America’s new growth model

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Journalists rarely focus on good news, but it is hard not to when thinking about America’s economy at the moment, particularly in relation to Europe. While the continent continues to struggle, and the UK in particular is beset with rising consumer prices and falling asset prices (home values are down 13.4 per cent from their peak) the US looks pretty rosy. 

Think about it — America has enjoyed an almost immaculate economic cooling, coupled with a still strong jobs market, steady GDP growth, and asset prices that have corrected somewhat (appropriately so), but certainly haven’t crashed and burnt. Nobody would have expected this kind of Goldilocks situation two years ago. 

Between the end of quantitative easing, the pandemic and a war in Ukraine, I frankly expected that we would have been looking at big asset price corrections and stagflation by now. But the transition that this White House is trying to make from a debt-driven consumption model to one based on more of a balance of production and consumption as well as income rather than asset price-led growth, seems to be going pretty darn well.

So, how did things go so right? I’d say that there are three reasons: firstly, fiscal stimulus; secondly, consumer confidence; and thirdly, the job market.

On the first point, massive post-pandemic fiscal stimulus is the main differential between the US and Europe. Between the household help and the rollout of Joe Biden’s signature legislation, such as the Inflation Reduction Act and the Chips Act, there’s been a huge tailwind for demand and consumption. Investment in manufacturing construction has nearly doubled in the past couple of years, contributing the most to GDP growth since data was first collected in 1958.

Meanwhile, supply chain issues have abated (with the exception of housing, read my column on that), and consumers have been able to get out and about to spend down the post-Covid cushion. A recent New York Federal Reserve report noted that this level of consumer bullishness has been an “only in America” phenomenon tied to the large amount of benefit payments and income support offered up by the Biden administration. 

While spending has plummeted in the euro area, UK and Japan, the cushion built up and now spent down by American consumers accounts for a lot of the difference in the growth trajectories of the various areas. In the second quarter of 2023, consumer spending in the US was up 9 per cent above its 2019 level, and growth was 6 per cent above that of the fourth quarter in 2019. Growth in the eurozone was 3 per cent up, Japan was 2 per cent up, and the UK was a sad negative 1 per cent down from 2019. 

While there may yet be a slowdown in the US, I think the evidence so far is a good repudiation of trickle down economics. The growth response from fiscal stimulus has far outweighed what you saw from the effect of tax cuts during the Trump administration. Yes, there is a lot going on in the global picture right now and I don’t want to overstate the case. But I do think that we are seeing the beginnings of a new, post-neoliberal growth model here. 

The final reason that America is doing better than its peers right now is the jobs market. It’s still strong, despite the interest rate increases, and job satisfaction is the highest it has been in 36 years. 

So, my question to you, Ed, is — why isn’t Biden getting more credit for all this? And what, if anything, can he do to grab some?

Recommended reading and listening

• Anne Case and Angus Deaton, the academics behind the “deaths of despair” research, laid out starkly why a college degree in America makes the difference between life, and an early death. This is so disturbing and can make one crazy, considering that two-thirds of the jobs open in the US actually shouldn’t require a four-year degree in terms of the skills required to do them. I’m hoping more governors and leaders in Washington follow Pennsylvania’s lead — Governor Josh Shapiro signed an order removing the BA requirement for 92 per cent of public sector jobs. Also kudos to private sector employers like JPMorgan and Google that are doing the same.

• Guess who runs the best K-12 schools in America? The military. This isn’t surprising to me, as the military is all about execution. Also, these schools are well funded (supported by a Pentagon budget that can allocate far more than comparably sized local district schools), diverse, and independent — meaning they can be flexible and aren’t subject to national or local school board mandates. An interesting lesson in what could be possible if education as a whole were reformed.

• In the Financial Times, my colleague John Gapper has a fascinating feature looking at the quest to engineer climate change-proof fruit. Food systems are going to be profoundly changed by global warming, with all kinds of implications, like the ones being grappled with by plant scientist Molly Jahn in her work with the Pentagon’s Darpa innovation arm.

• And also in the FT, John Burn-Murdoch charts up why America’s least fortunate live 20 years shorter compared with their counterparts elsewhere in the developed world. There’s always a rich/poor lifespan divide, but the size of it in the US should give us all pause.

Edward Luce responds

Rana, the question of how long it will take for voters to feel what the numbers are telling them is very much on White House minds — perhaps it is uppermost. I called it Biden’s “feel-bad boom” when I wrote on this subject a couple of months ago. The political instinct is to say the messaging is not good enough. Blaming it on communications strategy is usually a red herring. Better salesmanship will not bring mortgage rates down from 7.5 per cent, or halve petrol prices. The reality is that it takes time for voters to normalise the shock of higher nominal prices even if wage growth is now outstripping inflation. Hopefully that lag will expire in the next few months.

There is not a lot Biden can do to affect economic sentiment directly. But I can think of two steps he could take. First he can shave a point or so off inflation by getting rid of Donald Trump’s tariffs on a range of imports, including steel and aluminium. This would help. Second, he must strain every sinew to prevent the crisis in Israel from spreading to the wider Middle East and causing a further jump in oil prices. To be clear, he will want to be doing that geopolitical fire fighting anyway. But it will also protect him electorally. The correlation between high petrol prices and low presidential approval ratings is reasonably tight. Biden’s other strategy should be to hammer home what Trump would do to the economy. Trump’s latest idea of a 10 per cent tariff on all imports would be equivalent to a $300bn annual tax increase. That would be bad news for everyone.