Washington is now all too aware that foreign creditors and investors will punish it for any macroeconomic mismanagement. American competitiveness was at stake in the fiscal cliff negotiations.
Take a guess. Which of these put more pressure on US lawmakers to strike a deal and avoid the “fiscal cliff” – voters or global financial markets?
If you picked markets, you may be right.
On the day after the last-minute agreement, an uptick in global stock prices seemed far more welcome in Washington than the reaction of voters. The reason is that foreign creditors to the US Treasury had been near a tipping point in wanting their money back, possibly forcing a crisis for US debt.
Investors worldwide now demand the US government display more stability and trust. Globalization has given them a big say in the policy logjams of many countries, and the United States is not immune. Its lingering disputes over issues like taxes and spending have become a prime indicator of its ability to remain innovative, reliable, and productive.
Elections do have consequences, for sure. But today so does a country’s economic competitiveness, measured in part by its level of dependability, openness, and flexibility in governance. On those sorts of attributes, the US needs work. Consider these latest rankings:
On a global index of innovation, the US has dropped from No. 1 in 2007 to 10th. On economic competitiveness, it has dropped to seventh in the last few years. And compared with other countries, the trust by Americans in their government ranks 54th.
The greatest weakness of the US is seen in its lack of macroeconomic stability. On that measure it fell last year from 90th to 111th.
In 2012, the US fell from the top tier of a “global prosperity index,” which measures such nonmaterial factors as entrepreneurship, safety, education, and governance. It now ranks 12th.
Within two decades, China is expected to have as many college graduates as the entire workforce in the US. The number of Chinese universities in the world’s top 500 has risen from 12 to 22 in just eight years.
The US must compete much more aggressively for foreign investment even as the flow of those investments has declined. Last year, the US was no longer the No. 1 destination for foreign investments. China beat it out.
Policy disputes over entitlements and taxes are important, but resolving them is even more important if the US is to enjoy a healthy economy. Lawmakers who fight over how to divide up the economic pie must, at some point, collectively agree on how to expand the pie. Prolonged bickering doesn’t do that.
The rest of the world still looks to the US economy as one of the most stable, open, innovative, and competitive places to invest. The limited fiscal-cliff deal shows some political ability to build on those qualities. Investors, as much as voters, demand more – and, when it comes to dealmaking, they may even have more influence.