Debunking American exceptionalism

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Good afternoon. The inaugural Free Lunch on Sunday on why Europe will not be a enterprise backwater prompted a stir. Time to shake views some extra this week with a dialogue on why the US will not be distinctive.

The time period “American exceptionalism” is commonly used to explain the nation’s fast post-pandemic financial progress, booming inventory market and personal sector-led technological innovation. The fanfare over US capitalism will not be unfounded. However it will probably obscure arguments that counter the concept of US financial superiority. Listed below are some examples.

First: healthcare. Near a fifth of US GDP comes from well being expenditure. That’s effectively above different OECD nations (in per capita phrases too). But the nation has among the many worst well being outcomes. Individuals usually tend to die youthful, have a number of persistent circumstances, and die from a preventable or treatable illness, relative to residents in different wealthy nations.

That is value maintaining in thoughts every time we learn concerning the “strong” US shopper and jobs market. Healthcare spending is the most important part of American households’ providers expenditure (which drives total consumption). As for employment, greater than 40 per cent of recent non-public sector jobs created for the reason that begin of 2023 have been in healthcare. The largest US industries by income embrace hospitals, drug wholesalers and medical insurers.

Put merely, a big share of the US’s “booming” financial system is generated by illness. Inefficiencies in its healthcare system can also prop up US GDP by sustaining excessive ranges of pricey healthcare-related expenditure, whether or not by way of overtreatment or the continued remedy of preventable sicknesses. (I’ve lined this in additional depth on FT Alphaville.)

Second, authorities spending has performed an under-appreciated position in supporting America’s post-pandemic progress. Public transfers account for over 1 / 4 of residents’ revenue in additional than 50 per cent of US counties. Because the begin of 2023, the federal government has created extra jobs than dynamic sectors like tech, finance, building and manufacturing mixed. As for Friday’s “blowout” nonfarm payrolls quantity — displaying 256,000 new jobs in December — over 100,000 got here from healthcare, social help and the federal government.

Not all public expenditure includes increased spending on welfare and paperwork. The federal government has made productive investments and spent on defence. Nonetheless, outdoors of the pandemic and monetary disaster, US public sector spending as a share of GDP is close to its highest for the reason that second world warfare — and it’s forecast to rise as debt curiosity funds choose up.

Positive, America’s public spending largesse emanates from the revenues its extremely worthwhile non-public sector generates. However it additionally stems from its privileged capacity to run huge deficits.

“American exceptionalism is tied to the surge in government spending that has persisted since the global financial crisis,” notes Tavi Costa, a macro strategist at Crescat Capital. “The dollar’s reserve currency status has enabled the US to exceed its fiscal limits for an extended period, especially when compared to other nations.” Whether or not that may proceed sustainably is one other query.

Past healthcare and authorities exercise, shopper spending has been the primary driver of US progress. However the picture of the “resilient” US shopper who spends insatiably on retail, recreation and eating places will not be the best one. For starters, the majority of providers spending has been on requirements reminiscent of hire, utilities and well being. Discretionary spending has picked up, however it’s closely skewed by earnings. Current Fed analysis exhibits higher-income households have fuelled post-pandemic retail spending.

Larger non-discretionary prices have squeezed decrease earners extra. And credit score helps to pay the payments. (Individuals have a low financial savings price, and common bank card debt is among the many highest on the earth.) Critical bank card and auto mortgage delinquencies throughout the US at the moment are at their highest for the reason that monetary disaster fallout, and although mortgage misery is under historic averages, rents have rocketed.

Larger consumption has additionally been supported by Wall Road’s surging shares, the place fast-growing firms and unrivalled liquidity have underpinned rising valuations (which, in flip, has attracted extra liquidity).

However there could also be a much less distinctive issue contributing to increased inventory costs. Andrew Lapthorne, international head of quantitative analysis at Société Générale, suggests rising demand for equities, alongside falling provide, has performed an under-appreciated position. “The US equity market index has risen by over 400 per cent over the last 20 years,” he mentioned. “But the number of shares available to buy is actually 15 per cent lower, courtesy of companies being bought or delisting and share buybacks.” Lately, the variety of listed NYSE firms has fallen too, simply as liquidity has surged.

Both means, excessive earners have the lion’s share of fairness investments. That’s one other well timed reminder that the S&P 500 is a suboptimal indicator of the general power of the US financial system. America’s low earners are asset poor too and see minimal upside to each hovering shares and property costs. And with fairness holdings accounting for near 50 per cent of households’ property (a document), most Individuals are weak to market corrections.

Lastly, enterprise dynamism. In my Market Insights column this week, I wrote about how, though artistic destruction could seem like alive and effectively within the US, by some metrics, reminiscent of firm exit and entry charges, it’s really fading. One rationalization is rising company focus. The share of property owned by the highest 0.1 per cent of firms has risen from 47 per cent in 1931 to round 88 per cent. The market capitalisation share of the nation’s high 10 listed firms additionally surged post-pandemic, and is now at a historic excessive.

In fact, scale permits firms to reap the benefits of efficiencies, which helps innovation. However it will probably additionally create a aggressive moat that may stymie it (a 2019 US research suggests {that a} rising variety of patents are registered by companies with an already excessive inventory of patents). The US’s smaller listed companies are additionally much less worthwhile than in peer nations. That will mirror the dominance of America’s supersized companies.

Individuals have among the many highest median equivalised disposable incomes in PPP phrases of all superior nations. There’s a cause for that. America’s financial system is a confirmed engine for wealth creation, technological innovation, consumption and elevating capital at scale. Its 15 per cent share of the worldwide financial system displays that. However additionally it is true that America’s scale — and a give attention to GDP numbers and inventory markets — helps conceal its much less dynamic options, together with its disparities, vulnerabilities and distinctive privileges.

What do you assume? Message me at: freelunch@ft.com or on X @tejparikh90.

Meals for thought

Economists could have lastly discovered homo economicus, the rational determination maker that underpins financial fashions: it’s a big language mannequin. This VoxEU column assesses how generative pre-trained transformers (GPTs) outperform people on the matter of financial rationality.