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America's Exceptional Economy

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America’s history is marked by exceptional economic development and growth. Compared to other countries, the labor market has always been dynamic and robust. Moreover, America’s long history of immigration and assimilation has helped it grow for over two centuries.

Click below to watch the other videos in Examining America's Exceptional Economy.
This four-part video series explores what has made America's economy successful, what sets it apart from other nations, and what needs to be done to sustain its prominence in the global economy. Lazear shows that America and its people have prospered by prioritizing economic freedom, industriousness, low taxes, light regulation, free trade, and openness to immigration. 
 
Edward Lazear studies labor markets, tax reform, human capital, and their effects on economic growth. He is the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution and the Davies Family Professor of Economics at Stanford University's Graduate School of Business. He also served at the White House from 2006 to 2009 as a chairman of the President's Council of Economic Advisers.
 

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I remember as a young child, my dad telling me that like all Americans, we were individuals. We could do anything we wanted. This is the land of opportunity. But while most Americans may have heard that from their own parents when they were growing up, that message is not a universal one. When I conveyed my father’s words to a European colleague, she said, “Oh really? We were told exactly the opposite. Our parents always told us, ‘Don’t think you're so special. You're not so special’.”

Is America special—are we exceptional?

Part of the answer is revealed in growth of GDP for various countries over time, going back to the 1820s. Not surprisingly, our political parents, the British, had led the world in terms of GDP per capita. But that changed over time. We caught them and eventually, after World War II, we started to pull ahead quite significantly, so that in 2010 we were 28% percent richer than Britain, 22 percent richer than our Canadian counterparts, and 65 percent richer than Italy. We’re quite a bit wealthier than most of the other countries with whom we would compare ourselves.

Despite all efforts to the contrary, the American economy has been robust. The U.S. growth rate during the last four years, during the recovery, has been 2%. Why “efforts to the contrary”? In terms of public policy, we’ve raised taxes on capital, which virtually every economist who has studied this thinks is the worst thing you can do for economic growth. Our debt has exploded, and we’ve had a significant increase in what most would think of as non-business-friendly regulation. Despite that, we’ve still managed to grow, to be among the world’s leaders.

We’re better than Germany, better than Japan, better than France, certainly better than Italy. What that tells us is that the American economy is resilient as measured by the outcomes that people care about

The first thing we care about is earning a good living, having a source of income—a standard of living that’s high enough to allow us to live comfortably. The second thing we want is job security; freedom from the worry that our source of income is in jeopardy. The third factor is the desire for our children to be able to live better than we did. I think we all share that aspiration, even if we don’t think that’s necessarily going to be the case. What we want is the ability for our children to be upwardly mobile in our society. 

The American economy, in terms of income, has done quite well. In terms of growth, it also looks pretty good. How about on the job security front? One indicator is average unemployment rates. Over about the last 30 years, the unemployment rates in the United States, on average, have been lower than just about every comparable country in the world.

The one exception is Japan. Japan has very low unemployment rates and it’s fair to ask why we aren’t beating them. At the risk of sounding like an American apologist, I’d say that there is such a thing as too low an unemployment rate. Japan has a kind of stagnant, impacted labor force that doesn’t churn enough. That’s not the case in the United States. We have low unemployment rates despite the fact that we have the most dynamic labor force in the world.

Most American children actually do better than their parents despite the rhetoric and fears to the contrary. According to a dataset called the Panel Study of Income Dynamics, 84 percent of children, in real buying-power terms, which means accounting for inflation, are earning more than their parents.

Ninety-three percent of children in the lowest quintile—that is, the people whose parents were in the bottom 20 percent—do better than their parents. That’s not so surprising. If you start out at the bottom, it’s easier to rise to the top. But even among the top 20 percent, 70 percent of children do better than their parents. That’s pretty good.

In terms of mobility, is it possible for Americans to move up, or are we stuck where we were born? The answer is that we move up very successfully. Of the people who are currently in the top 20 percent of earners in the United States, 60 percent came from families that were in quintiles other than the top 20 percent.

The majority of people who are at the top now were not living in families that were at the top when they were growing up. It’s also true that the majority of those people who are born into families in the lowest 20 percent will escape that lowest category.

To be fair, America has been criticized for some lack of mobility across generations, and this is particularly true within certain communities, especially among the poorest individuals in our society. There is some tendency to get locked in. But most of income is not explained by where you were born. That’s not exceptional. It’s true in the other G7 countries as well. For example in Canada, the leader in mobility, 95 percent of income is not determined by parental income. That means that factors other than parents’ income account for 95 percent of personal income in that country.

In the United States, that figure is a lot lower, but it’s still 78 percent: This means that almost 4 out of 5 of the variations in income across America is determined by factors other than parental income. The bulk of where you end up in the economy is independent of where you were born in terms of your income or your status. Despite the fact that we’re not doing quite as well as some other countries in this measure, we actually do very well in terms of mobility; and the truth is, so do most G7 countries now. 

That said, I believe the best indicator of whether we are exceptional is in the market test. Are people buying our products?  Do people want to come here?

Look at the length of the queue of people waiting for green cards relative to the number of green cards issued over the past five years or so. What we see is that four times as many people are in the queue for a green card as are actually issued one in any given year. We’re the team everybody wants to play for. We’re the people you want to hang out with.

The evidence for that is the fact that this is the toughest country to get into, or certainly one of them. A survey of Europeans, asking in which country they would prefer to work, found that for the plurality the answer is the United States, with the UK second, followed by a variety of other countries.

What we don’t tend to see on that list are countries like Russia and China. Even Brazil is on there—it beat Russia and China, which are at the bottom, at 2 percent. We are, without question, the place that people want to come. If we are market-oriented, and believe that people put their money where their mouths are, this is telling us that we are exceptional.