Building policy in all the wrong places

The U.S. has not fully recognized the severity of the loss of competitive positions that have resulted in the hollowing out of one or more tiers in multiple domestic supply chains. Helping mask the seriousness of the resulting decline in domestic value added are (1) importation of cheaper components that have been offshored, which temporarily accelerates corporate productivity in the remaining tiers of the domestic supply chain so that aggregate value added is sustained by these remaining industries, and (2) the fact that offshoring (loss of domestic market share) occurs at different rates among tiers in a supply chain, temporarily obscuring the eventual aggregate negative impact on domestic profits and employment. In summary, industries and even entire sectors that have not adequately invested in productivity growth will at best shrink or, increasingly, offshore completely with the aggregate negative impact finally becoming painfully evident to policymakers. Thus, a major policy error has been that viewing the hollowing out of a domestic supply chain over multiple technology life cycles as simply a matter of global specialization according to the law of comparative advantage is turning out to be naïve in that not only is value added from the offshored industries lost, but so are economic benefits from co-location synergies achieved by formerly fully integrated domestic supply chains. Losing major portions of formerly integrated domestic supply chains explains the constrained rates of growth over the past 40 years.