U.S. Economy

Seeking the Cure for American Economic Sclerosis

Great technology isn't enough. A country also needs great institutions, and many of the U.S.'s are in trouble.

The run-down feeling.

Photograph: Brendan Smialowski/AFP/Getty images

The Soviet Union had amazing mathematicians, scientists and engineers. Names like Andrey Kolmogorov and Lev Landau are still spoken of with reverence in technical circles. The Russians beat the U.S. into space twice, and for a time had the best missiles and fighter jets in the world. And yet in the 1980s, Russians were standing in lines for bread.

The moral of this story is that without good institutions, an economy can’t translate technology into wealth. Economists love to say that in the long run, productivity is determined by technology, but for the citizens of the USSR and many other dysfunctional countries, that long run never arrived. If you want to raise productivity, you need to focus some attention on the quality of your country’s institutions -- for example, how markets are set up and regulated or how contracts are made and enforced.

One problem with the quality of institutions is that it’s very hard to define them, much less quantify them. Various measures of business climate have been devised, but few if any have predictive power. Even just trying to measure a country’s regulatory burden is very hard, given how many different kinds of regulations there are.

So instead, we’re forced to rely on a combination of circumstantial evidence, observation and gut instinct. In the 1980s and 1990s, there was talk about “eurosclerosis,” and in the 1990s and early 2000s Japan was said to suffer from “dogs and demons.” There was just a general sense that things weren’t working -- a sinking feeling that national institutions had become ossified and weren't coping with the most pressing problems.

Now, in the 2010s, it’s the U.S.’s turn for a bout of sclerosis. Anomalously high costs for everything from construction to health care to education are eating people’s budgets with little increased productivity to show for it. Here are health expenditures per capita:

Paying More, But Not for Better Health Care

Annual U.S. health expenditures per capita*

Source: Federal Reserve Bank of St. Louis

*Not seasonally adjusted

Americans spend far more on health care than their European and Asian counterparts, and receive about the same quality of care in return.

Meanwhile, urban rents have skyrocketed, pricing many Americans out of cities:

The Rent Is Too Darn High

How average U.S. rent has changed relative to median income.

Source: Federal Reserve Bank of St. Louis

Many new regulations seem more intended to protect existing jobs than to make markets function more smoothly. Occupational licensing is rife, stifling competition. Employment agreements barring workers from jumping to rivals have proliferated. Industrial concentration has risen:

It's Good to Be Big

Change in sales concentration between 1982 and 2012 of top four companies.

Source: "Concentrating on the Fall of the Labor Share," David Autor, David Dorn, Lawrence Katz, Christina Patterson, and John Van Reenen

At the same time, entrepreneurial dynamism has fallen. U.S. companies are getting older, less competitive and more secure in their positions. The freewheeling spirit of creative destruction that once characterized U.S. business is rapidly becoming a memory.

American society and culture seem to be suffering as well. White Americans are dying in increasing numbers. Poor and working-class people are giving up on marriage. Civic engagement is down, and an epidemic of heroin abuse is sweeping the country. Some thinkers allege that younger Americans have fallen into a dangerous state of complacency. Meanwhile, trust in industry, government and institutions of all sorts has drifted down.

In this sort of climate, it will be very hard for the U.S. to innovate its way to faster productivity growth. Technological advances will do little to enrich the nation if high costs, industrial concentration, anemic dynamism, social dysfunction, protectionist regulation, low trust and polarized politics prevent new innovations from being translated into broad-based wealth.

The real danger, however, goes even beyond U.S. stagnation. Europe and Japan don’t seem to have entirely emerged from their earlier periods of sclerosis (though Japan, at least, has made progress, as has Germany). The danger is that if all of the developed countries in the world stagnate at the same time, the world itself will stall. Rich countries provide crucial demand for the products of developing nations, and investment that helps them grow. They are also responsible for making investments in innovation that push the boundaries of human knowledge. With a sclerotic U.S., Europe and developed East Asia, it will fall to a slowing, graying China to power the world economy.

What can be done about Amerisclerosis? There was hope in some circles that President Donald Trump would follow through on his campaign pledge to restore U.S. competitiveness and efficiency. It's still early in his presidency, but so far little movement in that direction has materialized.

There is no obvious solution on the horizon. But as with Europe and Japan in the 1990s, the crucial first step is to recognize the severity of the problem. A general awareness of sclerosis is helpful in generating the urgency to find solutions at all levels of society -- government, business and community. The U.S. has overcome its economic and social problems in past eras, displaying a relentless willingness to change. If it can do so again, it may be able to show Europe and other sclerotic societies a path out of their own doldrums. That would go a long way toward restoring global productivity growth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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