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The crisis in U.S. competitiveness can't be ignored

September 6, 2012: 10:05 AM ET

A noted Harvard Business School professor is sounding the alarms on an economic  issue that's been building for decades. But he remains optimistic about America's future.

By Tory Newmyer

Michael Porter

Michael Porter

FORTUNE -- Despite some allusions to facing hard truths, there were none spoken from the stage at the Republican convention in Tampa last week — or, so far, at the Democratic one here in Charlotte. To hear some bracing real talk about the economic challenges facing the country, you'd have to head to an underground theater downtown on Wednesday afternoon.

There, at an event sponsored by Duke Energy (DUK) and Verizon (VZ), Harvard Business School professor Michael Porter laid out what he called some "very, very disturbing trends" emerging in the economy.

Porter has been studying the fraying of American competitiveness -- the phenomenon of companies and workers seeing their lots improve in tandem -- and found that the economic downturn exposed fundamental problems that have been festering for as long as two decades. He said the American job growth engine, once the envy of the world, actually ground to a halt twenty years ago. Industries exposed to international competition have created no new jobs in that period, and workforce participation reversed a long and steady climb back in 1998 and now stands at a 30-year low.

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"This is a real, real issue facing this country, and we've got to tackle it. We can't hope that we'll just have a recovery and things are going to go back to the way they were," he said. "They're not."

Porter backed up his research with a survey of HBS' 50,000 alumni, who overwhelmingly affirmed his grim assessment. Of those directly involved in making decisions about locating operations, for example, 1,000 were considering whether to move something out of the United States and only 150 were thinking about moving something in. The top reason: American productivity is not strong enough to justify higher wages.

Meanwhile, the rest of the world has made huge strides closing the gap on advantages we've long taken for granted, upgrading their infrastructure, boosting their education systems and rooting out corruption. "Our problem isn't that we're horrible," Porter said. "Our problem is that we're just not getting better."

The list of our weakest spots, as revealed by his survey, should be familiar by now: burdensome regulations, an overly complicated and inefficient tax code, and political deadlock. But Porter wasn't strictly doom and gloom, pointing out we retain many our core strengths, and some are actually getting stronger: world-class universities, a spirit of entrepreneurship and innovation, strong intellectual property protections, and the most efficient capital markets in the world.

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And in fact Porter declared himself an optimist about America's future, if only because the fixes are so readily at hand. Notably, they include priorities drawn from both parties. And Porter subtly deflated some of the demagoguery from both sides. Democrats have made hay attacking Mitt Romney's work at Bain Capital, with President Obama repeatedly blasting the Republican as "an outsourcing pioneer" who shipped American jobs abroad to fatten his own returns. Without citing the campaign-trail fight, Porter noted the phenomenon "is not some pernicious misbehaving on the part of the business… it's just the way it is" in a global economy.

Republicans, meanwhile, have made a mantra out of Obama's "you didn't build that" quote -- taking it out of context to suggest the President doesn't believe entrepreneurs deserve credit for their own success. But Porter argued governments and businesses indeed have to collaborate to improve what he called "the commons"  -- "a series of institutions and assets that exist in their community."

Not all of the changes need to come from Washington, Porter said. But he made an appeal nevertheless for an end of the squabbling. "We've made the rounds in Washington, we've talked to both sides and we understand why you don't want to do this, because if you do this, then you give up the bargaining power to get this," he said. "There are all these complicated arguments for why we can't get these things done. But frankly, we don't have time."

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