US economy: wake-up call for Washington

8 May 13
David M Walker

The US is becoming less competitive partly because it refuses to address mounting debt problems. Federal policymakers in Washington DC have to make some tough choices to put the nation's finances in order and improve economic prospects

US competitiveness has been declining in recent years. Four years ago the US ranked first out of 144 nations in the , but now it ranks seventh, with further declines likely unless policy actions are taken. Part of this decline is due to the failure of Washington to address the nation’s mounting debt burdens and the resulting uncertainty this creates about the future.

Most innovation and entrepreneurship occurs in the private sector, thus economic competitiveness is influenced predominantly by the private sector. But government plays an important role as well because it sets many policies and promulgates many laws and regulations that affect business. Government also needs to invest in areas such as critical infrastructure, scientific research, and education and training, but these investments are being squeezed by large deficits and escalating debt burdens.

The US government's lack of a strategic plan, a responsible budget and outcome-based performance metrics, combined with mismanagement of the nation’s finances, limits the available funds for these critical investments. This serves to hamper economic growth, reduce employment opportunities, and undermine both current and future economic competitiveness.

The country faces a short-term economic challenge and a long-term structural debt challenge, and both need to be addressed to create a better future. It cannot ignore the enormous future government obligations that are not reported on the balance sheet, thereby significantly understating the true financial challenge facing the country.

The US has overpromised in several areas that comprise mandatory spending, especially in connection with health care. Mandatory spending was 64% of the budget in 2012, up from 2% a century ago, and mandatory spending is increasingly crowding out discretionary spending, which includes all investments in the future and in young people.

Not all government debt is bad and some level of debt as a percentage of the economy is acceptable. For example, federal borrowing to invest in properly designed and effectively implemented infrastructure programmes that grow the economy, generate jobs, enhance mobility, improve the environment, and benefit future generations makes sense. These investments can produce more benefits in the future than their current cost today.

However, borrowing to fund current operating costs, excess consumption and to service past debt can pose a serious risk to economic competitiveness. This is what the US federal government is currently doing, and competitiveness has been deteriorating in recent years as a result. This risk is compounded by the fact that interest rates are at historical lows and the average duration of US debt is also relatively short, thereby creating significant interest rate risk in the future.

Another aspect of competitiveness is the ability to attract investment and talent. A country should be fiscally sound and politically stable for individuals and companies to be confident in investing both financial and human capital. There must be a positive return on investment after subtracting their expected tax burdens.

Based on the current fiscal path, future US tax levels are expected to rise, therefore reducing expected future returns. This, along with uncertainty regarding various regulatory burdens, (eg the Affordable Care Act) creates additional uncertainty that reduces the willingness of some to invest.

It's time for federal policymakers in Washington DC to recognise reality and start making tough choices to put the nation's finances in order. A proper path forward would involve more targeted investments in the short term, coupled with comprehensive tax reform and structural reforms to various social insurance programmes that would be phased-in over time. Such action could stem the recent decline in US competitiveness.

If the US recaptures control over its budget and changes federal policy in a manner that results in more investment and production, and includes less domestic consumption, more exports and a fairer trade policy, it can once again rise to the top of the competitiveness charts.

  • David M Walker
    David M Walker

    David M Walker is a former comptroller general of the United States and is now a senior strategic advisor to PWC

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