Why the US economy is still the envy of the world

0:01NPR.

0:11Hey there, it's Adrian Ma. So by now, we all know that Donald Trump's victory in the presidential election last month was driven in large part by the fact that a lot of voters were just not happy about the economy the past couple of years. They were feeling the sting of inflation. And yet there is a sort of disconnect here because there are some pretty strong economic metrics that show that the economy the past couple of years has been doing pretty well. from cooling inflation to rising wages to low unemployment and strong consumer spending. And when you put all this together, it's actually not an exaggeration to say that the U.S.

0:48economy is the envy of the world right now. And in fact, that is the title of a special report in The Economist recently titled The Envy of the World. It was co-authored by Simon Rabinovich. So the U.S. has effectively grown three times as fast as its kind of largest comparable economic block. That block he's talking about is the G7 group of rich countries. Places like the U.K., Japan, and Germany. If you take the economies of all the G7 countries and put them in a pie, he says the U.S. used to be about 40 percent of that pie. That was back in the 1990s. Today, it's grown. It's more than 50 percent today.

1:31So, you look at all of these different basic top-line GDP economic output metrics, and American outperformance is really quite striking. The big question now, though, is whether that outperformance will continue under a president who's promising some major economic changes. And that is what we're talking about with Simon Rabinovich today. Now, if Simon's name rings a bell, it's because we actually had him on the show just after the election. Today's episode is an extended cut of that chat. This version of the chat is something that you may have already heard if you are a supporter of Planet Money Plus.

2:12But today, we're giving everyone a chance to hear it. Episodes like this one are just one perk of signing up for Planet Money Plus. You also get to hear every episode of The Indicator and Planet Money without sponsor messages. And there's some nice perks available, like exclusive Planet Money merch in the NPR shop, just for supporters. Learn more at plus.npr.org. Now, here's my conversation with Simon Rabinovich. You go through in your story, basically it seems like four main reasons why the U.S. is outperforming other rich countries. And I wonder if we could just go through them one by one, starting with productivity.

2:51Yeah. So productivity is absolutely key to understanding any economy's growth potential. Ultimately, what dictates an economic size over a matter of years and decades is how many people are in the country, how many people are working, and how productive they are. So if you just look at per worker productivity in the US since 1990, it's increased by about 70%, whereas in other rich world economies, it's closer to 40 or 50%. So on a yearly basis, that's not a huge difference. That's maybe kind of 1.5 % in the US, 1.2 % elsewhere. But the power of compounding interest is such that over a period of decades, you can really see the American advantage.

3:36What drives that? One, business dynamism. It's a lot easier for businesses to go bust, but also for new ones to be founded in the U.S. It's easier for workers to move around to where they're actually needed. Number two, a lot of investment in capital. It's higher in the U.S. than elsewhere. That's not just in physical structures, but also critically in software, research and development. America is very strong in that. And then number three is tech dominance. It's not just that the U.S. is home to Silicon Valley. It's also that American companies tend to do better, tend to be faster at adopting new technology, something that we're seeing now with artificial intelligence.

4:14So all of these things feed through together to make the U.S. a more productive economy. I wonder, though, some people might hear like, oh, it's great that we're like being more productive. But how does that translate into like material gain? Do people feel productivity in their lives? Well, I guess the way in which productivity is felt is wages. And so if you look at wage levels, if you look at per worker output in America, it's dramatically higher than in other countries. So, you know, actually one of the striking findings of our report is the average wage level in Mississippi, which is America's poorest state, is higher than the average wage level in Germany, Britain or Canada.

4:58Now, there's a lot of inequality. So when you're looking at averages, it's partly skewed by wealthy people doing extraordinarily well. But I guess the point is that there is a lot of growth, a lot of wealth, and there are questions politically about how that should be shared or divvied up in the U.S. But as far as the starting point, the U.S. has a very, very strong starting point, which is the result of higher productivity. Okay. So productivity is one wind at the U.S. economy's back. The next one that you go into is energy as a key economic driver. Say more about that. Yeah. So, I mean, this one is fairly straightforward in that there was the Great Shale Revolution of the early 2000s.

