American exceptionalism meets its maker
By Barry EICHENGREEN
American exceptionalism has had a long, successful run. Gauged by the growth of GDP per capita and other statistical measures, the US economy has outpaced its advanced-economy rivals since the turn of the century.
America is home to the world’s leading high-tech firms. It is at the forefront of AI. And investors have cashed in on that outperformance: as of late 2024, US large-cap markets had yielded an average annual return of 13% over the preceding ten years, compared to just 6% for European markets.
The question is whether US President Donald Trump’s destructive policies have now brought this economic exceptionalism to an end.
That prospect was reflected in the stock market in April, when the S&P 500 fell more than 17% from its record high after Trump’s inauguration. While market has since recovered most of those losses, volatility remains high.
Important voices, not only in the administration, insist that this is just one of those market disturbances that happen from time to time.
The wellsprings of American economic excellence – high-tech dominance, a business-friendly environment, deep and liquid financial markets, and a culture of entrepreneurship – remain intact.
Just give it time, say the optimists, and Trump’s aberrant policies will be reined in by the bond market, the midterm elections, and the courts.
This Panglossian take underestimates how recent events tear at the fabric of US economic exceptionalism, and how difficult that fabric will be to mend.
America’s dominance of high tech derives not just from a vibrant business sector but also from basic research done in universities and government, and from close public-private sector collaboration.
It is not a coincidence that the garage in which Hewlett-Packard originated was in Palo Alto, California, close to Stanford University. Nor is the fact that the internet emanated from the US Defense Advanced Research Projects Agency (DARPA), with an assist from the National Science Foundation.
The Trump administration’s attack on university and government research funding pulls the rug out from under this collaboration. US researchers who have seen their funding cut and their academic and intellectual freedom curtailed are being actively recruited by other countries.
The same is true of the administration’s hostility to immigration. The excellence of America’s universities and innovation hubs, such as Silicon Valley, depends on scientists and entrepreneurs who come to the US to study and decide to stay.
Given what has been revealed about the way Trump’s America treats immigrants, they will now think twice about both the studying and the staying.
Much has been written about how Trump’s tariffs will disrupt US companies’ supply chains and raise production costs.
To be sure, companies will adapt, for example by reshoring some production. But adapting to Trump’s arbitrary trade regime will also mean offering under-the-table favors in exchange for concessions.
A transactional president has revealed the US to be a transactional society, where the highest returns accrue to rent seeking and cronyism, not to initiative and innovation.
A business environment in which access to the Oval Office is the key to success is likely to lead to a further increase in market concentration, since it is the Elon Musks of the world who have access.
The US has already seen how rising market concentration is accompanied by an increase in markups of prices over costs, declining firm entry rates, falling job reallocation, and a growing gap between leading and lagging firms. Sooner or later, productivity growth will become a casualty.
Ultimately, economic growth depends on the rule of law, as proponents of the now ironically named Washington Consensus have instructed developing countries for decades. That, in turn, depends on a separation of powers and on a system of checks and balances that prevent the arbitrary and capricious exercise of executive authority.
All of this was well understood by the framers of the US Constitution. But recent political events in the US have shown that constitutional and statutory safeguards are weaker than previously supposed.
A president who seeks to amass power can use executive orders to override the spending decisions of Congress and the regulatory decisions of supposedly independent government agencies. He can fire independent government administrators at will. He can cow spineless members of Congress by threatening to “primary” them.
Such a president can also disregard the rulings of the courts. If the bond market threatens to misbehave, he can lean on the Fed. As for the disciplining influence of the ballot box, he can dismiss the results of free and fair elections.
In this environment, neither property rights nor contracts are secure. And as generations of political scientists have taught us, secure property rights are a fundamental determinant of investment, while reliable contract enforcement is the foundation of commerce and trade.
Some say that the next US president will turn the clock back to pre-Trump days, making secure property rights, reliable contract enforcement, and equality under the law facts of American life again.
But some lessons, once learned, are not easily unlearned. Many investors, like house cats, will not jump onto a hot stove twice.
Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, is the author, most recently, of In Defense of Public Debt (Oxford University Press, 2021).
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