Toward the Post American World?: The Link Between Public Debt and Global Competitiveness

Towards the Post American World?: 

The Link Between Public Debt and Global Competitiveness

Over the past 20 years globalization has been driving a new era of equality in the world economy. The so called 'developing' countries   such as China, Brazil, and India have experienced consistently high rates of economic growth. Meanwhile, the 'developed' world remains mired by slow growth, high-unemployment and the possibility of long-term stagnation.Yesterday the World Economic Forum,, a European public-policy think-tank,  released its annual Global Competitiveness Report. The report suggests that uneven rates of growth are likely to persist for years to come. 

Advanced industrialized economies in Europe, as well as the United States face a number of impediments to maintaining competitiveness. Perhaps the biggest issue facing advanced industrial democracies are soaring public debt levels which threaten macro-economic stability, crowd out private investment, and force difficult policy choices. In Debt, Deficits, and the Markets the Economist reports that similar debt levels have had divergent effects on national borrowing capacity.

According to the economist, Japan still faces relatively low borrowing costs despite its massive public debt. One driver of Japan's low financing costs is there strong domestic investment ratio. Other debt-ridden countries are not so fortunate, and the seemingly endless Euro-Zone Debt Crisis  continues to threaten the macro stability of the global economy. 


No advanced industrial economy has defaulted in the post WWII era, but the possibility of a worst-case scenario seems very real.  As the Global Competitiveness Report  argues, "In the short term, sovereign defaults in advanced economies could push the world into recession, notably by triggering another wave of failures of still-fragile banking systems." Policy responses to economic downturns in the form of financial bailouts could exacerbate the situation further leading to a vicious cycle that simply delays rather than corrects a market response.

Even if the EU manages to prevent an implosion of the single currency increased debt burdens will drag down economic productivity, dampen prospects for future prosperity, and harm the ability for government investment in essential public goods. The report rightly claims that "Reducing public debt to precrisis levels will constrain government expenditures for at least a decade." Forced to pay for yesterday countries will be less able to invest in the future. The report argues that "reducing public investments for health, education, research and development (R&D), or the upkeep of infrastructure will erode competitiveness over the medium to longer term."

The United States stands in a similar position to much of Western Europe. Pressures from increased austerity are already being felt. Both infrastructure and education spending have plummeted. 

Image from  http://www.marketoracle.co.uk/Article23072.html 

Education was one of the first victims of the financial crisis. The report argued that while overall government spending increased, the share spent on education decreased from 16.8 to 15.8 percent. Billy Easton, in the New York Times claims that for the past two years the State of New York embarked on "$2.7 billion in school aid cuts, resulting in the loss of 30,000 educators and increased class sizes at two-thirds of the state’s schools." According to the Pennsylvania State Education Association (PSEA), the State Government cut "$860 million from PA public schools in 2011-12."Similar cuts are happening across the country, and the U.S. education system continues to under perform. International education rankings show the U.S. has been on a declining trend for nearly a decade.  

Infrastructure has also suffered. GAO reports "one in four" U.S. bridges are structurally deficient. The transportation sector as a whole suffers from a dilapidated fixed capital base. In Freight Train Late? Blame Chicago, The New York Times reported earlier this year freight trains can take up to 30 hours to travel through Chicago's 40 mile radius. According to the article, "six of the nation's seven biggest railroads pass through the city," and  "with freight volume in the United States expected to grow by more than 80 percent in the next 20 years, delays are projected to only get worse." According to Forbes, spending cuts threaten U.S water infrastructure, as well. 

As the West recovers the developing world continues to catch up. Kristina Costa, a blogger for the website thinkprogress.org, claims that, "Only two U.S. ports... make the list of the top 20 ... whereas Chinese seaports comprise six of the top 10. The port of Shanghai alone has more container capacity than the top seven U.S. ports combined." Reinvestment is badly needed, but funding is becoming more scarce. 

As education budgets are slashed, and infrastructure projects delayed the share of GDP consumed by debt service payments increased. The average OECD debt payment will increase from 1.7 to 2.2 percent of GDP, further reducing realized gains in productivity and dampening prospects for sustained economic growth. The United States Global Competitiveness Ranking has been on a steady decline. America ranks 24th in quality of overall infrastructure, and 37th in quality of primary education.

Of the 12 pillars measured by the Global Competitiveness Index the United States ranks first in only one: market size. If America is still the greatest nation in the world it is only because it still possess the World's largest market. Uneven rates of growth are likely to reduce this advantage. As globalization works to equalize the world economy, political institutions will become more important determinants of continued prosperity. Eroding public trust in the political system represents the greatest threat to American economic security. 

World Economic Forum rankings suggest that American institutions have lost capacity to effectively promote the rule of law. Out of 144 countries included in the study the United States ranks 39th in protection of property rights, 50th in public trust of politicians, 50th in favoritism of government decisions, 50th in transparency of government policy making, and 36th in judicial independence.  If our political system fails to respond to the real problems facing our nation, American exceptionalism may become an anachronism and The Post American World  a new paradigm.   

- John Louis

About the author: John Louis is a Graduate Fellow at the Clough Center for the Study of Constitutional Democracy. He writes on political economy, public finance, and infrastructural development. His views do not represent those of the Center.