5:40Obviously, environmentalists are not terribly happy with the outcomes of that. But economically, it's quite profound, its impact. It has made America the world's biggest producer of both oil and natural gas. That's really, really important for the economy. First of all, it's good for the U.S. terms of trade. Energy is one of the few sectors in which the U.S. is actually a net exporter. But more crucially, it insulates America from global volatility, from global price spikes. So in the 1970s, there was the OPEC crisis, which led to a period of stagflation in America, of extremely low growth, extremely high inflation.

6:20You look at the Russian invasion of Ukraine and what that did to global energy markets. That was a huge albatross around the neck of European economies, whereas America was basically insulated from the energy effects of it because it was producing so much oil and so much gas. U.S. consumers might complain a little bit about the price of gas at the pumps, but the fact is, compared to heating prices in Europe, in Asia, they're incredibly well-off, incredibly well-insulated. And this is also good for American companies, too, that rely on energy to fuel their operations. So that's another really, really big and important source of strength.

6:58Okay, a third thing that you spotlight as driving U.S. outperformance is the stock market, probably something that we hear about every day, and it might be the most tangible manifestation of the economy for a lot of people. So how is this playing a role? Yeah, so this is, as you say, highly tangible. And it's amazing when you look at the numbers. The U.S. economy is roughly 20 % of the global economy. But the U.S. stock market is about 60 % of the global stock market by capitalization. So there really is outsized power there. And it's not just a question of prices. So yes, U.S. companies, they trade on slightly higher multiples, largely because the U.S.

7:41is home to the world's biggest tech companies. the world's biggest growth stocks, and that drives a lot of the valuation. But there's really important consequences from this. It means that you have highly, highly liquid markets in the US. You have a lot of faith in US markets because of the rule of law, which is something that attracts investors globally into America. If you're a tech startup anywhere in the world, you'll look to get listed in the US. You'll look to set up operations in America as well. venture capital, private markets. The U.S. accounts for roughly 50 % of global VC funding, which really then begets the next generation of startups, of innovative companies, which is why when you think about U.S.

8:23productivity, it's driven in part by stock market dominance. And because the stocks are so strong, you expect that innovation and productivity in the future will remain strong as well. So it's one of these things that you would say is really a virtuous cycle for the U.S. economy.

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9:26all these sorts of advantages. How do you see it figuring into your picture of the economy? Yeah. So, I mean, first of all, there's a debate about whether or not the U.S. will remain the world's reserve currency. And so one of the things that we look at in the report is various metrics by which you measure that. And, you know, one obvious metric is share of global foreign exchange reserves held by global central banks. And the dollar's gone down a little bit, but it's still about 60%. If you throw in dollar-affiliated currencies like the Australian dollar and the Canadian dollar, it's still absolutely dominant.

10:02The RMB, China's RMB, has barely made a dent in that over the past decade. And beyond FX reserves, you look at FX transactions globally, foreign debt issuance, cross-border bank lending, the dollar is truly unparalleled. So, you know, it is the global reserve currency today. It will be the global reserve currency tomorrow, probably in 10 years from now as well. So there's very, very solid underpinnings to that. The next debate then is what does being the reserve currency actually get for America? And it really is an important source of strength. It helps the government with financing because the U.S.

10:43dollar is the reserve currency. Foreign investors, foreign central banks, they want to hold the dollar. They want to hold dollar-based assets. That means that if the U.S. government issues debt, it is always going to have customers for it, which then means that if there's a financial crisis in the U.S., like we saw in 2008, like we saw with COVID in 2020, 2021, the U.S. government, more than almost any other government in the world, is able to rack up a very big deficit, finance that quite effectively, and then propel the economy back to growth. So it really is kind of a get-out-of-jail-free card for the U.S.

11:23government and the U.S. economy. And the second point is that then for U.S. companies, it reduces their cost of financing. They're able to issue debt a little bit more cheaply. They're able to borrow from banks and U.S. dollars a bit more cheaply. And this just is kind of one more reason that they're able to then fund investment in software and capital and be the growth dynamos that they are. Okay. So just a quick recap, productivity, energy, the stock market, and the U.S. dollar are all driving the U.S. economy to, as you wrote, be the envy of the world right now. And this sort of paints a very rosy picture of our economy.

