The US economic boom is a mirage

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The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’ 

As the US goes to the polls, its economy looks unusually strong. Averaging nearly 3 per cent growth for nine straight quarters, the country is attracting heavy flows of foreign money, which have helped push its share of the global stock market index well above 60 per cent, a record high. Yet voters remain pessimistic about their economic and financial prospects.

Why? US growth is a mirage for most Americans, driven by rising wealth and discretionary spending among the richest consumers, and distorted by growing profits for the biggest corporations. Times look good but this growth is lopsided, brittle and heavily dependent on spending and borrowing by the government, which is typically the lender of last resort.

Although the world marvels at “unsinkable” US consumers, a growing number are priced out of homes and falling behind on credit-card debt. The bottom 40 per cent by income now account for 20 per cent of all spending while the richest 20 per cent account for 40 per cent. That is the widest gap on record and it is likely to widen further, says Oxford Economics, a consultancy. Most Americans now spend so much on essentials such as food that they have little left for extras like travel or eating out. 

Discretionary spending is becoming a luxury for the wealthy, and so is optimism. Confidence collapsed during the pandemic and has since recovered much more strongly for the richest third of consumers than for the middle or bottom thirds. The impact of rising wealth on spending is also concentrated among rich consumers, who own most of the assets. This decade, booming financial markets added $51tn to US wealth and while millennials did especially well, virtually all their gains went to rich millennials. To a widening wealth gap between the young and old, add this new source of division and anger within the younger generation.

Increasingly, America is a gilded economy, with a shiny but thin veneer. In the corporate sphere, the 10 largest companies account for 36 per cent of stock market cap — a peak since the data began in 1980. The most valuable US stock trades for 750 times more than any stock in the bottom quartile — up from just 200 times 10 years ago, and the widest gap since the early 1930s. 

As the big grow bigger, anxiety haunts the rest. The share of small businesses expressing uncertainty about the economy and their own future is unusually high, and their confidence is at lows rarely seen outside recessions. 

Most analysts see dominant tech companies as a plus for the US economy, driving growth, justifying sky-high stock prices and drawing in a torrent of money. In the 2010s, foreigners invested about $30bn a year in US stocks, but that is set to hit $350bn this year.     

Normally, though, booms are financed by rising debt in the private sector. The government ramps up its borrowing only later, to help dampen the shock after the boom goes bust. This time, government leads the way; the deficit has more than doubled over the past decade to top 6 per cent of GDP and is on track to expand further in coming years. Public debt is exploding, up $17tn in the last decade, matching in 10 years the increase in the previous 240 years — almost back to US independence.

By accounting definition, the government deficit is the mirror image of private savings, which include corporate profits. Historically, US corporate profits have risen with the deficit, a link established as early as 1908 in the “Kalecki-Levy equation”. It has held ever since, powerfully so of late, with rising deficits turbocharging the surge in corporate profits.  

Democrats and Republicans don’t agree on much but are united in indifference to the deficit, which is expected to increase significantly regardless of who wins Tuesday’s election. With so much money pouring in, why not keep borrowing? 

Following the end of the zero-interest rate regime two years ago, the “bond vigilantes” woke from a long slumber and began punishing nations for fiscal profligacy, starting with frontier markets such as Sri Lanka and Ghana, shifting to emerging markets like Brazil and Turkey and most recently to developed markets, first the UK and now France. Thanks to heavy demand for the world’s preferred currency, the US seems less vulnerable, but no country in history has been immune forever.

With deficits on the rise, artificially inflating America’s growth, there are already signs that these forces are pushing up interest rates. Empires have often failed when they could no longer cover their own debts, and the way the US is headed, its next president may learn this lesson the hard way.