Growth: Why Exactly is America So Rich?

Economics

Why is America so rich?

Nov 9th 2010, 13:50 by R.A. | LONDON

ECONOMIC gloom and doom aside, America remains the world's richest large country. It's generally estimated to have a per capita GDP level around $45,000, while the richest European nations manage only a $40,000 or so per capita GDP (setting aside low population, oil-rich states like Norway). Wealth underlies America's sense of itself as a special country, and it's also cited as evidence that America is better than other economies on a range of variables, from economic freedom to optimism to business savvy to work ethic.

But why exactly is America so rich? Karl Smith ventures an explanation:

I am going to go pretty conventional on this one and say a combination of three big factors

You'll notice that four of the top five countries in the Human Development Index have the Common Law and the top, Norway, is a awash in oil. Without the petro-kronors they probably wouldn't be so hot.

You'll also notice that 3 of the top 4, again with Norway the odd man out, are immigrant nations. The founder effect here should be clear.

The bonus from the great exodus is definitely waning. Most of our hey-day German and Jewish scientists are dying off, but its still given us a boost that lingers to this day. There is no fundamental reason why the US should be the center of the scientific world but for a time it was the only place in the world safe for many scientists.

It's a difficult question to tackle because there's so very much to it. America jumped to a huge productivity lead early last century by developing a resource- and capital-intense, high-throughput style of manufacturing producing mass market goods. The fractious, class-riven European continent struggled to copy this technology, and while adoption of these methods eventually led to a period of rapid catch-up growth, the process of catch-up was never quite completed. And so that's one gap to explore.

There's also the question of what exactly one is comparing. What if we take similar European and American metropolitan areas and adjust for human capital and hours worked? On that basis, the difference between America and northern Europe looks relatively small. One might then focus on the ways in which America's more integrated domestic market leads to a lower level of within-continent inequality, even though national inequality levels in Europe compare favourably with America's.

The size of the market may be more important than we imagine. As Mr Smith notes, four of the top five HDI countries share the Common Law. They also speak English. In a world in which national and cultural barriers still bite, America's wealth could be chalked up to the fact that it's a uniquely large and uniform nation. Common rules, culture, language, and so on facilitate high levels of trade and mobility. National and cultural barriers within Europe, by contrast, work to limit the extent to which the economic potential of the continent can be reached.

Mr Smith also gets at something important in discussing immigration and talent. The economic geography of the world is lumpy, and talent likes to clump together into centres of innovation. Through fortune and foresight, America managed to develop world-leading centres of talent in places like Silicon Valley, Boston, and New York. Relatively open immigration rules and the promise of a safe harbour for war refugees, including persecuted Jews, helped build these knowledge centres. When one combines that innovative capacity with a system that makes it relatively easy to develop ideas and relatively lucrative to exploit them economically, the potential is there for rapid and sustained growth.

America does seem to be special in important ways, but it's not always clear what those ways are. A liberal economic order and geographically mobile population are important, but so is the level of education, the promise of social mobility, and the openness of America's borders. It's worth keeping all of that in mind as the country's leaders think about the ways economic policy should change in the wake of the Great Recession.

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I have a few other pointers:

A lack of a governmental system that keep down costs on negative, see the enormous difference in US health care cost compared to Northern Europe, which actually inflates the GDP, more hours worked, still the small lingering benefits of not blowing itself to pieces two times the last century, economies of scale (especially when it comes to the universities), locking up the underclass rather than supporting them.

And also, the US economy was built on oil once as well, which everyone seems to agree. The first petro-dollars was simply dollars.

One thing more.

GDP is strictly not riches, but income.

When looking on the old economist slide about "the east rise again" Western Europe had much a bigger share of the world's financial assets, and should strictly be richer.

It wouldn't be too much of a stretch to look at rapidly developing countries today, determine what makes them grow, and assume those same characteristics worked for the US. Take China, for example. Freer markets and a small amount of protection for private property is all it took for development to explode.

BTW, Saudi Arabia and Iran are more awash in oil than Norway and are much poorer. Then there are Nigeria and Venezuela and Russia. Oil isn't that big of a deal. In fact, development economists often talk of the "curse" of natural resources as a hindrance to development.

PS, remember the Solow growth model. It's an oldy but goody!

Oh, and one more, especially if you compare to North Europe: Unfunded loans :).

@Fundamentalist

Yes, it is true that oil might not always be that good (the richest country in the world though is Qatar, guess why?) but in ALREADY developed markets, it is hard to see a negative effect.

Toss in: 4) A good banking system - until deregulation in the 80's 5) Good infrastructure - roads, rails, ports 6) Easier access to either Europe or Asia - (lower costs as we are between the two)

There's probably more.

Regards

Two points here.

1. America's income is higher. But that is mainly due to Americans working far more hours than Europeans. The reason for that is up for debate, but I think it has little to do with main reasoning of the post.

2. I am not familiar with HDI, but rank statistics in this case can be misleading. Quality of life in top 5 HDI countries may be only infinitesimally better than countries ranked 10 or 20. In that case, talking about superiority of common law system or the advantages of English language is almost pointless.

Other factors:

- Rule of law. - Relatively high economic freedom. - High participation of women in the work force. - A culture which tends to value work over leisure. - Relatively isolated from invading armies (see Poland, France, Germany, Russia...). - Vast resources relative to population (including arable land in productive temperate zones).

I'm sure there are others.

The reservce currency as the necessary and sufficient condition for the American-style richness.

It is important to remember that America's place at the top of the heap is by no means guaranteed. Smith's 3 foundation factors are now reduced to 1-1/2, far less immigration and the bright minds will come only as long as the rich opportunities beckon. Perhaps the 4th foundation factor was an excellent universal education system, which is definitely not what it once was. Americans themselves tend to work harder and for longer hours than people in other top rated countries, and it may be that is what is carrying the US forward now.

Jasiek, The reserve currency is a double-edged sword, bringing not only benefits but a moral hazard (too easy to borrow) that has of late been our undoing. Open capital markets (enabling chicanery such as Yuan-Dollar pegging) and constant pressure to inflate (to supply medium for trade to which the U.S. is not a direct party) are other downsides to the reserve currency.

One can argue whether or not the world pays or will ultimately pay too great a price for what they get out of the Dollar, but there have been enormous advantages to the very same countries who now protest debasement. Without the USD standard, the U.S. could never have run the persistent trade deficits that funded the rapid development of Germany, Japan and China to name a few.

I personally find their hypocrisy quite irritating.

When looking for reasons for development, you have to eliminate things that help make people richer in general but which other countries that didn't develop also had. So if some countries had huge amounts of natural resources, such as Russia, all of Africa and Latin America, and didn't develop, then natural resources can't be a reliable indicator of development. The thing that sets the US and Western Europe apart from the rest of the world has to be unique to those nations. And it has to work for nations today.

For example, you can't say that working longer hours makes the US wealthier because people in the poorest countries work the longest hours.

The only unique aspects of the US and Western Europe have been the institutions that protect private property, including a free market. And we find that since WWII, those nations that protect property the most become the wealthiest. That is the lesson of the New Institutions School of Economics.

Why are the United States so rich? The answer is simple: because they are very creative when calculating their key indicators:

http://www.youtube.com/watch?v=zPkTItOXuN0 http://www.tampabay.com/news/article473596.ece

/thread

Sorry, but i find this article a typical example of selectively using available data to arrive at a conclusion the author was determined to make.

The only sentence that makes sence is the first.

The US is indeed the only BIG rich country but maybe this is what sets it aside in the group (big countries).