ECO DP

Economics

Why the U.S. Is Still Richer Than Every Other Large Country by Martin S. Feldstein

April 20, 2017

Summary.   The U.S. remains richer than its peers. But why? A plausible list of

explanations might include: A culture of entrepreneurship and a financial system

that supports it, abundant energy, immigration, smaller and more decentralized

government, long work...

Each year, the United States produces more per person than most

other advanced economies. In 2015 real GDP per capita was

$56,000 in the United States. The real GDP per capita in that same

more

year was only $47,000 in Germany, $41,000 in France and the

United Kingdom, and just $36,000 in Italy, adjusting for

purchasing power.

In short, the U.S. remains richer than its peers. But why?

I can think of 10 features that distinguish America from other

industrial economies, which I outline in a recent essay for the

National Bureau of Economic Research, from which this article is

adapted.

An entrepreneurial culture. Individuals in the U.S. demonstrate a desire to start businesses and grow them, as well as a willingness

to take risks. There is less penalty in U.S. culture for failing and

starting again. Even students who have gone to college or a

business school show this entrepreneurial desire, and it is self-

reinforcing: Silicon Valley successes like Facebook inspire further

entrepreneurship.

A financial system that supports entrepreneurship. The U.S. has a more developed system of equity finance than the countries

of Europe, including angel investors willing to finance startups

and a very active venture capital market that helps finance the

growth of those firms. We also have a decentralized banking

system, including more than 7,000 small banks, that provides

loans to entrepreneurs.

World-class research universities. U.S. universities produce much of the basic research that drives high-tech

entrepreneurship. Faculty members and doctoral graduates often

spend time with nearby startups, and the culture of both the

universities and the businesses encourage this overlap. Top

research universities attract talented students from around the

world, many of whom end up remaining in the United States.

Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations. Less than 7% of the private sector U.S. labor force is unionized, and there are virtually

no state-owned enterprises. While the U.S. does regulate working

conditions and hiring, the rules are much less onerous than in

Europe. As a result, workers have a better chance of finding the

right job, firms find it easier to innovate, and new firms find it

easier to get started.

A growing population, including from immigration. America’s growing population means a younger and therefore more flexible

and trainable workforce. Although there are restrictions on

immigration to the United States, there are also special rules that

provide access to the U.S. economy and a path for citizenship

(green cards), based on individual talent and industrial

sponsorship. A separate “green card lottery” provides a way for

eager people to come to the United States. The country’s ability to

attract immigrants has been an important reason for its

prosperity.

A culture (and a tax system) that encourages hard work and long hours. The average employee in the United States works 1,800 hours per year, substantially more than the 1,500 hours

worked in France and the 1,400 hours worked in Germany

(though not as much as the 2,200+ in Hong Kong, Singapore, and

South Korea). In general, working longer means producing more,

which means higher real incomes.

A supply of energy that makes North America energy independent. Natural gas fracking in particular has provided U.S. businesses with plentiful and relatively inexpensive energy.

A favorable regulatory environment. Although U.S. regulations are far from perfect, they are less burdensome on businesses than

the regulations imposed by European countries and the European

Union.

A smaller size of government than in other industrial countries. According to the OECD, outlays of the U.S. government at the federal, state, and local levels totaled 38% of

GDP, while the corresponding figure was 44% in Germany, 51% in

Italy, and 57% in France. The higher level of government

spending in other countries implies not only a higher share of

income taken in taxes but also higher transfer payments that

reduce incentives to work. It’s no surprise that Americans work a

lot; they have extra incentive to do so.

A decentralized political system in which states compete. Competition among states encourages entrepreneurship and

work, and states compete for businesses and for individual

residents with their legal rules and tax regimes. Some states have

no income taxes and have labor laws that limit unionization.

States provide high-quality universities with low tuition for in-

state students. They compete in their legal liability rules, too. The

legal systems attract both new entrepreneurs and large

corporations. The United States is perhaps unique among high-

income nations in its degree of political decentralization.

Will America maintain these advantages? In his 1942 book,

Socialism, Capitalism, and Democracy, Joseph Schumpeter

warned that capitalism would decline and fail because the

political and intellectual environment needed for capitalism to

flourish would be undermined by the success of capitalism and by

the critique of intellectuals. He argued that popularly elected

social democratic parties would create a welfare state that would

restrict entrepreneurship.

Although Schumpeter’s book was published more than 20 years

after he had moved from Europe to the United States, his warning

seems more appropriate to Europe today than to the United

States. The welfare state has grown in the United States, but much

less than it has grown in Europe. And the intellectual climate in

the United States is much more supportive of capitalism.

If Schumpeter were with us today, he might point to the growth of

the social democratic parties in Europe and the resulting

expansion of the welfare state as reasons why the industrial

countries of Europe have not enjoyed the same robust economic

growth that has prevailed in the United States.

MF

Martin S. Feldstein is the George F. Baker

Professor of Economics at Harvard University and

President Emeritus of the National Bureau of

Economic Research.

MF