12:06At the same time, you also write there are potential downsides to this sort of American economic exceptionalism. Yeah, that's right. So I guess the first point is not so much necessarily a downside, but a caveat is that economic exceptionalism does not necessarily translate into sunshine and roses across the board. So I think the most concrete example there is longevity. And, you know, it's a kind of a crude, but ultimately a very good measure of what the government or the system of government is actually delivering. Like how long people are living. Exactly. Exactly. You know, what is the quality of life in America?

12:44And if you look at that, you know, over the last few decades, longevity in the U.S. used to roughly be the same as in Western Europe. Well, today, a newborn in the US can expect to live to about 79. In Western Europe, it's closer to 82 years. That's a pretty big gap. Now, the argument that we'd make there is that this is not specifically related to economic development. You know, there's a lot of other problems in the US that aren't fundamentally economic in nature. So things like lax gun control laws, the opioid epidemic, none of those are fundamentally economic problems. They're really political problems.

13:23So that's just to say that an incredibly strong economy still has many things that can go wrong in it that aren't fundamentally economic in nature. Another point to make, and this one really is more economic, is that the US does have a lot higher inequality than most other economies. And you might argue you that this is partly the result of an economic model that puts so much primacy on delivering profits, on driving growth. You know, for example, other countries that have lower growth have more generous welfare systems. Well, in America, there's a longstanding debate about whether or not having more generous welfare provisions would dampen incentives to work and therefore would hold back the economy.

14:07So you could argue that that part of America's high inequality really is a direct cost of having such a growth-focused economic model. Which also seems to tie back into our politics. Absolutely. Absolutely. You know, when you look at where the U.S. is today, there obviously has been a lot of attention on inequality. I suppose the good news, Adrian, is that over the past 15 years, which has been a period of a very high growth for America, much stronger recovery, both from the global financial crisis and from COVID, we've actually seen inequality begin to narrow a little bit in America. There's still a long way to go.

14:47But I think there is a broader recognition that, you know, it's important to have a full employment economy. And that when you have that, even with welfare program deficiencies in America, you know, you're able to generate higher wage growth for people who are lower down the income ladder. And that does generate very positive outcomes. So you could also say that what we've seen in the last decade or so is that high growth can actually be consistent with the beginnings of an improvement on equality. Looking ahead, do you think this is going to continue? So just looking at growth alone, I think if we lived in a vacuum, politics aside, then yeah, it could continue.

15:31There's really, really deep interlocking routes that explain why the US has higher productivity growth. You look at the boom in AI investment right now, and once again, America is leading the world in that. And that leads to optimism that the US will remain more productive. If you look at the population side as well of the story, the US is in a much better position than most other countries. Even compared to China, China right now is roughly 18 % of the global population, but it's beginning to experience really, really sharp demographic decline. It's projected to go from 18 % of the global population to about 6 % by the end of the century.

16:09The US right now is 4 % of the global population. It's projected to basically stay 4 % because there's slightly higher fertility rates in America, and there's also a lot more acceptance of immigration. That's really, really important long-term for economic growth. The problem, of course, having talked about acceptance of immigration, is that the U.S. isn't in a political vacuum. Politics do matter. And so you look specifically at Donald Trump and what he's talking about, and he has a range of policy ideas and preferences, which, depending on how they're implemented, the extent to which they're implemented, really would begin to undercut the sources of U.S.

16:50economic strength. It'll be very bad for America's fiscal health. The cutbacks on immigration would be very bad for population growth, ultimately quite bad for innovation as well. If you begin to undermine rule of law, that will undermine American markets, that will undermine the American dollar. All of these things together, I think, would begin to unpick what are quite deep-rooted sources of strength, but ultimately, depending on the politics, can also be uprooted.

17:22Thanks to The Economist Simon Rabinovich for speaking with me. Episodes like this one are just one perk of signing up for Planet Money Plus. Learn more at plus.npr.org. I'm Adrian Ma, and this is NPR.