Don't take the American economy for granted

It's legitimately weird that it's this good; please don't break it.

Epistemic status: I’m a lot more sure about the bottom line here than the list of possible explanations. If you have an alternate explanation for it, I could easily be convinced.

Ethical status: I really hate writing politics-adjacent things¹, but I will at least minimally atone by doing my best to keep it nonpartisan on net, like a hedge fund doing its best to stay market neutral².

There’s a commonly made point that America doesn’t feel nearly as rich as you would expect based on its on-paper GDP per capita. I tried to come up with an explanation here, but even putting this aside - For a country that’s significantly richer per capita (in both average and median income) than pretty much anywhere else in the world³, America has weirdly terrible infrastructure, high crime, and low life expectancy. There’s all sorts of takes flying around trying to explain what america does wrong that causes this and how to fix this⁴.

But this is all missing a much weirder point: Given its many problems, how the hell is America so rich. This isn’t a small gap. America has twice the GDP per capita of France, two and a half times that of Japan or South Korea, and seven times the GDP per capita of China. This is despite the fact that every other country on that list has much better infrastructure, sacrifices much fewer resources on fighting crime and disorder⁵, and (at least for China and Korea) work more hours. And this isn’t even getting into the many other ways America shoots itself in the foot, from the Jones act to housing policy to docker unions that actively ban ports from using better technology. There’s also a long list of more specific advantages each of the other countries on that list has, like faster adoption of industrial robots or France’s nuclear power grid.

In fairness, the other countries on that list each have their own dysfunctions⁶. But it’s pretty hard to argue that they’re so bad as to make America two to seven times more productive than them per capita.

I should emphasize that I’m only looking at GDP here. Japan’s low crime rate and great infrastructure probably make life there a lot more pleasant in various other ways that aren’t directly calculated in their GDP, but even if all we care about is GDP, surely they should have some positive effect on that. How is America, with so many disadvantages, still so far ahead in the topline GDP numbers? Based on geography and culture, we should expect its GDP per capita to be somewhere between Canada and Mexico.

This is a point where we need to notice that we are confused and start looking for reasons⁷. Here are my candidates for it.

1. High skills immigration: America has, for over a century, drawn many of the world’s most brilliant and ambitious people to bring their skills over. It got nuclear weapons by importing hungarian Jews, won the space race by bringing in German scientists, and invented cloning by bringing in a croatian Mad Scientist. Elon Musk may be politically controversial (to say the least) in the last few years, but before that he was almost singlehandedly keeping entire sectors of American industry competitive with China. Two thirds of Silicon Valley tech workers are foreign born. No other country in the world has anything close; China may have four times the population, but America could historically draw the top technical talent from all over the world (including from China)⁸.

2. Economic freedom: Unlike the other countries with their giant corporations or even state-run economies, Americans have a free economy (for both legal and cultural reasons) where people can just go ahead and do things. Huge organizations become unwieldy, and economic drivers like the CCP or Samsung⁹ inevitably get too clumsy to keep up. The american economy is more startup driven - Giant companies like Boeing, Intel or Google may be failing lately, but there’s a horde of smaller more agile companies like OpenAI, SpaceX, or Anduril ready to step up and take their place. The american economy’s creative destruction makes up for the paralysis of its large institutions.

3. Natural resources: America is the world’s top oil producer, and has massive reserves of all sorts of natural resources. And this isn’t just in modern times; back in the nineteenth century and earlier, America’s vast reserves of timber and farmland helped make it richer per capita than most european countries, even if it had a lot fewer capitas. We may not think of America as a petrostate like Brunei or Australia or Norway, but it has some of the same things going for it as they do, resource-wise.

4. Dollar dominance: The US Dollar is the world’s standard reserve currency. Everyone wants to hold it, because it’s stable and trustworthy and people all over the world trust the fed. This lets America run a significant trade deficit (that is, other countries give us more stuff than we give them in return), because a lot of what we export is the concept of economic stability. Equivalently, the fact that people in other countries want dollars just because they’re dollars means our GDP is higher than our productivity (since we can trade a unit of productivity at a premium, since when we sell it it comes packaged in dollars).

5. High-value industries: America has gotten richer as it climbed up the value chain and specialized in higher value-add industries (just like the rich countries in Asia), moving up from farming to heavy industry to information technology. America is the undisputed global leader in software and finance, by far the two highest value-add industries per worker¹⁰. Even with their ridiculously terrible governance, New York and the Bay Area are the richest parts of the US, which is both an example in point and the indirect source of much of the rest of the country’s wealth.

These are all pretty nice and seem like important contributions. Unfortunately, it feels like there’s a bipartisan political consensus in favor of undermining them:

1. The Trumpian right is overtly anti-immigration - while the explicit platform is against illegal immigration, in practice Trump reduced legal immigration much more than illegal immigration in his first term, including a lot of the kind of high-skill immigration the economy runs on. And this has a negative effect on both sides of the ledger, with more of the kind of high-skill immigrants we want seeing how America treats immigrants and deciding not to come here after all¹¹.
   This is frustratingly bipartisan - when Democrats push back on immigration, they mostly push back against deportations of low-skill or illegal/undocumented¹² immigrants or asylum seekers. They’re motivated primarily by humanitarian concerns for the immigrants, not by the fact that America needs immigrants to have the next Ilya Sutskever or Elon Musk¹³.

