Can America stay exceptional?
Economists and investors are increasingly asking that question as growth forecasts and the stock market slide. The answer, which matters a lot for American businesses and households, is no longer a clear “yes.”
Since the 2008 financial crisis abated, America’s economy has been the envy of the developed world. Annual average real growth in gross domestic product has been twice that of Europe and Britain and more than four times that of Japan.
Strong growth, in turn, has helped make American equity markets more attractive than their peers. A $10,000 nest egg invested in the S&P 500 at the end of 2008 was worth more than $65,000 at the end of 2024, multiples higher than a similar investment made in Europe, Britain or Japan. American households with jobs and investment gains have been able to spend more, which has translated into more corporate revenue. Healthier companies with confidence in their customers have invested and hired more. And so the cycle continues.
Some key structural underpinnings of that economic exceptionalism are now at risk from policies being pursued by President Trump and the responses of our overseas allies and adversaries. The nation no longer being economically exceptional could bring household budget challenges and difficult retirement years ahead for millions of Americans.
Understanding economic exceptionalism starts with looking at the building blocks of growth. Simply put, G.D.P. is a function of labor and productivity — the number of workers in a country and the output created by each unit of labor. In recent decades America has benefited on both fronts, with a large, growing labor force and rising productivity.
Work force growth has increasingly been supported by immigrants. Between 2000 and 2022, workers born overseas represented nearly three-quarters of all growth in the private-sector civilian labor force. The native-born work force has barely grown. An aging population has led more people into retirement, and women have had fewer children.
It is premature to know how the administration’s efforts to crack down on immigration, both legal and illegal, will affect this picture. Still, Mr. Trump’s first term suggests that foreign-born workers will be less enthusiastic about America. Even before the pandemic, the U.S. recorded a 13 percent drop in immigrants receiving permanent residency, or green cards, according to data from the Department of Homeland Security. That contributed to a slower rate of labor force growth.
Even without a boost from an expanding work force, strong productivity growth can be a significant source of economic support. American productivity growth has averaged around 1.5 percent since 2000, compared with Germany, where it gradually declined over the period and averaged around 0.4 percent.
Productivity is driven by a range of factors including capital investment, technological innovation and, perhaps most fundamentally, education.
It’s obvious that better education should produce better workers, but it is notable just how much education drives growth. Research published by Laura Marquez-Ramos and Estefanía Mourelle in 2019 found that a 10 percent increase in secondary education boosts economic growth by 1.5 percent.
American education has ample room for improvement, as evidenced by poor test scores and high college costs. That said, there are bright spots, including advanced education. The number of research doctorates awarded increased to 57,862 in 2023, from 41,369 in 2000. That’s a 40 percent increase, creating a steadily growing pipeline of sophisticated academic and industry researchers.
In terms of productivity, education works hand-in-hand with capital investment, such as plants, equipment and research and development. In recent years, optimists have pointed to huge capital investments from the largest technology firms in artificial intelligence. Goldman Sachs estimated in 2023 that broad adoption of A.I. could raise productivity growth by about 1.5 percentage points annually over 10 years — that’s nearly double the recent trend.
Private-sector investment seems likely to continue, at least for now. But the public sector is pulling back. Less government research funding, flowing through to fewer Ph.D.s, works against an exceptional economy.
In February, the National Institutes of Health said it would cap all funding for research “indirect costs” such as facilities and administration, effectively cutting $4 billion in annual federal investment across universities, cancer centers and hospitals. Separately, the administration said it would end more than 80 percent of programs with the U.S. Agency for International Development, many of which included research initiatives. Universities face threats from the White House, which is threatening to cancel federal funding unless policies it deems discriminatory are addressed.
Universities around the country are already taking precautionary steps, including stopping research already underway, freezing hiring and reducing the number of Ph.D. students they will accept.
Republican leaders say they hope to boost growth through tax cuts and a deregulatory agenda that aims to increase traditional energy production and encourage more financial activity and risk-taking. They see their energy policy as a source of slower inflation, which in turn will help lower borrowing costs for households and companies. They also expect tariffs to lift growth by bringing manufacturing jobs back to America.
We will only know with time the aggregate impact of these policies. And America has other structural supports for its exceptionalism that are well intact, including deep, broad financial markets, ample natural resources and an entrepreneurial culture. For now, though, worries dominate, which we can see in reduced earnings expectations for companies and lower near-term growth forecasts.
The era when America’s economy led the world was partly driven by policy choices outside its borders. That, too, is changing.
The White House’s decision to reduce its support for Ukraine prompted Europe’s largest economy, Germany, to propose loosening a longstanding fiscal straitjacket that had stymied economic growth. Realizing they could no longer depend on America for security, German leaders are working to quickly pass fiscal policy reforms and significant spending increases on defense and infrastructure.
In China, the world’s second-largest economy, policymakers continue to try to offset a worker shortage by pushing technology and research. At the latest Party Congress, leaders announced a state-backed fund to support A.I. and other technology, with a goal of attracting nearly $138 billion from the public and private sectors. According to a 2021 analysis from Georgetown University’s Center for Security and Emerging Technology, China has been graduating more science, technology, engineering and mathematics Ph.D.s than America since 2007, and the country’s total doctoral grads nearly doubled America’s in 2022.
Simply making America relatively less exceptional is tempting investors to look elsewhere. Less global capital coming to America, including less support for corporate stocks, would make consumers feel less wealthy. Less confident consumers tend to spend less. The flywheel that has powered the economy would turn negative, and the potential for America to become less exceptional will only increase.
Rebecca Patterson is an economist who has held senior roles at JPMorgan Chase and Bridgewater Associates. This article originally appeared in The New York Times.
