States Have Role to Play in New Global Challenge

From editorial boards to Capitol Hill to living rooms across the United States, much has been made of the outsourcing of American jobs overseas. Outsourcing is not, however, the cause, but rather a symptom of a larger and more critical issue the U.S. may be losing its competitive edge and its leadership is once again being challenged in the increasingly global marketplace.

And it is states, more than any other level of government, working in partnership with the private sector that offers the best hope of meeting this new global challenge.

There is no question that trade agreements, coupled with rapid technological change and deregulation over the last two decades, have made the global marketplace extremely competitive. The United States used to compete against countries with low wages, low skills, and obsolete technology or high wages, high skills, and new technologies. Today, however, we are competing with countries such as China and India, and other developing countries in Southeast Asia, with low wages, high skills, and new technologies. If the United States responds appropriately to these new realities, U.S. citizens will benefit in terms of higher real wages. On the other hand, if we fail to maintain our competitive edge, Americans' standard of living will begin to decline.

This is not a challenge the private sector can meet by itself; states are best positioned to assist in meeting the economic challenges and political realities of the modern global marketplace. While there are critical roles for all three levels of government, it is the state role that is most critical because states provide services to the business community, make investments in educating and training the labor force, and shape the economic environment through regulation and taxation.

The role of state government in making the United States economy competitive and successful in the world market is essentially three fold.

First, states provide direct services to businesses and citizens. From technical and financial assistance to business to providing childcare and health care to low-income residents, it is states that administer most domestic programs in this nation. Even when programs, such as food stamps, are fully funded by the federal government, they are still administered by the states. Here, it is vitally important for states to accelerate the reengineering of state government to become more adaptable, customer-oriented, and performance-driven. Often this means more public-private partnerships, more privatization, and better use of technology so that state government is available to businesses and citizens 24/7.

Second, states invest in human and physical capital. About 30 percent of state spending, or $150 billion annually, is spent on elementary, secondary, and higher education and perhaps another $40 billion on roads, highways, ports and airports. It is the quality of these public investments that will go a long way in determining our ability to maintain United States competitiveness in this new global marketplace.

While states are investing in the right areas, they are not all investing as wisely as they could. States must stress lifelong learning, but it is essential that policy-makers have reliable measures of achievement available to determine the rate of return they are receiving on all types of investment from early childhood education to community colleges to graduate courses in engineering.

With these achievement or output measures in place states will be in a better position to reallocate funds toward those areas that provide the highest rate of return in terms of increases in knowledge and skill levels per dollar of expenditure -- critical step toward restoring America's leadership in today's global economy. For example, there is a fair amount of anecdotal evidence suggesting states should allocate more funding to early childhood education, but only if more objective measures were available would that reallocation be supported by the public.

Our current "second chance" education system is outdated and ineffective. Our students do not achieve the required skill level the first time, instead they don't learn these requisite skills until after they leave school, enter the labor force, and then find it necessary to return to a community college, four-year institution, or vocational school. We can no longer afford such a comprehensive "second chance" system, we must ensure today's high school graduates are properly equipped for the changing rigors of college and the workforce.

Third, states shape the economic environment by how they regulate and tax. States must continue to review and streamline regulations to remove market distortions, e.g., setting environmental standards, but allowing the private sector to make decisions regarding technology. Furthermore, states must bring their tax systems into the 21st century. No longer should they tax the telephone industry at a very high rate as if it were a monopoly while having zero sales taxes on many services. Failure to have taxes as low as possible on the broadest base will not only misallocate resources, but it will restrict economic growth.

Changing state government to meet global challenges requires vision and leadership. A new wave of bold initiatives in partnership with the private sector is needed to ensure that our nation's prosperity continues to flourish well into the 21st century.

Raymond C. Scheppach, Ph.D. is the executive director of the National Governors Association. The views expressed here are those of the author and do not necessarily represent those of the National Governors Association.