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Why does the US make its people richer faster than other big, advanced economies?
While the United States is unable to produce a consistently high-performing men’s soccer team, we remain consistently able to make our citizens richer faster than other advanced economies. (Somehow this important point got lost in the 2016 presidential campaign.) To that, this handy and illustrative chart from the consistently high-performing Justin Fox of BloombergView, based on IMF data:
So, yeah, a good chart for America. And if you want to argue that America’s supply-side reforms since the early 1980s play a role, the widening gap since 1980 is certainly an interesting data point. (I would also note that the latest World Economic Forum competitiveness report ranks the US as the most competitive large economy.)
More insight on this issue comes from economist Martin Feldstein, who has ranked in order of importance what he sees as the explanatory factors for American outperformance. From Feldstein’s paper earlier this year, “Why is growth better in the United States than in other industrial countries,” his top ten list (as edited by me):
(1) An entrepreneurial culture. Individuals in the United States demonstrate a desire to start businesses and grow them and a willingness to take risks. There is no penalty in the US culture for failure and for starting again.
(2) A financial system that supports entrepreneurial activities. The United States has a more developed system of equity finance than the countries of Europe and a decentralized banking system that helps local entrepreneurs.
(3) World class research universities. These produce much of the basic research that drives the high-tech entrepreneurial activities. Faculty members and doctoral graduates often spend time in new businesses that are located near these universities. The culture of the universities and of the businesses welcomes these overlapping activities between academia and the private sector. The great research universities attract talented students from around the world, many of whom end up remaining in the United States.
(4) Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations. . . . State level licensing rules are probably the most serious barrier to job changing and to interstate mobility.
(5) A growing population, reflecting both natural growth and immigration. The growing population means a younger and therefore more flexible and trainable workforce.
(6) A culture and a tax-transfer system that encourages hard work and long hours. The average employee in the United States works 1800 hours per year, substantially longer than the 1500 hours worked in France and the 1400 hours worked in Germany.
(7) A supply of energy that makes North America energy independent.
(8) A favorable regulatory environment. Although the system of government regulations needs improvement, it is less burdensome on businesses than the regulations imposed by European countries and the European Union.
(9) A smaller size of government than in other industrial countries. According to the OECD, outlays of the US government at the federal, state and local levels totaled 38% of GDP while the corresponding figure was 44% in Germany, 51% in Italy and 57% in France. The higher level of government spending in other countries implies that not only is a higher share of income taken in taxes but also that there are higher transfer payments that reduce incentives to work. . . . Americans have a higher pre-tax reward to working and can keep a larger share of their earnings.
(10) The US has a decentralized political system in which states compete. The competition among states encourages entrepreneurship and work effort and the legal systems protect the rights of property owners and entrepreneurs. . . . The United States is perhaps unique among high-income nations in the degree of decentralization.
While one can quible about the ranking (and I’m not sure at all about #7), the list does provide a reasonable guide to policymakers of what to encourage and what not to harm. (Also check out this piece from The Economist which addresses some related possible explanations.) Feldstein ends his paper with a nod to Joseph Schumpeter who warned “that capitalism would decline and fail because the political and intellectual environment needed for capitalism to flourish would be undermined by the success of capitalism and by the critique of intellectuals.”
While Schumpter’s warning was directed at social democratic parties, perhaps in 2017 populist-nationalist parties are the more relevant to threat competitive, innovative capitalism — or what Deirdre McCloskey calls “trade-tested progress” or “technological and institutional betterment at a frenetic pace, tested by unforced exchange among all the parties involved.”