WAR SPENDING UNDERMINES U.S. ECONOMY

by Emad Mekay

(IPS) WASHINGTON -- One of the world's most exclusive business clubs warned the United States on Tuesday that its open-ended national security and war expenditures, along with tax cuts that led to large budget deficits, could erode the country's status as a powerful economic force.

The Geneva-based World Economic Forum issued its 2006-07 Global Competitiveness Index (GCI) rankings and listed the United States in sixth place, down from the top spot, behind Switzerland, Finland and Sweden and just ahead of Japan.

The top 10 countries are all rich industrialized nations. They are Switzerland, Finland Sweden, Denmark, Singapore, the United States, Japan, Germany, the Netherlands and Britain.

The report says that with potentially even higher spending commitments in defense and homeland security, which comes with the U.S. war on terror and ongoing plans to lower taxes further, the U.S. faces a difficult fiscal balancing task.

"With a low savings rate, record-high current account deficits and a worsening of the U.S.'s net debtor position, there is a non-negligible risk to both the country's overall competitiveness and, given the relative size of the U.S. economy, the future of the global economy," said Augusto Lopez-Claros, chief economist of the World Economic Forum's Global Competitiveness Network.

The report says that the United States faces major institutional challenges because the quality of the country's public institutions fares worse than those of other rich nations in terms of transparency and efficiency, especially after the devastation wrought by Hurricane Katrina last year.

The report did praise the U.S. higher education system and said that the country remains the world leader in innovation.

The pro-market forum ranks countries based on specific criteria, including macroeconomic policies, market regulation, technological development and education.

The comprehensive annual survey is conducted by the WEF along with research institutes and business organizations in the countries covered by the report. This year's report was complimented with a poll of more than 11,000 business leaders in a record 125 economies worldwide.

The World Economic Forum is a loose grouping of the most powerful companies around the world and is best known for its annual meetings in the Swiss Alpine resort of Davos, where world leaders and top business executives gather to chart the financial course for the next year.

The admonition from such a pro-market establishment group could serve as a red flag on the direction of the U.S. economy. If international confidence in the U.S. economy continues to ebb, the U.S. dollar is likely to fall further and foreign investment will shrink.

The report was immediately seized on by the U.S. opposition party as evidence of counterproductive policies from the Bush administration. Democrats, who will be competing with Bush's Republican Party for congressional seats on Nov. 7, blamed the administration's economic policies for the deterioration in the U.S. ranking.

House Democratic Leader Nancy Pelosi said in a statement that Bush administration officials and Republican lawmakers "have run up record budget deficits in their quest to help the privileged few, given subsidies to companies to ship jobs overseas and failed to pursue an aggressive trade agenda on behalf of America's companies and America's workers.

"Nothing less than our economic leadership is at stake," she added.

The U.S. economy is menaced by large macroeconomic imbalances, particularly rising levels of public indebtedness associated with repeated fiscal deficits.

Economists say the country could see disorderly adjustment of such imbalances, including the historically high trade deficit. The U.S. ran a humongous trade deficit of nearly $791.5 billion last year. The trade deficit hit $68 billion in July, up 5 percent from June's record.

The running U.S. trade deficit is $820 billion in 2006 -- keeping the United States on pace for a record annual trade deficit, for the fifth straight year -- far ahead of last year's record and approaching 6 percent of the Gross Domestic Product (GDP).

A deficit that reaches 4 percent of the GDP is considered by economists to pose a threat to an economy's general stability by increasing prospects for high interest rates or sudden sell-offs of a country's currency.

The WEF noted the seriousness of those rates.

"What is unsustainable is the present growth of the U.S. deficit as a share of GDP," says the report.

"Maintaining a constant share deficit may require some depreciation of the dollar and a reduction in the trade deficit. It will also require greater effort on the part of the United States to reduce fiscal imbalances."