come to bite us.
The American mantra might as well be - "Innovate and Outsource"
In my recent book, Obama's Bank: Financing a Durable New Deal (Cambridge University Press 2010), I describe how the Reagan Revolution steered our economy into a ditch well before the Iraq War hit the gas peddle.
We have invested in:
(1) Telecommunications lines around the world (making it possible to outsource call centers, to have corporate decision-making spread over secure networks, to facilitate global banking communications)
(2) Systematically retrofitted ports around the world to make them interoperable (the container port system was put in place, which made the global shipping system possible);
(3) Power plants (to make factories run and keep them going as demands increased)
(4) Water systems (to, for instance, make the outsourcing of chip manufacturing, which is highly dependent on large flows of water, possible)
(5) Financial infrastructure (stock markets were created so that risk could be placed overseas and tax liabilities shifted across multiple jurisdictions)
(6) Transportation (so that manufactured goods could get to ports and flown out of countries.
The answer to our competitive disadvantages today is to follow our own prescription - invest in the basic physical and energy infrastructure that is a precondition to growth.
President Obama, to his credit, has been directing money toward our airports, ports, rail, power, telecommunications, and other infrastructures. He has done this not only through the shovel-ready projects, but also through the extensive leveraging vehicles in the Stimulus Act, things such as Build America Bonds, Non-AMT Private Activity Bonds, Clean Energy Bonds, etc. His proposed Infrastructure Bank aims build on these investments, ramp them up and also make certain that they are driven by merit in our post-Recovery Act world.