An American economic miracle?
Matt Yglesias directed me to this tweet:
If you looked at certain polls, you’d think the economy was doing poorly. On the other hand, if you looked at state economic performance polls, or polls asking about an individual’s personal financial situation, then things look far better. But one thing is clear—the US is outperforming the economies of other developed countries by a fairly wide margin. Why is that?
Let’s start with the macro. I think Pethokoukis somewhat overstates the supply shock and monetary headwinds. As you know, interest rates don’t matter. The thing that does matter (NGDP) has been a headwind, not a tailwind:
The growth rate has recently slowed, but remains well above the pre-Covid norm.
There were some supply shocks in 2022, but the energy situation is now pretty good, and many other supply line bottlenecks have been resolved. On the plus side, a big surge in immigration has added substantial labor force supply (even with the recent downward revision.)
At the micro level:
1. We have less regulation in some key industries like fracking, and this has boosted our GDP relative to Europe.
2. We have gains from agglomeration and network effects. When combined with an inflow of many highly talented individuals, this has led us to vastly outperform our rivals in high tech.
3. We have our Nimby problems, but in much of America it’s still pretty easy to build. Densely populated Japan and Europe (especially the UK) probably have more restrictions on building.
Note that all three of these micro factors are things that have become much more important over the past 10 or 20 years. And this roughly corresponds to the period when Europe stopped catching up to us and began falling further behind.
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30. August 2024 at 08:41
Huge fiscal deficits
Draining the RRP facility
Percentage of DDs to TDs
Activation of monetary savings via MMMFs
July is the inflection point.
30. August 2024 at 09:04
When it comes to per capita GDP, I suggest “agglomeration and network effects” can also be called a size effect. That the U.S. can grow GDP in more new ways than other high income countries means more total GDP and per capita GDP so more apparent worker productivity whether or not the individuals are talented. Adding to that, larger scale production improves per worker productivity. Adding to that, talent, but I don’t know how talent ranks compared to the other 2 considerations.
30. August 2024 at 09:55
? Sumner, I thought Japan was a relatively YIMBY country for residential purposes.
30. August 2024 at 10:57
I suspect that voters know that the job market has been getting worse recently. Also, given that a fairly large share of new jobs have gone to immigrants, the job prospects of citizens might be worse than a simple look at the headline job and unemployment numbers would suggest.
30. August 2024 at 11:24
Bank credit isn’t constrained by the FED’s policy rates:
https://fred.stlouisfed.org/series/TOTBKCR
30. August 2024 at 11:46
Harding, Yes, but I wonder about industrial and commercial. Recall that they recently shut down their nuclear industry.
In fairness, the problem there may be more of a lack of land.
Lizard, You said:
“the job prospects of citizens might be worse than a simple look at the headline job and unemployment numbers would suggest.”
I doubt that.
30. August 2024 at 11:56
Trump, Oddly, there’s almost no correlation between country size and per capita GDP. Look at Europe. Look at Asia.
Not saying you are wrong–the US is obviously a strong point in favor of that claim. But I’m kind of surprised that there are so few clear examples. Maybe small size is not a problem if you are not isolated. Thus New Zealand is poorer than Australia, but Switzerland and the Netherlands are richer than Germany. New Zealand is isolated from trade routes, whereas the small European countries are not.
30. August 2024 at 18:18
It appears to me that it has been harder for people in the US to find jobs in the past 12 months. So to me it is reasonable that voters don’t seem to feel particularly happy about the direction of the economy. Also, don’t reduced immigration numbers in the past 12 months also indicate a slowdown in the economy?
30. August 2024 at 19:00
Lizard, That might be slightly true, but:
GDP was 3% in Q2 and GDPNow says 2.5% in Q3
Monthly jobs numbers remain strong.
Unemployment seems to have risen because of immigration, but the level remains low. Higher minimum wages may have hurt a bit in California.
So maybe a bit slower, but we’re still booming.
30. August 2024 at 19:35
The two economics-minded bloggers I follow the most are you and Noah Smith (I forget who I followed first). Noah has written a lot about how the US is a Build-Nothing country, with failures in infrastructure, housing, and more.
Like you, I would expect that the US would build better than Europe or Japan. But I think Noah provided evidence that Japan builds better than the US (at least in terms of infrastructure and housing).
Do you have data about the US being better at building than Europe or Japan?
31. August 2024 at 03:12
I wonder what the economy would have done to be like for voters to feel good about it overall (and controlling for partisanship). I cannot cite evidence for it, but I think that housing would have to become more affordable relative to income. Anecdotally, I have seen a number of people on my neighborhood Facebook groups complaining about the cost of housing, and some complaining that they feel like they will have to move in the future because they can no longer afford rent in the area. And this is in a sunbelt boomtown that is cheap relative to a lot of other cities. I wonder if housing is different than other things, insofar as it is somewhat public. If you eat rice and beans for most meals to save money, or shop at Goodwill for clothing, etc., no one else needs to know that. But if you have to move out to the boonies to afford someplace to live, or have to live with a lot of roommates, it is a lot harder to hide that from your friends and family.
31. August 2024 at 05:10
The gap has really widened over the past decade. I’m not as familiar with Europe as I am with Australia, but I put it down to a few things:
1. Fracking in the US vs moratoria on onshore gas exploration in Australia (in the two most populous states – New South Wales and Victoria). Coupled with that, we are seeking wholesale gas price caps and threats againty LNG exports.
