US Economy Ranked Most Competitive- CNBC Disagrees!

A WSJ article two Thursdays ago noted that the United States is now ranked 'most competitive' among nations. CNBC also carried the story, but with a different spin.


CNBC immediately panned the pick in a live discussion of the news.


C. Fred Bergsten, the ultra-liberal economist, was the 'expert' of choice for Maria Bartiromo, herself never accused of any economic knowledge. His Peterson Institute bio reads, in part,


It's curious that CNBC chose C. Fred. Here are some excerpts from his bio on the website of the Petersen Institute,


Dr. Bergsten was assistant secretary for international affairs of the US Treasury during 1977–81. He also functioned as undersecretary for monetary affairs during 1980–81,


He was also chairman of the Competitiveness Policy Council created by the Congress from 1991 through 1995;


Dr. Bergsten was born in 1941. He received MA, MALD, and PhD degrees from the Fletcher School of Law and Diplomacy and a BA magna cum laude and honorary Doctor of Humane Letters from Central Methodist College.


From his academic information, it doesn't appear that he is even an economist by training! He's a lawyer, or a diplomat.


With so many decent economists available on CNBC- Larry Kudlow, David Malpass and Brian Wesbury, to name just three- why select C. Fred, who isn't even a trained one?


The World Economic Forum, which brings you the Davos summit each year, is responsible for the rankings. According to the Journal,


"However, the U.S.'s sharp climb was due to a change in methodology that gives more weight to market-related factors in the survey, relative to macroeconomic criteria on which the U.S. is weak. Under the new methodology, the U.S. would have topped the rankings last year, too.

"The U.S. does amazingly well on innovation and markets, but on the macroeconomic-stability pillar it ranks 75th" out of 131 countries included in the survey, said Jennifer Blanke, the forum's chief economist and a co-author of the report. "This still reflects a very serious problem that could hurt the U.S. in the future."

The U.S. scores badly for high levels of government debt and deficits and a low savings rate that reflects overextension among U.S. households. The recent credit crunch, triggered by problems in the subprime-mortgage market, is an example of the risks these weaknesses hold for the U.S. and global economies, according to the survey's authors.


The forum's annual competitiveness report covers 12 criteria that range from business sophistication to health and primary education, polling 11,000 business leaders around the world. The goal is to identify the potential of economies to raise productivity and prosperity, measured as gross domestic product per capita."


Upon the receipt of this news at CNBC, C. Fred and Bartiromo launched into a savage critique of the US economy. Bartiromo insisted that because of our financial system's SIV-related challenges, and a recently-weaker dollar, our economy can't possibly be ranked most competitive.


C. Fred chimed in to reinforce Bartiromo's unquestioned views, and added that 'our deficit is spiraling out of control,' or something like that.


Except it isn't, C. Fred. It's shrinking. It's on track to be gone in two years, unless the free-spending, ear-mark-happy Democrats derails us from that accomplishment.


Last month, the Journal reported,


"for fiscal 2007, the Federal deficit had declined to $162.8B, from $248B in 2006. This was a 34% reduction in the annual deficit."


So much for the popular notion that our deficit is large and growing. It's now down to just a few percent of our annual GDP.


As I read the WEF ranking article, I couldn't help but recall this post, in January of this year, describing Nobel-winning economist Edward Prescott's analysis of our nation's economic situation. I wrote,


"Mr. Prescott observes that "privately held interest-bearing debt relative to income" is at levels comparable to those of the 1960s. So he also judges our governmental debt level to not be "too big."Perhaps the most interesting myth is the fifth one. It's a sort of product of the third and fourth myths, with a little emotional zing tossed in about the next generation's inherited liabilities.


Here, Mr. Prescott refers to some prior research, stating,


"Theory and practice tell us that the optimal amount of public debt that maximizes the welfare of new generations of entrants into the workforce is two times gross national income, or GDP. This assumes 1% population growth, 2% productivity growth, 4% real after-tax return on investments, and that people work to age 63 and live to age 85. Currently, privately held public debt is about .3 times GDP, and if we include our Social Security obligations, it is 1.6 times GDP. In either case, we could argue that we have too little debt."


Mr. Prescott actually make the point, subsequently, that government debt is a necessity if one has a long-lived population that is not growing rapidly. In effect, the more older, non-working people a society has, the more productive assets it needs with which to generate wealth in order to pay for those retired people. It's the reverse of how most economists present this situation."


Thus, it's quite possible that the WEF's macroeconomic criteria are not sensitive to the unique mix of population growth, age, and productivity. It makes sense that, when weighting innovation and markets, the US dominates. And, as Prescott indicates, it makes sense to feed the world's most productive economy by using debt finance. Especially when that economy belongs to the world's most free, stable government.


Our deficit isn't a problem, and neither is our current, short-term problem with losses in various structured finance instruments. They constitute a short-term loss of investment capital, not a long-term burden on the economy.


But leave it to CNBC to look for the dark cloud surrounding an economic silver lining. A view on the country's global economic supremacy, as judged by the WEF, brought to you by two non-economists.