2. It’s increasingly hard to “just build things” in America. This is famously difficult with housing and infrastructure, but seems increasingly hard to start any sort of business that affects anyone in the real world - there’s a million regulations and restrictions on everything from building wind farms to opening hotels to peeling bananas in a daycare¹⁴. And that’s without even worrying about lawsuits. Half the new businesses starting lately seem to follow the uber model, where you just have to try building things while ignoring the law and hope it doesn’t catch you until you’re too big to kill¹⁵. It’s nice that this works sometimes, but you can’t run an economy like this (just ask India).

3. It’s hard to completely undermine a massive amount of natural resources, but politicians on the left have tried to do it on environmental grounds, while Trump’s trade wars have achieved a similar effect. And the general regulations preventing construction of renewable resources (or nuclear power) are also a surprisingly bipartisan consensus that harms American energy production. And that’s without even getting into transportation restrictions given by the Jones Act or the Dredge Act.

4. The US Government (across multiple administrations) has weaponized the dollar in various ways (like sanctioning bank accounts for terrorists, Mexican cartels, or Russia after the invasion of Ukraine), as well as prosecuting cybercrime¹⁶. This has caused some countries to look for alternatives to the dollar, either in a Chinese-led effort or via stablecoins like Tether¹⁷, both of which weaken the dollar. The Trump administration’s tariff policies have also (arguably), sought to deliberately weaken the dollar in order to aid exports.

5. More generally, policy across both the Trump and Biden administrations (at least) has been to reshore industry, often explicitly focusing on low-margin goods. Arguing against financialization in its various forms is a fairly common political take, as is calling out the economy as overly tech-focused.

And to be clear, a lot of these are actually really good arguments. I dislike most nimbyism but some planning and limits on pollution really are good ideas. There really are good environmental and economic reasons to avoid over-reliance on resource extraction. Sanctioning terrorists and drug cartels makes a lot of sense. There really are dangers in many forms of IT¹⁸ and financialization¹⁹, which can often be harmful or just a waste of talented engineers. It really is neither achievable nor desirable to have an economy driven by tech and finance, or one where those are the only areas with good jobs²⁰.

But. It’s important to notice the costs. Having a high GDP is really good, both in general and for America specifically. America has its share of problems, but they’re mostly not caused by having high GDP (and high GDP helps a lot with keeping them problems instead of crises). So go ahead, use those tools when appropriate, just… step lightly. Maybe coordinate with China on sanctioning terrorists²¹, to avoid undermining the dollar system and destroying your ability to do that. Focus your industrial policy on critical or high-value goods, or at those we have a comparative advantage on. Make environmental laws and permitting requirements as light as possible to achieve their goals, and make sure cases that do deserve a permit get it quickly and easily instead of being stuck in application hell for years. And take those issues seriously. They’re priorities, not just nice-to-haves.

Our discourse has mostly neglected these issues recently. This makes sense. Once you feel like you’ve made it - and America’s been the richest country in the world for all of living memory now - there’s no political signal to be gained by talking about how you’ll make it even more, but quite a lot of signal to be made in announcing which priorities you’re willing to sacrifice it for. Unless there’s a crisis²², it’s just not very interesting to talk about being cautious about how we manage our priorities.

This is one reason feeling genuinely threatened - by China, Russia, Trump, whoever - might be a good thing for America in some ways. We’ve been resting too much on our laurels, and some pressure to actually get more done might help us get over it. Maybe we should up the pressure.

Afterword

I wrote most of this piece a week or two ago, before tariff day imploded the US economy.

In light of this, what to make of the present crisis?

I’ll start with the bad (mostly this is bad. Obviously the crisis itself is bad, I have nothing original to say about that. But it’s actually worse than just the crisis itself. I started this piece noting that it’s weird that the US economy does so well, and then came up with some potential explanations for it. But the thing about noticing something is weird is that sometimes you’re not just poking around for explanations. Sometimes you’re just early on the wave of noticing that something unsustainable is falling apart²³, and the gravity of reality soon brings it more in line with your expectations.

Which is to say, maybe the fact that American economic success is weird means it’s actually pretty fragile. In which case there’s really no guarantee we’ll get out of this crisis and things will be better again. Maybe even when we do get out, we find that gravity has pulled us down to Korean levels of productivity per work hour and we’re two or three times poorer than we are now. This seems pretty extreme, and is honestly pretty unlikely. But it shouldn’t be unthinkable.

