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The myth of America’s economic exceptionalism

The US has long ceased to be a prosperous, productive country.

Phil Mullan

Topics UK USA World

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At first glance, the US appears to stand apart from the economic stagnation plaguing the West. Its relatively high growth figures and its ever-climbing equity markets seem to make it an exception to the dire trends afflicting European and other advanced nations.

Economists highlight that, since the eve of the pandemic, the US economy has grown much faster than every other major advanced country. Living standards, as measured by real GDP, grew by 11 per cent between the end of 2019 and the third quarter of last year. This is compared with four per cent growth in France, 3.1 per cent in Japan, three per cent in Britain and the bare 0.1 per cent in struggling Germany over the same period.

Meanwhile, US stock markets continue to hit new highs, with only a couple of significant blips interrupting their steady ascent since the 2008 financial crash. Contrary to the sceptical view that this is all down to the outperformance of the Magnificent Seven tech stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla), the rest of the S&P 500 index has also been hitting record highs.

The notion of US economic might has become almost unquestioned. A recent Financial Times essay on the US’s ‘soaring’ economy exclaimed that American ‘long-term productivity growth is the envy of the developed world’. The Sunday Times’s Irwin Stelzer similarly wrote that Donald Trump will inherit ‘a fully employed, wildly innovative and growing economy, and one where productivity is rising faster than in other countries and the EU’. In this vein, Mario Draghi’s report on European competitiveness last year pointed to the US’s apparent dynamism as evidence of the economic crisis besetting Europe’s main economies. He went on to claim that the EU could emulate the US by centralising power in Brussels.

But peer beneath the surface and it’s clear that, contrary to this narrative of exceptionalism, productivity growth is actually decaying in the US, just as it is in other mature industrialised nations.

Growth in real gross domestic product per head – that is growth, per person, adjusted for inflation – has slowed substantially since the post-Second World War boom came to an end in the 1970s. It fell from an average of 2.5 per cent a year during the boom to just below two per cent between 1973 and 2007, on the eve of the West’s financial crash. Since then, real growth per person has slowed by another third, to just over 1.2 per cent between 2007 and 2023.

Even in comparison with other nations, US productivity growth has been particularly dismal. Productivity growth, or growth in output per hour worked, has slowed more rapidly in the US than elsewhere in the 21st century. Average annual productivity growth in the mature economies roughly halved from an average of 1.7 per cent per year between 2000 and 2007 to 0.9 per cent between 2011 and 2019. But in the US, it plummeted by two-thirds in the same period, from 2.2 per cent to 0.8 per cent.

America’s economic exceptionalism is supposed to rest on its ‘frontier’ spirit, its entrepreneurial culture and a ‘free market’ unconstrained by state regulations. This is a caricature, to put it mildly. That serious commentators still entertain this view speaks less to America’s exceptional vigour, but rather to some peculiar forces that have kept the economy resilient in the face of its long-running productive decline.

Indeed, there are good reasons why the American slowdown over the past half-century has not been as visible as in other G7 countries, even if this paints a deceptive picture.

Historically, the US’s economic resilience has been based on its size – enabling periodic geographic restructuring – and on its relative self-sufficiency in resources and productive capabilities. Today, though, America’s resilience rests a lot on its good fortune to have substantial fossil-fuel reserves. In the recent period of disruptions to global energy supplies, the US has had the advantage of its own abundant reservoirs of oil and gas. The take-off of fracking and horizontal drilling since the early 2010s has boosted production of both oil and gas. This has made America less dependent on the volatile energy prices that have hit most other G7 economies in the wake of supply shortages during the Covid-19 pandemic and Russia’s 2022 invasion of Ukraine.

As a result, business users of electricity in the US pay a bit less than in Japan and France. They pay half of German levels and less than a third of prices in the UK and Italy. This is a competitive benefit for energy-intensive US industry – one that often gets forgotten amid Europe’s quixotic pursuit of Net Zero carbon emissions.

The US trade balance has also been a major beneficiary of this. In 2019, the US became both a net exporter and net producer of energy for the first time in over 60 years. As of 2021, the US was the largest producer of both crude oil and natural gas in the world. This resource blessing cannot in itself drive forward productivity, but it has ameliorated the US’s economic decline in the short and medium term. American capitalism would likely be in an even worse condition without this.

The more significant source of economic resilience is the US’s capacity to expand government debt. All the mature industrial countries have been relying on borrowing from the future to sustain themselves, but the US has a particular endowment that allows it to do this to a greater extent, and at a much lower cost – namely, the US dollar’s role as the global reserve currency.

The continuing global appeal of the dollar as a ‘safe haven’ currency leads to buoyant investor demand for US government debt. This means the US government is less constrained in running expansionary budget deficits than its industrialised peers. This has been especially critical since the 2008 financial crash, which led private-sector investment to dry up. Alongside the US Federal Reserve’s super-easy monetary policies, the US Treasury was able to go further than its counterparts in maintaining an unusually high level of deficit-backed government spending. From 2010 to 2023, under both Democrat and Republican governments, the US budget deficit averaged nearly seven per cent of GDP, more than double the 3.2 per cent average across the Eurozone.

A bigger budget deficit rarely translates automatically into the equivalent GDP growth, and increased deficit spending alone has not prevented the decline in US productivity growth. The actual impact depends on where the additional money is spent, how much leaks into servicing the associated debt enlargement, how much flows abroad to pay for imports, and how much private-sector spending and investment is crowded out. But when higher deficits enable a government to spend more than it otherwise would, then this can boost economic activity and the level of national output, at least in the short to medium term.

Despite these unique sources of American resilience, the underlying reality of economic decline is already apparent if we look at how most Americans are living. Yes, US rates of GDP per person still top those of its G7 partners. But this measure of average prosperity mostly reflects the lives of the minority of better-off people. Unusually stark inequalities paint a deceptive picture of nationwide affluence.

Discussions of US inequality tend to frame it as a problem of money flowing upwards from poor to rich. What is really contributing to inequality is the economy’s lack of dynamism. Capitalist development is usually uneven, but today’s stagnant economy is struggling to generate rising prosperity for the vast majority of people.

Since 1970, over half the growth in real incomes has gone to the top 20 per cent of American households. As a result, this select group’s income share rose from 43 per cent then to 52 per cent today. It is these peoples’ fringe experiences, shared by many of the media and cultural elites, that have helped sustain the commentariat’s illusions about ‘exceptional’ American economic strength.

What this means for the living standards of the many is that the remaining 45 per cent of income growth has been shared across the eight out of 10 other households. So little of it was secured by the bulk of the American population that a person needed to be in this top fifth of earners to do as well as, or better than, national average income growth. Instead, the incomes of more than 80 per cent of American households have grown more slowly than average.

Indeed, for about four-fifths of private-sector employees, real average weekly earnings are today at the same level as they were for their parents’ and grandparents’ generations. Real wages for this large section of the populace fell for much of the 1980s, 1990s and 2000s. They did not rebound to 1970s levels until the pandemic in 2020. So much for the land of milk and honey.

It doesn’t end there. The US is currently experiencing growing poverty levels, housing shortages, homelessness, middle-class job insecurity, disappointing life-expectancy trends, crumbling infrastructure and rising numbers of men not active in the workforce.

Clearly, the US economy is far from the soaring, dynamic creature it is so often made out to be. For the many, US exceptionalism is a myth.

Phil Mullan’s Beyond Confrontation: Globalists, Nationalists and Their Discontents is published by Emerald Publishing. Order it from Amazon (UK)

Picture by: Getty.

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