Everybody seems to agree that the economy is broken. Why? And more relevantly, why might they be wrong?
As we know, Trump promised to make America great again, and Biden is spending $2 trillion to build back better. Despite the fact that 80% of the population are expressing concern for their or their children’s future, what we see when we look at the numbers relative to the rest of the world, is that the United States’ economy is a stunning success.
I’ll give you an example. America is the world’s richest, most productive, and innovative country. Let’s look at China. China has grown phenomenally since the 1990s. Back in 1990, the United States was 25% of global GDP. Despite China’s phenomenal growth, the United States still is at 25% of GDP.
In fact, back in 1990, the G7, supposedly the biggest economies in the world, the United States was 40% of their GDP. Today it’s 58%. So yes, China has grown. China has its own problems, we’ve talked about that. But what the United States has pulled off is absolutely phenomenal.
In fact, let’s look at Europe. It’s one of the richest areas of the world after the United States. In purchasing power parity terms, the average income in Mississippi is about $50,000 a year. The poorest state in the United States ranks equal or exceeds that of France, one of the richest nations in Europe. So, let’s talk about six reasons why the United States is outperforming its peers.
Number one, better productivity. Yes, everyone knows Americans work more hours and take fewer holidays than the rest of the world. But during those working hours, Americans are also more efficient and more productive. From an intellectual point of view, 20% of the world’s patents are from the United States. And they’re mostly original, not copycat patents as we see in places like China.
Two, lower taxes. This is an interesting issue politically, but the fact of the matter is that the United States taxes about 25% of the GDP of the country. In most western countries, it’s closer to 40%. There’s quite the range, but we’re certainly at the lower end of the range, matched only by countries like Ireland. Which, interestingly enough, also has a very successful economy.
Three, free trade. Now of course, free trade has gotten a lot of bad press lately, but the fact of the matter is that the United States is the world’s largest free trade zone. We are a test tube experiment of the value of free trade since 1776, and it’s been shown to be phenomenal. Relatively speaking, we have free trade throughout the NAFTA region. NAFTA was modified, but those modifications were mostly cosmetic.
Four, natural resources and oceans. This you can’t replicate, you can’t take, you can’t change. The United States, on the planet, is in one of the most fertile bands. It has enormous natural resources, and there are these two huge oceans on both sides that make it particularly difficult to invade.
Five, flexible labor markets. In the United States, it’s easier to terminate people than almost anywhere else in the Western world. Within certain states it’s easier, the right-to-work states. And guess what? What do you see in right-to-work states? Low unemployment. People come from other states to the right-to-work states. People come from other nations to the United States.
The right-to-work is the right to be fired. The two are very highly intertwined. Companies don’t want to take risks hiring people who don’t have the right background, who don’t have experience, who maybe come from a disadvantaged demographic if when things don’t go right, they can’t let them go.
And six, demographics. The United States has a younger population and a higher birth rate than most western countries. This was particularly true up until 2008. Unfortunately, after the Great Recession, the United States started mimicking the rest of the world in that birth rates dropped below the replacement rate. But we have higher immigration than most countries. It’s not what it used to be.
So those are the six reasons why the United States is outperforming its peers. Why do we have this huge misperception? First and foremost, fake news and ad-driven outrage from social media and the internet. When studies are done on fake news, it’s amazing how much of the confirmed fake news was actually generated by companies trying to drive advertising. It wasn’t even politically motivated or issue motivated.
It’s a huge problem with the internet. It’s interesting, they’re talking about banning TikTok in the west, and the Chinese are arguing. In China, TikTok has been functionally banned for anyone under the age of about 25. There are very strict rules on how many hours a day people can access it. And of course, there’s a downside to such an autocratic environment, but I would argue they’ve got that one right.
Also, we have this duopoly. These two big organizations, almost corporate entities, called the Republican and Democratic parties. They’re run by the primary extremists. They have become codependent on each other’s bad behavior to fire up their base, and of course, all the press that goes around that. All of the distorted reality, the horror stories, make us believe that things are much worse than they really are.
So, I will make the case that the economy is not broken. That three-and-a-half percent unemployment is not a recession. That inflation of five, 6%, though not great, is something that many countries would wish for – especially post-covid.
In the next video we’re going to talk about, what are the concerns most people have? Why do they think the economy is most broken? And what can go wrong? What we should worry about, and maybe what we shouldn’t. I wish you the best of investing success.