For decades, the U.S. economy was the envy of the world. With few, notable exceptions the U.S. economy was a consistent model for growth, innovation, diversification and job creation. The US economic engine, and the optimistic middle class it enabled, also has been a testament to the value of our democratic, rule-of-law-based governance system.
Unfortunately, the confidence of our middle-class, of young Americans, and of the international community, in the U.S. economic system – and by extension our political system –is weaker and more fractured than once it was. For most, despite today’s historically low unemployment levels, real wages have stagnated since the 1970’s, even when productivity grew substantially. And the rising costs of education and health care, which are core to U.S. progress, have far outpaced inflation (and trends in other high-income countries) even as technology created whole new industries and services. U.S. economic and productivity growth have leveled off, and social mobility has seized up, compared to what it was and relative to other countries.
Recent reports find that 70 percent of all U.S. wealth is held by the top 10% of the population. The price of housing (a key middle class asset) in the U.S. just fell for the first time in seven years. The U.S. population overall is aging and young people are marrying later and having fewer kids, creating demographic headwinds against higher growth and undercutting the power of consumer spending to drive growth.
Is this really a “new normal” as some argue, or is there still potential to unleash a U.S. economy that delivers measurably better living standards to a broad swath of America? It is a crucially important question, especially at this time of deep economic uncertainty. To answer it, we might best start by asking how the U.S. economy stands up to others, and what are its strengths and weaknesses. It is especially useful to be clear-eyed about where the U.S. economy falls short, as it points to opportunities for tangible improvement. And based upon some useful indicators and analyses, there appears to be considerable upside potential for U.S. economic revitalization. Realizing that potential, however, may require a broader understanding of and willingness to face concrete realities about the large and complex U.S. economy.
In results just released, the IMD Competitiveness Center reports that the U.S. has fallen from the first to the world’s third most competitive economy by its account, behind Singapore and Hong Kong. Singapore, they say, benefits from advanced technological infrastructure, skilled labor, favorable immigration laws, and efficient ways to establish new businesses. In the Heritage Foundation’s Index of Economic Freedom, the U.S. is currently ranked 12th, and is characterized as “mostly free,” in part because trade freedom and fiscal health have measurably declined. Economic freedom is a hallmark of the U.S. system, and an approach we might expect to lead easily. Not only do Canada, New Zealand and the UK do better, so too does the UAE.
On an important, related note, the U.S. is ranked eighth overall on the World Bank’s 2019 “Ease of Doing Business” indicators. Though down two spots since 2018, it is not a bad record. But it is worth noting that the U.S. ranks in the top 25 on only three of ten core indicators – “Getting credit,” “Resolving insolvency,” and “Enforcing Contracts.” Surprisingly, the U.S. is 36th on “Trading across Borders” and 53rd on “Starting a Business.” Given the US emphasis on innovation, it may also surprise some to know that the United States comes in 6th in the Global Innovation Index, despite spending more on R&D than any other country in the world. The U.S. does have the largest number of science and technology “clusters,” even relative to China. The U.S. also ranks highly on the sophistication of its market and the quality of the business environment and of U.S. universities, but further down in the pack on “general infrastructure” and “human capital.” In terms of the Index’s “innovation efficiency ratio,” a notional measure of the innovation output a country gets from related inputs, the U.S. is ranked only 22nd worldwide. And despite the emphasis on enhancing math and science skills, in 2015 the U.S. ranked 30th in math and 19th in science among the 35 members of the Organization for Economic Cooperation and Development, which sponsors the Programme for International Student Assessment (PISA) initiative. The U.S. ranked 23rd on PISA’s overall averages of math, science and reading scores in PISA’s most recent 2015 assessment. China ranked 10th.
Perhaps less surprisingly, according to the World Economic Forum (WEF), in 2017 the U.S. ranked 10th out of 131 countries in terms of the quality of its overall infrastructure. The U.S. American Society of Civil Engineers (ASCE) currently gives the overall condition of U.S. infrastructure a cumulative grade of D+. Among 16 broad categories, 12 (including drinking water and hazardous waste) get D grades. Rail infrastructure is the only B; bridges, ports and solid waste infrastructure garner C’s. The cumulative grade has not improved in years, and despite periodic talk of a U.S. public-private infrastructure initiative, there is none in sight. Meanwhile, spending by state and local governments on all types of capital has dropped from its high of 3 percent of the nation’s gross domestic product (GDP) in the late 1960s to less than 2 percent in 2017 – a decline of over 30 percent in average spending overall. Federal infrastructure investment too is down ― from 1 percent to 0.5 percent of GDP, a 50 percent decline ― over the last 35 years, exacerbating the problem.
There is also surprising scope for improvement in terms of how well the U.S. does on indicators of human development and governance quality, both of which also underpin a vibrant market economy. On the UNDP Human Development Index, for example, the US is ranked 13th. And we now compare particularly unfavorably with other highly developed economies is in inequality – in income, life expectancy, education. Experts believe that inequality shaves nearly 14% off the country’s human development levels, which includes lost economic progress. But lest we assume that patterns of inequality in the U.S. reflect a clear urban-rural divide, the reality according to the latest census bureau is that poverty is higher in urban versus rural areas in every region of the country. People are also younger in urban than in rural areas. Education levels and access to health care are substantially lower in rural areas, and more jobs are being created in U.S. cities and suburbs.
Americans are justifiably proud of our rule-of-law based justice system, and of the efficient, arms-length commercial interaction it supports. Rule of law promotes trust and accountability. And while the U.S. system is surely not perfect, evidence that we are losing ground rather than making progress should concern us all. In fact, the U.S. fell 6 places to 22nd in the Transparency International 2018 Corruption Perceptions Index, its lowest rank on seven years. Moreover, the U.S. currently ranks 20th in the World Justice Project’s (WJP) 2019 Rule of Law Index. In the 2019 World Press Freedom Index, the U.S. rank fell to 48th, from 45th in 2018 and 41st in 2016. The United States, of course, is still rated as “free” by Freedom House, but in 2018 the U.S. score on political rights declined from 1 to 2, due to Russian election interference, and issues related to government ethics and transparency.
There are no simple policy prescription that flows from this consideration of economic and social indicators for the United States. What does come to light is that the United States has plenty of scope to improve its economic and social performance. Identifying the right and appropriate mix of policies to achieve such improvements would require considerable thought and involve tough decisions about national priorities, resources and phasing. But the key takeaway is that while the U.S. and global economic conditions differ importantly from those of the past, and we may not see 5 percent regular annual growth again, there is no “new normal” that fundamentally prevents the United States from making measurable progress on economic and social issues. And we could measure and track progress using indicators and comparisons, if we chose to. But as the saying goes, “the first step in solving any problem is recognizing there is one.”