Reducing Debt and Other Measures for Improving U.S. Competitiveness

November 21, 2012

American competitiveness is at risk as the burden of the national debt continues to take its toll on the economy, say Jason J. Fichtner and Jakina R. Debnam of the Mercatus Center.

  • The current level of debt sits at more than $16 trillion.
  • Because of this, the government is forced to redirect resources from productive activities to paying its debt.
  • Furthermore, when the government turns to borrowing, interest rates go up on private businesses.
  • As a result, profits and overall growth decline, which hurts the economy.
  • Additionally, high levels of debt create uncertainty about the appropriate tax levels needed to service the debt as well as the potential for inflation, which hurt overall productivity and growth.

As the debt continues to increase, the government is forced to either increase taxes or make difficult spending cuts, or both. In either case, it hurts the ability of the government to provide essential investments to improve the nation's productivity.

Empirical evidence proves the impact that high levels of debt can have on economic growth. One study that took over 200 years of data from 40 countries found that when the gross national debt exceeds 90 percent of gross domestic product, real growth was cut anywhere between 1 percent and 50 percent. Another study found that economic growth slows when debt exceeds 85 percent in Organization for Economic Cooperation and Development (OECD) countries. Unfortunately, the United States exceeds both those thresholds.

There are several reforms the United States can pursue in order to quickly reverse the decline in competitiveness.

  • Enact corporate tax reform: The United States can reduce its statutory rate of 35 percent of the average rate of 26 percent or less like many other OECD countries. In addition, the United States can end its policy of taxing any earnings made in a foreign country.
  • Regulatory reform: Allow regulators to look at the impact of a potential regulation on domestic and global competition. Regulations should place an emphasis on allowing innovation, implementing new technologies, and making compliance low-cost.
  • Tort reform: Complex legal codes deter innovation and make it difficult for domestic firms to compete internationally. Instead, reforms could place caps on how much companies are liable and for how long after a good is produced.

Source: Jason J. Fichtner and Jakina R. Debnam, "Reducing Debt and Other Measures for Improving U.S. Competitiveness," Mercatus Center, November 13, 2012.

 

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