Why the US economy is still the envy of the world

Summary

Summary of "Why the US Economy is Still the Envy of the World" | The Indicator from Planet Money

Release Date: December 14, 2024
Host: Adrian Ma
Guest: Simon Rabinovich, Economist and Co-author of The Economist’s Special Report “Envy of the World”

---

Introduction: The Paradox of Economic Perception

In this episode of The Indicator from Planet Money, host Adrian Ma delves into the intriguing paradox where despite voter dissatisfaction with the economy influencing political outcomes, key economic indicators suggest that the U.S. economy remains robust and enviable on the global stage. The discussion is anchored around a special report titled “Envy of the World,” co-authored by economist Simon Rabinovich.

Key Drivers of U.S. Economic Excellence

Simon Rabinovich outlines four primary factors contributing to the United States' economic outperformance compared to other G7 nations.

1. Productivity: The Engine of Growth

Timestamp [02:52]

Productivity is highlighted as a cornerstone of economic growth. Rabinovich points out that since 1990, U.S. per-worker productivity has surged by approximately 70%, outpacing the 40-50% growth seen in other advanced economies. This difference, while seemingly modest on an annual basis (1.5% in the U.S. versus 1.2% elsewhere), compounds significantly over decades, reinforcing the American economic advantage.

Quote:
"Business dynamism, higher investment in capital, and tech dominance all feed through together to make the US a more productive economy."
— Simon Rabinovich [02:52]

Rabinovich attributes this productivity boost to several factors:

• Business Dynamism: Easier for businesses to enter and exit the market, fostering innovation and adaptability.
• Investment in Capital: Higher investments not only in physical infrastructure but also in software research and development.
• Technological Dominance: Leadership in technology adoption, particularly in burgeoning fields like artificial intelligence, propels productivity further.

Adrian Ma probes the tangible benefits of productivity growth, to which Rabinovich responds that higher productivity translates into increased wages. He cites that even in economically poorer states like Mississippi, average wages surpass those in countries like Germany, Britain, and Canada. However, he acknowledges the caveat of significant income inequality in the U.S., where the benefits of productivity gains are unevenly distributed.

Quote:
"The average wage level in Mississippi, which is America's poorest state, is higher than the average wage level in Germany, Britain, or Canada."
— Simon Rabinovich [04:31]

2. Energy: Fueling Economic Resilience

Timestamp [05:34]

The "Great Shale Revolution" has been instrumental in making the U.S. the world's leading producer of oil and natural gas. This energy abundance offers multiple economic advantages:

• Improved Trade Terms: As a net exporter of energy, the U.S. enjoys favorable trade balances in this sector.
• Insulation from Global Volatility: Unlike Europe, grappling with energy crises due to geopolitical tensions (e.g., the Russian invasion of Ukraine), the U.S. remains relatively unaffected, stabilizing its economy against external shocks.

Rabinovich emphasizes that domestic energy production protects American consumers and businesses from the unpredictable fluctuations of the global energy market, thereby sustaining economic stability and growth.

Quote:
"Energy is one of the few sectors in which the US is actually a net exporter. More crucially, it insulates America from global volatility, from global price spikes."
— Simon Rabinovich [05:34]

3. Stock Market: A Beacon of Financial Strength

Timestamp [07:15]

The U.S. stock market's dominance plays a pivotal role in its economic prowess. Despite the U.S. economy comprising about 20% of the global economy, its stock market accounts for approximately 60% of global market capitalization. This disproportionate influence is fueled by:

• High Valuations: Especially of tech giants and growth-oriented companies, which trade at premium multiples.
• Liquidity and Trust: The U.S. markets are highly liquid and trusted globally, attracting substantial foreign investment.
• Venture Capital Leadership: With the U.S. capturing around 50% of global venture capital funding, it fosters a continuous pipeline of innovative startups and technologies.

Rabinovich describes this as a "virtuous cycle," where stock market strength feeds into innovation and productivity, further reinforcing economic growth.

