Budget deficits, health care and competitiveness

The latest World Economic Forum (WEF) competitiveness rankings are out – and the US has slipped to number 6. Business Week – Is the U.S. Losing Its Competitive Edge? points to the core problem:

While the U.S. excelled in such business categories as market efficiency and innovation, its score in the World Economic Forum’s annual ranking was dragged down by government-related measures. Out of 125 countries, the U.S. was 40th in health care and primary education and a lowly 69th in macroeconomy, reflecting its large budget and trade deficits. In macroeconomy, the U.S. scored lower than such nations as Vietnam, Venezuela, Uganda, the Philippines, Peru, and Nigeria. (Ouch.)
. . .
Was the deck stacked against the U.S.? That depends on whether you agree with the forum that the U.S. deserves big demerits for being the world’s biggest debtor, running a large budget gap, and having a current account deficit amounting to a record 6.5% of gross domestic product. Nouriel Roubini, a New York University economist who worked on the rankings, said that the U.S. score was probably also hurt by the government’s mishandling of Hurricane Katrina, relatively high infant mortality and low life expectancy, and the prevalence of AIDS.

The Wall Street Journal focused on the budget deficit:

“The U.S. remains a very competitive economy,” said Augusto Lopez-Claros, the Forum’s chief economist. “It leads in innovation and patent registrations, has some of the best universities in the world, and it has extremely high level of collaboration between universities and industry,” he said. “However, how you manage your public finances is very important.”
Serial budget deficits in the U.S. have led to rising public debt, which means an increasing portion of government spending goes on debt service. That means less money is available for spending on infrastructure, schools or other investments that could boost productivity. Heavy government borrowing, by competing for funds in financial markets with the private sector, also tends to drive up businesses’ borrowing costs.

As the New Economist blog points out, Lopez-Claros summarized the keys:

The top rankings of Switzerland and the Nordic countries show that good institutions and competent macroeconomic management, coupled with world-class educational attainment and a focus on technology and innovation, are a successful strategy for boosting competitiveness in an increasingly complex global economy.

While we should not put too much stock in these types of composite rankings, the WEF Competitiveness Report should be seen as a shot across the bow – especially to Washington.
COUNTRY RANKINGS 2006-2007
1. Switzerland
2. Finland
3. Sweden
4. Denmark
5. Singapore
6. U.S.
7. Japan
8. Germany
9. Netherlands
10. U.K.
11. Hong Kong
12. Norway
13. Taiwan, China
14. Iceland
15. Israel
Source: Global Competitiveness Report, World Economic Forum

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