2. A slower ‘energy transition’ in the US – putting it in scare quotes because the US has done quite well reducing emissions due to (1). Whereas countries like Australia and Germany have hamstrung themselves by closing coal power stations prematurely and rushing headlong into wind and solar, coupled with the new and expensive transmission network infrastructure needed to connection renewable plant in different parts of the country to where fossil fuel plant are situated. While the levelised costs of renewable technologies have fallen a lot, the fact remains they they do not provide reliable power and they are causing fossil fuel plant to exit (due to lower average wholesale market prices) before the ends of their useful lives. The national GDP growth and productivity statistics don’t care a jot about any climate damage avoided due to a faster transition (if indeed there is any).
3. In Australia at least, the growth in the ‘NDIS’ – the National Disability Insurance Scheme has been responsible for 40% of employment growth since 2019. It was founded for noble reasons, but has grown into a ‘autism’ treatment scheme for middle class women’s sons. In other words, the two growth areas of the Australian economy in the last 5-10 years have been renewable energy and mild ‘autism’/developmental delay treatment, none of which adds to per capita output over any reasonably foreseeable time horizon. It’s the capture of the economy by rent-seekers, something the US has avoided more than most until now.
31. August 2024 at 08:23
Jonathan, It is certainly easier to build here than in the UK. It may be easier to build in Tokyo than in California, but I suspect it’s easier to build in the US than in most of Japan (partly due to our lower density—no fault of the Japanese.)
Lizard, Why do you think people respond “good” when asked about their own personal finances? Or the condition of the state they live in?
Rajat, “but has grown into a ‘autism’ treatment scheme for middle class women’s sons.”
Would it also be accurate to describe these people as “middle class men’s sons.” 🙂
Seriously, I feel like we have lots of wasteful rent seeking here (consider our horrible tort law system), but I suppose the grass is always greener . . .
31. August 2024 at 10:27
No talk o about the capes boom that’s been partially been driven by the US’s infra bills, inflation reduction act, and chips act?
31. August 2024 at 12:38
I look at the NGDP chart still can’t fathom why the Fed chose December 2015 to increase the rate on IOR. Oh, and even harder to comprehend increasing it in October 2008.
31. August 2024 at 14:07
Joni, Possible, but I’m skeptical that those bills have had much effect at the macro level.
Bill, The 2008 one is the real head-scratcher.
31. August 2024 at 19:01
Quote… “there’s almost no correlation between country size and per capita GDP… Switzerland and the Netherlands are richer than Germany”.
Let’s consider the small country exceptions. You informed us that Switzerland and Singapore have made English their business language. English proficiency in the Netherlands is the highest of any non-Anglophone country. The Anglosphere is the biggest talent pool so this is evidence of a size effect. (Bigger than Mandarin, Spanish, and Hindi on a first plus second language basis). The size effect is not only a country phenomenon but also a language phenomenon.
In some measures Switzerland and Singapore are at a higher income level than the U.S., so those small countries don’t bleed talent the way New Zealand, Australia, Canada, and the U.K. do, but in an imaginary world where those smaller countries are at the same income level as, say, Canada, I suspect that they would still have an easier time keeping their talent because of cultural differences. I’m certain that the Swiss would think Tim Horton’s doughnuts are unappealing. This raises the question: if Canada and Singapore were at the same income level, why wouldn’t cultural differences prevent Canadians from moving to Singapore? Strictly speculation: maybe some cultures are less concerned about being the victims of unfair discrimination and more open to exploration.
So size of the language matters and culture matters and I would say other things matter. If you want to keep some of these things constant you can look at the 5 Anglophone countries, so the U.S. demonstrates the size effect and it’s hard to find other examples.
1. September 2024 at 04:03
It blows my mind how little news focus or discussion has been about IOR. Especially then but also in the following 16 years.
1. September 2024 at 08:04
Where are the polls about state level economic performance? I did a quick web search and everything I found was about the national economy.
1. September 2024 at 09:18
Trump, Don’t underrate the role of policy—both Singapore and Switzerland are extremely free market oriented, at least compared to most other places.
Lizard Man, https://www.cnn.com/2024/04/03/politics/economy-trump-voters-what-matters/index.html
1. September 2024 at 18:13
The Fraser Institute 2019 economic freedom ranking, which is the most recent one visible on a relevant Wikipedia page, put all 5 of the Anglophone talent bleeders (Ireland included) higher ranked than the U.S.. Maybe if you’re in the top 50 the differences in economic restriction are small. Maybe it doesn’t even matter for many business or career pursuits. My wife is trying to get FDA approval in the Philippines (ranked 70) and there are frustrations but I think she’ll succeed and it hasn’t even seemed unreasonable.
Everywhere I’ve worked I see signs size is a huge advantage. I worked in the software side of 3 technology companies that manufactured electronics and an investment bank. Everywhere in manufacturing, size is a huge advantage. In software it’s an obvious advantage. There are practical reasons why big companies in every industry buy small ones and not the other way around.
2. September 2024 at 14:19
Trump, That seems plausible, but how do you account for the lack of correlation between population and income in Europe?