Sorry, the Fundamentals of the Economy Are Sound. That's Right!

There is more to America than just Wall Street and Washington.

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Picture the U.S. economy this way: It's like an Olympic athlete, say Michael Phelps or Bryan Clay, who's been struck down with necrotizing fasciitis, the "flesh-eating" disease. (And imagine the government as leg weights.) Cure the credit markets and he can get back in the game.

More evidence of the truth of this analogy comes from the World Economic Forum—the Davos people—who for the second straight year judged the United States as possessing the most competitive economy in the world. (Then came Switzerland, Denmark, Sweden, and Singapore.) Among America's strengths: innovation, flexible labor markets, and higher education. Not surprisingly, though, our institutions ranked a dismal 29th. (Thanks, Wall Street.)

The WEF also listed what our biggest problems are. Check out these top three, in descending order: tax rates, tax regulation, and inefficient government bureaucracy. That's right. The horrible handiwork of Uncle Sam is our big "problemo." Also, look at this insightful explainer of the WEF's approach:

For hundreds of years, economists have tried to understand what determines the wealth of nations. This attempt has ranged from Adam Smith's focus on specialization and the division of labor to neoclassical economists' emphasis on investment in physical capital and infrastructure, and, more recently, to interest in other mechanisms such as education and training, and technological progress.... The central point, however, is that they are not mutually exclusive—so that two or more of them could be true at the same time.... This also can partly explain why, despite the present global financial crisis, we do not necessarily see large swings in competitiveness ratings, for example in the United States. Financial markets are only one of several important components of national competitiveness.

And remember, the core U.S. economy is in far better shape than it was in the 1970s. Productivity, the key measure of an economy's strength, consistently grew at less than 2 percent in the 1970s and stayed weak until the tax cuts, deregulation, inflation fighting, and corporate restructuring of the 1980s blossomed into the tech and productivity boom on the 1990s and beyond. Productivity has averaged about 2½ percent since 1995 and is now running closer to 3 percent year over year, including 4.3 percent in the second quarter. So, yeah, the Main Street fundamentals are sound. It's Wall Street and Washington that are the problems.