Why Is the United States so Rich?

Harvard economist Martin Feldstein answers this in a newly-released NBER paper. He explains (in excerpts provided by AEI’s James Pethokoukis),

The sustained higher rate of real GDP growth in the United States over a longer period of time has resulted in a substantially higher level of real GDP per capita in the United States than in other major industrial countries. In 2015, real GDP per capita was $56,000 in the United States. On a purchasing power basis, the real GDP per capita in that same year was only $47,000 in Germany, $41,000 in France and the United Kingdom, and just $36,000 in Italy. So the official measures of real GDP clearly point to the cumulative result of higher sustained real growth rates in the United States than in the major industrial countries of Europe and Asia.

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How is this rate of real GDP growth achieved? Feldstein lists 10 reason:

(1) An entrepreneurial culture. Individuals in the United States demonstrate a desire to start businesses and grow them and a willingness to take risks. There is no penalty in the U.S. culture for failure and for starting again. Even students who have gone to college or to a business school show this entrepreneurial desire. The successes in silicon valley and with such firms as Facebook inspire entrepreneurial activities.

(2) A financial system that supports entrepreneurial activities. The United States has a more developed system of equity finance than the countries of Europe and a decentralized banking system that helps local entrepreneurs. The equity finance system includes “angel investors” willing to finance start-up firms and a very active venture capital market that helps finance the growth of firms. The national system of small local banks that provide loans to new businesses includes more than 7,000 individual small banks that are important in their local communities.

(3) World class research universities. These produce much of the basic research that drives the high-tech entrepreneurial activities. Faculty members and doctoral graduates often spend time in new businesses that are located near these universities. The culture of the universities and of the businesses welcomes these overlapping activities between academia and the private sector. The great research universities attract talented students from around the world, many of whom end up remaining in the United States.

(4) Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations. In the private sector, less than seven percent of the labor force is unionized. There are virtually no state-owned enterprises. While labor laws and regulations affect working conditions and hiring rules, they are much less onerous than in Europe. 
State level licensing rules are the probably the most serious barrier to job changing and to interstate mobility.

(5) A growing population, reflecting both natural growth and immigration. The growing population means a younger and therefore more flexible and trainable workforce. A high degree of geographic mobility within the United States increases the effectiveness of the labor force. The higher level of real income makes the United States an attractive destination for ambitious and talented young people around the world. 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 special “green card lottery” provides a way for eager people to come to the United States.

(6) A culture and a tax-transfer system that encourages hard work and long hours. The average employee in the United States works 1800 hours per year, substantially longer than the 1500 hours worked in France and the 1400 hours worked in Germany. Of course workers in some Asian countries work much longer hours, with working hours over 2200 per year in Hong Kong, Singapore, and Korea.

(7) A supply of energy that makes North America energy independent. The private ownership of land and mineral rights has facilitated a rapid development of fracking to expand the supply of oil and gas.

(8) A favorable regulatory environment. Although the system of government regulations needs improvement, it is less burdensome on businesses than the regulations imposed by European countries and the European Union.

(9) 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 percent of GDP while the corresponding figure was 44 percent in Germany, 51 percent in Italy and 57 percent in France. The higher level of government spending in other countries implies that not only is a higher share of income taken in taxes but also that there are higher transfer payments that reduce incentives to work. …  So Americans have a higher pre-tax reward to working and can keep a larger share of their earnings.

(10) The U.S. has a decentralized political system in which states compete. The competition among states encourages entrepreneurship and work effort and the legal systems protect the rights of property owners and entrepreneurs. The United States political system assigns many legal rules and taxing power to the fifty individual states. The states then compete for businesses and for individual residents by 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 also in their legal liability rules. The legal systems attract both new entrepreneurs and large corporations. The United States is perhaps unique among high-income nations in the degree of decentralization.

Each of these points is worth considering.