Quote:
"The U.S. stock market is about 60% of the global stock market by capitalization. It's a virtuous cycle for the US Economy."
— Simon Rabinovich [07:15]

4. The U.S. Dollar: Global Reserve Currency

Timestamp [09:51]

The U.S. dollar's status as the world's primary reserve currency endows the U.S. with substantial economic advantages:

• Global Demand for Dollar Assets: Foreign investors and central banks hold significant amounts of dollar-denominated assets, ensuring consistent demand.
• Financing Advantages: The U.S. government benefits from lower borrowing costs and greater flexibility in deficit financing, as foreign entities are eager to purchase U.S. debt.
• Corporate Benefits: American companies enjoy reduced financing costs, enabling more investments in growth and innovation.

Despite slight declines in the dollar’s share of global foreign exchange reserves, it remains dominant at around 60%, bolstered by the strength and reliability of U.S. financial institutions and market regulations.

Quote:
"The dollar is truly unparalleled. It is the global reserve currency today and will likely remain so in the foreseeable future."
— Simon Rabinovich [10:08]

Potential Downsides of American Economic Exceptionalism

While the U.S. economy exhibits robust strengths, Rabinovich cautions against overlooking underlying issues.

1. Longevity and Quality of Life

Timestamp [12:50]

Economic might does not automatically equate to high quality of life across all metrics. The U.S. faces challenges in public health and social issues that manifest in lower longevity rates compared to Western Europe.

Quote:
"A newborn in the US can expect to live to about 79. In Western Europe, it's closer to 82 years."
— Simon Rabinovich [13:14]

Rabinovich attributes this gap to non-economic factors such as:

• Lax Gun Control Laws
• The Opioid Epidemic

He emphasizes that these are predominantly political and social issues rather than direct economic problems, yet they significantly impact overall quality of life.

2. Income Inequality

Timestamp [13:16]

The U.S. grapples with higher income inequality compared to other advanced economies. While high productivity and growth can generate wealth, the distribution of this wealth remains uneven.

Quote:
"The US does have a lot higher inequality than most other economies. This is a direct cost of having such a growth-focused economic model."
— Simon Rabinovich [14:51]

Rabinovich discusses the tension between fostering economic growth and implementing generous welfare systems. He notes that while high growth has historically been associated with increased inequality, recent trends indicate a potential narrowing of this gap due to robust economic recovery following crises like the 2008 financial meltdown and the COVID-19 pandemic.

Looking Ahead: Sustainability of U.S. Economic Supremacy

Timestamp [15:55]

Rabinovich remains cautiously optimistic about the continued outperformance of the U.S. economy, provided certain conditions prevail:

• Technological Investment: Ongoing leadership in artificial intelligence and other cutting-edge technologies.
• Demographic Stability: The U.S. maintains a stable population growth rate through higher fertility rates and greater immigration acceptance, unlike countries facing demographic declines such as China.

However, the optimism is tempered by political factors. Policies under President Donald Trump, particularly those that:

• Cut Back on Immigration: Could stifle population growth and innovation.
• Undermine Rule of Law: May erode trust in markets and the stability of the U.S. dollar.
• Fiscal Irresponsibility: Potentially harm the nation's fiscal health.

Quote:
"Depending on how policies are implemented, they could begin to undercut the sources of U.S. economic strength."
— Simon Rabinovich [15:59]

Rabinovich warns that detrimental political and economic policies could unravel the deep-rooted advantages that currently make the U.S. economy exceptionally strong.

Conclusion: A Balanced Perspective on U.S. Economic Health

The episode concludes by acknowledging the multifaceted nature of economic health. While the U.S. economy boasts impressive strengths in productivity, energy, the stock market, and the dominance of the dollar, challenges such as income inequality and public health issues remind us that economic metrics do not capture the entirety of societal well-being. Moreover, the sustainability of America’s economic advantages hinges significantly on political will and policy choices.

Final Quote:
"An incredibly strong economy still has many things that can go wrong in it that aren't fundamentally economic in nature."
— Simon Rabinovich [13:16]

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This in-depth discussion underscores the complexity of evaluating economic success, highlighting that while the U.S. holds enviable standing in several key areas, ongoing vigilance and thoughtful policy-making are essential to maintain and enhance this position.

