If the politicians are asked this question, the democrats will complain that corporate power and inequality of wealth have geared the economy to benefit and protect the rich. Ask the republicans and they will contend that the entrepreneurial spirit has been stifled and the public debt is completely out of control. What then is the answer?
Comparisons to Other Leading Economies: Compared with the world’s other leading economies the U.S. economy comes out on top most of the time. Considering Purchasing Power Parity (PPP), a common measure based upon what an individual can buy in his own country, China would have the largest economy and the U.S. the second largest. That’s not surprising since China’s population is many times larger. Placing this comparison on the World Stage, however, and exchange rates driven by markets put the U.S. in front.
Compare the U.S. GDP (Gross Domestic Product) with the G7 richest countries in the world, and it went from 40% of the total to 58% over the last 30 years. Comparing PPP over the same time period, the increase of the U.S. vs the G7 rises from 43% of the total to 51%. Income per capita in 1990 was 24% higher in the U.S. than in Western Europe and 17% higher than in Japan. Currently it is 30% higher than in Western Europe and 54% higher than in Japan. The wealth in the U.S. is not confined to the ultra rich. By contrast, a truck driver in the U.S. can earn more than a physician in Portugal.
How then does the American Economy do it?
Skilled American Workers: The increase in wealth is largely due to an increase in productivity. Increased productivity can be credited in part to increased investment, but also increases in efficiency due in large part to adoption of new technologies. This also is not surprising since the U.S. spends about 37% more per student in schools than Organization for Economic Co-operation and Development (OECD) members. The percentage becomes twice the average when applied to higher education beyond secondary schools. American workers are on average highly skilled. About 34% of Americans have education past high school, making the U.S. first among world economic leaders in the last 30 years.
Large, Single American Market Place: America has a large, single marketplace that drives a thriving economy. Europe has a large overall marketplace that is unified, but has language and cultural differences between and among member states. India has a large marketplace, but it is not yet a rich one, and it also has linguistic and cultural differences to get around. China is also a large marketplace that is unified, but over controlled or over managed in the aggregate by the government.
Mobile American Population: The American population is more mobile and moves more quickly to different geographic areas that need skilled employees. Further, this mobility is accomplished by the desire of the employee and not the dictates of the state. As many as five million Americans move from state to state each year. Those moving the most are usually the most educated who are heading to jobs that are more suitable and productive than those found in the area in which they lived.
Cooperative Financial Markets: U.S. financial markets are the world’s deepest and most liquid. Capital flows fairly efficiently to areas where it is needed. The combined stock market capitalization runs as high as 170% of overall Gross Domestic Product (GPD). Starting a company in the U.S. is many times easier than in most foreign countries, and capital often finds its way to those startups that have the best chances of success. New ideas, new products, new methods, and new technologies have long been sought after by American entrepreneurs. Some ideas that lead to a start up will wind up failing, but corporate protections under the law help prevent entrepreneurs from being wiped out in the event of a business failure.
Strong Corporate Culture: The American corporate culture further promotes the economy as corporate success is often based on competition that can be fierce at times in certain companies. Terminating those executives and managers that are unable to produce is easier to do in the U.S. than in most other industrialized countries. Well run companies in the U.S. are often rewarded by financial markets. American companies that are bloated with too many managers and an excess of labor will find capital costs much higher.
Warnings for the Future: The one thing that could damage the future of the U.S. economy is the scary trend in government away from globalization. This comes from both major political parties in the form of excessively restricting immigration, applying tariffs to imports, and interfering with outputs that come from such laws as capping profits in the oil industry.
Another warning sign is the huge, massive, fiscal debt. The threat of default is a political ploy that’s been used in the past to little advantage by one political party over the other. But the damage done by a real default, even a temporary one, would be crucial to economic growth for years to come. Investor confidence is the main reason for the supply of capital, and that confidence has sailed along for two and a half centuries knowing that the risk of default by the U.S. Federal Government is unlikely to happen.
The rise of self-harming policies that can hurt growth and development have sprung from a pessimist attitude in parts of the population that does not find its base in facts. The negative viewpoint finds its way into politics and into government creating economic sticking points that can hurt growth.
Sources: From Strength to Strength, The Economist, April 15th, 2023.
Excellent blog as always. Loads of facts that support the article.
Let us hope our politicians read it and fully understand both parties need to work together and prioritize what needs to be done
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