But I’m a natural optimist, and there is a hope here. A sudden sharp crisis can be better than a gradual decline in actually making us realize there’s problems we need to adress. A lot of people noted that covid was the wrong size of crisis - it was bad enough to be really bad, but not bad (or specific) enough to make us shape up on the various things we need to shape up on²⁴. Maybe this crisis is bad enough, and specific enough, that we actually start worrying about undermining ourselves.

1. To atone, the next post will be Animorphs fanfic.

2. For those without a finance background: The idea of a hedge fund being beta neutral is that the hedge fund has better ideas about which stocks will go up or down than the market as a whole, so even if it has a rough idea of the direction of the market (which it usually does; e.g. markets normally mostly go up), that’s not its information advantage so it should avoid taking net directional bets. Similarly, while I do have some partisan opinions I have no special reason to think my net partisanship is especially wise, so I mostly try to avoid making it explicit; like an investor putting most of his money in a hedge fund then buying S&P futures to achieve net market exposure, you too can apply partisan blame on top of this article as needed.

3. Except maybe Singapore, Switzerland and a few tiny petrostates.

4. Or, occasionally, trying to argue that this isn’t actually a problem for <reasons>.

5. There’s a counterargument that those points may not be measured directly in GDP - sure Japan has a lower crime rate than America and that probably makes life there more pleasant, but crime isn’t counted in GDP figures directly. The point I’m trying to make here isn’t about quality of life though,

6. Especially France. Actually I take back the cheap shots at France, those guys are alright.

7. This is slightly abusing the rationalist notion of noticing confusion. Usually it goes “I notice that I am confused, therefore something I believe must be wrong”. I’m skipping to making the assumption that the thing we’re missing is that America has some huge unaccounted advantages, but rationalism should imply we should at least consider the possibilities that American GDP is badly misreported, or that the disadvantages we noted earlier are fake. I will discount these without argument, and considering them more seriously is left as an exercise to the reader.

8. This is specifically talking about talented scientists and engineers. There’s a lot more debate about the effects of low skill (or just unfiltered) immigration, which seems at best very dependant on circumstances (for example, recent immigration waved haven’t delivered much growth for Europe or the UK).

9. A fun trivia fact about Samsung: It’s the highest market-cap company in the world as measured in its local currency (that is, the number of won you would have to pay for it is higher than the number of dollars you would have to pay to buy Apple, for example). This is a completely useless piece of information that has no relevance for anything except to remind us that currency exchange rates are a thing.

10. Hong Kong is an even clearer example of this: Roughly 40% of the government’s revenue comes from taxing financial companies.

11. And this is all on top of an exogenous crisis for America, which is that in recent years Chinese universities have gained status within China to the point they’re the preferred institutions. We used to be able to get the best chinese students to come to America for school, and often to stay afterwards and help us build the economy. Now the top chinese students prefer to go to Tsinghua University and we mostly get the ones who couldn’t make it into the top schools in China.

12. The fact that there’s a debate over which word to use here is itself further evidence that this is where the political pushback happens.

13. Possibly because Democrats don’t like Musk.

14. They technically repealed the rule about peeling bananas in a daycare, but they did it with an incredibly narrow law targeting that specific issue - it doesn’t seem to have occured to anyone (or maybe it was just too hard a political lift) that a system that produces restrictions this stupid is probably full of a million other restrictions you haven’t run into that need to be scrapped.

15. This seems to be Elon Musk’s philosophy, which may be why he’s the only one left who can still manufacture things in America.

16. Including some odd cases, like a South Korean man in Montenegro whose fraud victims were mostly Korean who was extradited to the United States because his fraud used the US-based financial system.

17. I guess moving to stablecoins instead of the US dollar wouldn’t undermine the dollar. It would undermine our ability to sanction people though.

18. For example, Silicon Valley tech takes a lot of our smartest people and makes them waste their talents on making people click ads or mobile gaming apps, and that’s without even getting into the incentives to rewrite code in needlessly complicated ways.

19. To take one example, I’ve heard people I trust blame Boeing and Intel’s current woes on being run by MBA types who don’t know or understand the actual products well enough. I do not know enough about them to personally endorse this view but it sounds plausible.

20. I skipped the one against high skills immigration, because there I really don’t think there’s a good argument. The actual reason the government keeps it a problem is that it’s hard to patch high-skills immigration without getting drawn into a flame war about the rest of the immigration debate, which is politically toxic. There are some hardcore nativists (on both the MAGA side and the Sanders-style left) who are against all immigration and actually focus on H1Bs and O1s - those people are just wrong on the merits and do not understand how the economy works (some have concerns about cultural impact, but whatever your opinion of that on the merits, there just aren’t enough high skill visas to make a significant impact on that).

21. This does have the downside of not being able to sanction groups that China is sufficiently opposed to you sanctioning. Whether and when you want to push boundaries on it is a judgement call.

22. It’s worth noting that the areas where there is a real crisis - mostly housing and some related permitting issues - are also the ones where we have seen some real political movements form to push back on recently.

23. As an extreme case of this, Bryne Hobart may have accidentally destroyed Silicon Valley Bank.

24. It didn’t even make us invest properly in pandemic preparedness.