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Renewing America Watch: All About the Economy

by Toni Johnson
February 22, 2012

Senate Budget Committee ranking minority member Sen. Jeff Sessions and Republican Policy Committee Chairman John Barrasso at a news conference, February 13, 2012. (Larry Downing/Courtesy Reuters) Senate Budget Committee ranking minority member Sen. Jeff Sessions and Republican Policy Committee Chairman John Barrasso at a news conference, February 13, 2012. (Larry Downing/Courtesy Reuters)

CFR’s Renewing America project focuses on six challenges the United States faces domestically that impinges on the country’s ability to project power globally. The country’s economic woes are certainly front and center as the presidential campaign heats up and candidates debate the debt and deficits coming  out of Washington as well as how to make the economy thrive.

Two items from the project tackle economic issues from different angles. On the Renewing America blog, CFR’s Edward Alden discusses the challenge of defining U.S. global competitiveness:

The debate over competitiveness is often muddied because the word is used in so many different and often incompatible ways. Economist Paul Krugman famously dismissed the notion entirely as a “dangerous obsession” in a 1994 Foreign Affairs piece, arguing that “the world’s leading nations are not, to any important degree, in economic competition with each other.” Krugman doesn’t appear to have changed his mind recently, but perhaps a careful reading of this issue will cause him to reconsider.

Michael Porter, who has led much of the Harvard Business School’s work on this issue, offers the best definition I have seen. He writes: “The United States is a competitive location to the extent that companies operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for the average American.” What this means is that “competitiveness” is not a synonym for “economic growth.” It refers only to the ability of the United States to succeed as a high-wage location for operations in internationally-traded sectors.

Competitiveness so defined is not an issue for much of the U.S. economy. Most jobs are still in non-tradable sectors (health care, retail trade, government) that do not face significant import competition. But the share of the U.S. economy exposed to international competition–not just in manufacturing but in service sectors as well–has grown immensely over the past several decades, and the pace will only accelerate. And these sectors really matter.

Meanwhile, a new CFR Backgrounder released  at the beginning of the week looks at the debt and deficit debate itself:

At some point in the not-too-distant future, analysts say, investors may decide the lack of effective governance constitutes an increased risk of default and will no longer be willing to hold U.S. Treasuries at normal interest rates. Standard and Poor’s downgrade of the U.S. debt rating in August 2011 indicated as much: “America’s governance and policymaking [has become] less stable, less effective, and less predictable than what we previously believed.” If many investors begin fleeing to alternatives, it may become prohibitively expensive for Washington to attract new buyers of debt, resulting in even larger deficits, increased borrowing, or what is known as a “debt spiral.”

Global investors may continue to fund high U.S. deficits for several years, but the recent experiences of several advanced economies in Europe–Greece, Iceland, Ireland, and Portugal–indicate the unpredictability and speed at which fiscal crises can come. Several factors have thus far helped insulate the United States from such a fate–a floating exchange rate, reserve currency status, lower borrowing costs, a higher capacity for growth, and no record of default. But there are also some striking similarities with the situation faced by some European states, including a rising debt to GDP and a reliance on foreign capital to finance debt.

 

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