https://www.economist.com/leaders/2023/04/13/the-lessons-from-americas-astonishing-economic-record

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Leaders | Riding high

The lessons from America's astonishing economic record

The world's biggest economy is leaving its peers ever further in the
dust

[20230415_LDD001]
Apr 13th 2023
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If there is one thing that Americans of all political stripes can
agree on, it is that the economy is broken. Donald Trump, who saw
trade as a rip-off and his country in decline, came into office
promising to make America great again. President Joe Biden is
spending $2trn remaking the economy, hoping to build it back better.
Americans are worried. Nearly four-fifths tell pollsters that their
children will be worse off than they are, the most since the survey
began in 1990, when only about two-fifths were as gloomy. The last
time so many thought the economy was in such terrible shape, it was
in the throes of the global financial crisis.

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Yet the anxiety obscures a stunning success story--one of enduring but
underappreciated outperformance. America remains the world's richest,
most productive and most innovative big economy. By an impressive
number of measures, it is leaving its peers ever further in the dust.

Start with the familiar measure of economic success: gdp. In 1990
America accounted for a quarter of the world's output, at market
exchange rates. Thirty years on, that share is almost unchanged, even
as China has gained economic clout. America's dominance of the rich
world is startling. Today it accounts for 58% of the g7's gdp,
compared with 40% in 1990. Adjusted for purchasing power, only those
in uber-rich petrostates and financial hubs enjoy a higher income per
person. Average incomes have grown much faster than in western Europe
or Japan. Also adjusted for purchasing power, they exceed $50,000 in
Mississippi, America's poorest state--higher than in France.

The record is as impressive for many of the ingredients of growth.
America has nearly a third more workers than in 1990, compared with a
tenth in western Europe and Japan. And, perhaps surprisingly, more of
them have graduate and postgraduate degrees. True, Americans work
more hours on average than Europeans and the Japanese. But they are
significantly more productive than both.

American firms own more than a fifth of patents registered abroad,
more than China and Germany put together. All of the five biggest
corporate sources of research and development(R&D) are American; in
the past year they have spent $200bn. Consumers everywhere have
benefited from their innovations in everything from the laptop and
the iPhone to artificial-intelligence chatbots. Investors who put
$100 into the s&p 500 in 1990 would have more than $2,000 today, four
times what they would have earned had they invested elsewhere in the
rich world.

One retort to this could be that Americans trade higher incomes for
less generous safety-nets. America's spending on social benefits, as
a share of gdp, is indeed a great deal stingier than other
countries'. But those benefits have become more European and, as the
economy has grown, they have grown even faster. Tax credits for
workers and children have become more generous. Health insurance for
the poorest has expanded, notably under President Barack Obama. In
1979 means-tested benefits amounted to a third of the poorest
Americans' pre-tax income; by 2019 these came to two-thirds. Thanks
to this, incomes for America's poorest fifth have risen in real terms
by 74% since 1990, much more than in Britain.

For the world as a whole, America's outperformance says much about
how to grow. One lesson is that size matters. America has the benefit
of a large consumer market over which to spread the costs of R&D, and
a deep capital market from which to raise finance. Only China, and
perhaps one day India, can boast of purchasing power at such scale.
Other countries have sought to mimic it. But even those in Europe,
which have got the closest, have struggled to become a true single
market. Differences in bankruptcy laws and contractual terms,
together with a variety of regulatory barriers, prevent bankers,
accountants and architects from touting services across borders.

The size and the quality of the workforce matters, too. America was
blessed with a younger population and a higher fertility rate than
other rich countries. That may not be easily remedied elsewhere, but
countries can at least take inspiration from America's high share of
immigrants, who in 2021 made up 17% of its workforce, compared with
less than 3% in ageing Japan.

Another lesson is the value of dynamism. Starting a business is easy
in America, as is restructuring it through bankruptcy. The
flexibility of the labour market helps employment adapt to shifting
patterns of demand. Already many of the workers in America who were
laid off from Alphabet and other tech firms at the start of the year
are applying their sought-after skills elsewhere, or setting up their
own businesses. In continental Europe, by contrast, tech firms are
still negotiating lay-offs, and may think twice about hiring there in
future.

Americans should find the economy's performance reassuring. If
history is a guide, living standards will continue to go up for the
next generation, even as the country bears the costs of decarbonising
the economy. Yet, resilient as the growth record has been, there are
shadows. The middle class has seen its post-tax incomes rise by less
than those of both the poorest and the richest. A group of people
have fallen into hard times. The share of prime-age American men who
are not in work has been rising for years and is higher than in
Britain, France and Germany. And life expectancy in America lags
shamefully behind others in the rich world, mainly on account of too
many younger people dying from drug overdoses and gun violence.
Tackling such problems should be easier when the economy as a whole
is growing. But America's poisonous politics are no help.

In addition, the more that Americans think their economy is a problem
in need of fixing, the more likely their politicians are to mess up
the next 30 years. Although America's openness brought prosperity for
its firms and its consumers, both Mr Trump and Mr Biden have turned
to protectionism and the politics of immigration have become toxic.
Subsidies could boost investment in deprived areas in the short term,
but risk dulling market incentives to innovate. In the long run they
will also entrench wasteful and distorting lobbying. The rise of
China and the need to fight climate change both confront America with
fresh challenges. All the more reason, then, to remember what has
powered its long and successful run. #

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This article appeared in the Leaders section of the print edition
under the headline "Riding high"

Leaders April 15th 2023

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Riding high: The lessons of America's astonishing economy

From the April 15th 2023 edition

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