The Economist: Leaders | The envy of the world
America’s economy is bigger and better than ever
Will politics bring it back to Earth?
Few sights have better captured America’s world-beating ingenuity. On October 13th a giant booster rocket built by SpaceX hurtled to the edge of the atmosphere before plunging back to Earth and being neatly caught by the gantry tower from which, only minutes earlier, it had taken off. Thanks to this engineering marvel, big rockets could become reusable and space exploration cheaper and bolder yet, just as the launch was a testimony to American enterprise, so Elon Musk, SpaceX’s founder, captures all that is going wrong with its politics. In his support for Donald Trump, Mr Musk has spread misinformation about voter fraud and hurricane relief and derided his opponents as ill-intentioned idiots.
America, too, continues to rack up a stellar economic performance even as its politics gets more poisonous. As they prepare to go to the polls in fewer than 20 days’ time, Republicans and Democrats have never mistrusted or disagreed with each other more. Against that gloomy backdrop, can America’s breathtaking economy possiblystay aloft?
Over the past three decades, America has left the rest of the rich world in the dust. In 1990 it accounted for about two-fifths of the GDP of the g7. Today it makes up half. Output per person is now about 30% higher than in Western Europe and Canada,and 60% higher than in Japan—gaps that have roughly doubled since 1990.
Mississippi may be America’s poorest state, but its hard-working residents earn, on average, more than Brits, Canadians or Germans. Lately, China too has gone backwards. Having closed in rapidly on America in the years before the pandemic, its nominal GDP has slipped from about three-quarters of America’s in 2021 to two-thirds today.This record is now in jeopardy. As America has become more partisan, both Kamala Harris and Mr Trump, the two presidential candidates, are focusing on policies thatprotect their own supporters, rather than expanding the overall economic pie.
America is not about to lose its economic dominance. But, sooner or later, rotten politics will start to exact a heavy price, and by then it will be hard to reverse course.
To see why, consider first the factors behind America’s success. As our special report
this week sets out, innate advantages play an important role. America is a big country blessed with vast energy resources. The shale oil revolution has driven perhaps a tenth of its economic growth since the early 2000s. The enormous size of its consumer and capital markets means that a good idea dreamt up in Michigan can make it big across America’s 49 other states.
Yet good policy has been important, too. America has long married light-touch regulation with speedy and generous spending when a crisis hits. Although supersized stimulus during the pandemic fuelled inflation, it has also ensured that America has grown by 10% since 2020, three times the pace of the rest of the g7. By contrast, stingier Germany is mired in recession for a second consecutive year.
This combination of factors has fuelled a powerful virtuous cycle. America’s dynamic private sector draws in immigrants, ideas and investment, begetting more dynamism. It is home, not just to the world’s biggest rocket-launch industry, but also to its internet giants and best artificial intelligence startups. Its seven big tech firms are together worth more than the stock markets of Britain, Canada, Germany and Japan combined; Amazon alone spends more on research and development than all of British business.
Because the dollar is the world’s reserve currency, investors have a keen appetite for American debt. They flock to Treasuries in times of crisis, letting the government dole out vast stimulus packages.
So far, America’s worsening politics have had little visible effect on the economy.
Over the past eight years Mr Trump and President Joe Biden have reached for protectionism and interventionism, in the name of helping factory workers, at the expense of the wider economy. Because America’s economic strength has been so broad-based, it has not been overturned; and for many years stimulus has provided an offsetting sugar rush. Yet the economy is not immune from politics. And as the country grows more divided, Ms Harris and Mr Trump are promising ever more damaging policies—Mr Trump especially.
For a start, both candidates would tamper with the market forces that have served America so well, by protecting some companies at the expense of others. They could also limit the government’s scope to swoop to the rescue next time a crisis hits. Both promise tax and spending giveaways—Ms Harris wants to spend more on families; Mr Trump to offer tax relief on everything from car loans to overtime work. Yet neither has a plan to rein in the budget deficit, which is running at around 6% of GDP, a level usually seen only during wartime or recession. Unchecked deficit spending could crowd out private investment and erode faith in American debt as a risk-free asset.
Mr Trump poses a bigger risk to America’s extraordinary economy. He speaks of imposing ruinous tariffs on imports and embarking on huge programmes to deport millions of non-citizens, many of whom have been fully integrated into the labour market for years. He is cavalier about institutions, including the Federal Reserve and the rule of law. Should the independence of either be undermined, America would no longer attract the talent and money it needs to keep pushing relentlessly ahead.
Nobody knows if Mr Trump means what he says, but the chance that he does hangs heavily over his candidacy, like Mr Musk’s rocket over the launch pad.
Growth is not an inalienable right, but a gift to be cherished and nurtured. If the virtuous cycle that propels America’s economy forward goes into reverse, toxic politics would by that point be ingrained. There is no knowing how bad a president’s ideas have to be before things start to fall apart. The turning point may not come tomorrow, or even in the next four years. But with every mistake that politicians make, it draws another step closer.
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