Transcript

[NPR]

NPR.

[Adrian Ma]

Hey 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 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 US Economy 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.

[Simon Rabinovich]

So the US has effectively grown three times as fast as its kind of largest comparable economic bloc.

[Adrian Ma]

That bloc 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 piece, he says the US used to be about 40% of that pie. That was back in the 1990s. Today it's grown.

[Simon Rabinovich]

It's more than 50% today. So you look at all of these different basic top line gdp, economic output metrics, and American outperformance is really quite striking.

[Adrian Ma]

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. But 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 US Is outperforming other rich countries. And I wonder if we could just go through them one by one, starting with productivity.

[Simon Rabinovich]

Yeah. So productivity is absolutely key to understanding any economy's growth potential. Ultimately, what dictates an economic size, you know, 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. What 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 US 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 US 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 US 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. So all these things feed through together to make the US a more productive economy.

[Adrian Ma]

I wonder, though, some people might hear like, oh, it's great that we're being more productive, but how does that translate into material gain? Do people feel productivity in their lives?

[Simon Rabinovich]

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 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. Now, 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. Of higher productivity.

[Adrian Ma]

Okay, so productivity is one wind at the US Economy's back. The next one you should go into is energy as a key Economic driver. Say more about that.

[Simon Rabinovich]

Yeah, so, I mean, this one is fairly straightforward in that there was the great shale revolution of the early 2000s. Obviously, 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 US Terms of trade. Energy is one of the few sectors in which the US 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. You look at the Russian invasion of Ukraine, and what that did to global energy market 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. US 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.

[Adrian Ma]

Okay. A third thing that you spotlight as driving US Outperformance is the stock market. Probably something kind of like 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?

[Simon Rabinovich]

Yeah, so this is, as you say, highly tangible. And it's amazing when you look at the numbers. The U.S. economy is, you know, 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, US Companies, they trade on slightly higher multiples, largely because the US Is 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 US 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 US Productivity, you know, 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, it's one of these things that you would say is really a virtuous cycle for the US Economy.

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[Adrian Ma]

In your report, you talk about the US dollar as a source of strength. And we've talked before on this show about how the dollar is the world's reserve currency and it gives the US all these sorts of advantages. How do you see it figuring into your picture of the economy?

[Simon Rabinovich]

Yeah. So I mean, first of all, there's a debate about whether or not the US Will remain the world's reserve currency. And so one of the things that we, 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. The rmb, the 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 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 US dollar 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 US 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 US government and the US economy. And the second point is that then for US 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 in US 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.

[Adrian Ma]

Okay, so just a quick recap. Productivity, energy, the stock market and the US Dollar are all driving the US 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. At the same time, you also write there are potential downsides to this sort of American economic exceptionalism.

[Simon Rabinovich]

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.

[Adrian Ma]

Like how long people are living.

[Simon Rabinovich]

Exactly, exactly. You know, what is the quality of life in America? And if you look at that, you know, over the last few decades, longevity in the US 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. 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. So 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 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 long standing debate about whether or not having more generous welfare provisions would dampen incentives to work and therefore would hold back the economy. So you could argue that part of America's high inequality really is a direct cost of having such a growth focused.

[Adrian Ma]

Economic model, which also seems to tie back into our politics.

[Simon Rabinovich]

Absolutely, absolutely. When you look at where the US 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, but I think there is a broader recognition that it's important to have a full employment economy and that when you have that even with welfare program deficiencies in America, 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.

[Adrian Ma]

Looking ahead, do you think this is going to continue?

[Simon Rabinovich]

So just looking at growth alone, I think if we lived in a vacuum, politics aside, then yeah, it could continue. There's really, really deep interlocking roots 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. The 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, you know, having talked about acceptance of immigration, is that the US Isn't in a political vacuum. Polit 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. economic 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.

[Adrian Ma]

Thanks 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.

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